Rethinking the World of Cleantech Investment: Strategic Partners or VCs?

 Manvi Goel –  Director of Strategic Partnerships Initiative, Greentown Labs

At Greentown Labs, we have been thinking hard about one of the greatest challenges facing the energy innovation ecosystem today – the lack of funding for early-stage energy startups looking to commercialize their technologies. On July 10, we kicked off the first session of our Strategic Partnerships Panel series, supported by the MassCEC, titled “Strategic Partnerships Vs. Venture Capital,” to explore just that!

View of the audience and panelists at the event
Fantastic turnout for the Greentown Labs cleantech investing panel on July 10, 2014

Our panel included:

Moderator Val Livada joined us from MIT Sloan, having had tremendous experience himself fostering connections between corporations and startups across sectors. Livada kept the conversation focused on answering the following questions:

How do we attempt to finance cleantech? What are the differentiating roles of corporate strategic partners versus traditional venture capitalists in fueling investments in our industry?

According to Grant Allen from ABB, “private investment is not equipped to fund new energy technologies.” The key distinction is that venture capitalists maximize financial returns and expect high multiples in short periods of time, which is not the case with startups, such as the ones housed in Greentown Labs, building capital-intensive, hardware technologies. Alternatively, corporations, through their corporate venture groups, are trying to maximize both strategic and financial value to the company. Allen mentioned, “ABB gets to take a long-ball approach” and invest in complex technologies in renewables or even robotics, even if that means a longer time until revenue.

How do we go about innovating in cleantech?

Fundamentally, there are two ways: 1) creating incremental improvements to the status quo, or 2) supporting next-generation technologies that have the capability to disrupt the status quo.

Corporations like Shell support both. Henrick Holland from Shell Tech Ventures mentioned, “We’re looking for improvements in our upstream and downstream O&G business but we’re also looking at entirely different future energy technologies.”

Saint-Gobain is focused on finding the right technology that supports a specific pain point a manager within a business unit may be having.

How can corporations and startups work together?

Dorothee Martin from Saint-Gobain mentioned that the process for bringing technology into the company requires overcoming cultural differences, “Business unit managers are very operationally oriented and think very differently from how the CEO of a startup might think.” Corporations and startups have to learn to navigate each other, ensure transparent communication, and set progress milestones together in order to build lasting, strong partnerships.

What about VCs?

For the most part, corporate VCs and traditional VCs need to work together to syndicate effective deals.

Ben Hemani from Braemar mentioned, “A strong institutional VC can help create balance between the strategic partner and the startup,” ensuring that the strategic partner gets access to the technology in fair terms while the startup still maintains independence. It’s also important when constructing deals that startups avoid any first rights of refusals and avoid baking everything into the term sheet; the key is to separate out the equity relationship from the JDA.

Where is the future of cleantech investment heading?

According to the panelists, the energy sector is likely not going to follow the trend of the pharmaceutical industry, where over time large corporations became accustomed to adopting new drugs by acquiring many startups. Establishing acquisition candidacy takes a much longer time and is a much more non-linear process for corporations in the energy sector. They’re more likely to make small investments at the early stage to see if a technology plays out step by step. As Henrick mentions, “We’re looking to accelerate innovation in this space and see through the development of new technologies, not create a large acquisition pipeline.”

The world of cleantech investing is complicated and more debate, alternative models, greater cooperation is required to truly figure out how we enable startups to cross the chasm. At Greentown Labs, we are knee-deep in our research efforts to design an effective engagement strategy between potential corporate strategic partners and startups that leads to greater testing and development.

The broader Strategic Partnerships series will continue for the remainder of the year. It is meant to inspire debate around how entrepreneurs should pursue various types of strategic partnerships to acquire funding or resources. Later sessions will explore topics such as legal and IP considerations, pitching, the role of family offices, and partnerships with municipalities.

Stay tuned with Greentown Labs for event details!