I’m currently in China and cannot substantiate whether this note comes out as planned. I will write more on my trip soon… huge market, technology (hardware + software) talent everywhere, commuting is not fun except via bullet train, Peking duck, my brain cannot comprehend it all. As an entrepreneur, I lived with the tunnel-vision approach to reaching my startup’s end goal. Other times, I have adopted a more panoramic approach in hopes of spotting the solution among the points of light out there on the horizon.
Either of these extremes might work in helping you choose the right direction for your startup. But they also could create problems down the road. A tunnel-vision approach could lead you down a rabbit hole that ends with a dead-end. A panoramic view could leave you exhausted and broke from chasing too many rabbits. I have taken both approaches in my startups.
Once you’ve established your vision and set about the strategy to create your product or service, you’ll need to start thinking about where to acquire funding and expert advice to help you along the way. It’s helpful to realize investors could succumb to that same syndrome of misguided vision.
Venture capital (VC) firms must take a broad approach to financing startups if they are to succeed because of the high-risk nature of their investments. A recent analysis by Correlation Ventures of some 21,000 financings from 2004 to 2013 found that 64% lost money or broke even. 25% netted a return between 1 and 5%. Only a mere 4% offered a return above 10%. Though many venture capital firms do focus on certain industries, they still must take that more panoramic approach to satisfy their need to stumble upon those big returns.
If your product is designed for a specific industry, such as energy, you might be better served by considering a corporate venture capital (CVC) arm as a seed or early series funder. In this case, you should be aware a CVC may be more apt to apply a tunnel-vision approach as they seek solutions to address their current needs. They might not be looking at future needs. As a potential disruptor in the industry, you don’t want to be reined in by a company not willing to look beyond its current business model.
What’s the right approach for you as you consider your funding needs and options? Since you’re here reading my blog, I’m going to assume you consider your startup applicable for the energy business. So I will focus on energy CVCs for the remainder of this article.
Educate Yourself about Energy CVCs
Thomas Wendt and Elizabeth Spaulding of Bain & Company pointed out in a recent article that many corporations use their CVCs to address “known knowns.” But they would actually be better able to become the disruptors, or at least not succumb to the disruptors, if they are willing to examine “unknown unknowns.” If that’s impossible, they say, exploring “known unknowns” is still a better option.
Wendt and Spaulding argue addressing “known knowns” should be the role of a company’s R&D or business development programs. It’s when you get outside the conservative corporate culture that you find the people who are thinking about how the industry needs to look five or ten years in the future — in other words, YOU!
Energy CVCs can get caught up in this insular vision. Take, for example, this statement from E.ON Group’s Scouting and Strategic Co-investment team website:
“Primarily the SCI Team invests in mid-stage startups creating new energy solutions but also considers projects that are not directly related to energy regardless of investment and the growth stage of the company.”
While they leave themselves a bailout there with the “but” statement, they admit their primary focus is on startups already well on their way to creating new energy solutions. Does that sound like your company? If so, great — it’s a possible investor for you.
Now, I will give E.ON Group credit because (1) any good CVC will be focused on generating returns. If you disagree, read my article on social responsibility and let’s jump on LinkedIn to #ratio one another. E.ON has either learned the hard way (investing early into energy has traditionally been value destructive) or has done their research. (2) E.ON also offers an agile accelerator program similar to Shell’s Gamechanger program. This gives early-stage startups an intensive program to speed up the development of their product.
Like E.ON’s accelerator program and Shell’s Gamechanger team, ExxonMobil launched its Technology Scouting and Venturing Group about a year and a half ago. It has the two-prong focus of finding technologies to generate new energy sources and to address carbon capture and other environmental strategies. Some argue that this is merely an extension of the company’s already expansive research lab work; however times have changed. R&D is done both internally and now externally by engaging with startups like you. So climb aboard because if you get picked, it could be your huckleberry.
Are CVCs Willing to Make the Long Haul?
Make sure you’re leading your investors in the right direction — even if they want to take charge.
Another issue with CVCs that Wendt and Spaulding note is that venture capital just doesn’t fit into the classic conservative corporate model of investments returning cash as quickly as possible. They note that, according to Pitchbook, the median age of a company backed by venture capital at IPO was 11 years in 2018, up from just eight years in 2006.
I noted in this earlier blog post that energy startups trend even slower than in other industries. So energy CVCs, in particular, require great patience to realize their return on investment.
Corporations also have to be willing to accept failure: the vast majority of great ideas that can inspire startups might not be feasible or scalable to meet a corporate need. It’s not really in a corporate mentality to accept a loss as a lesson learned.
As the leader of a startup, I think you can gauge the patience of a CVC by checking its exit strategy with previous investments. Do they tend to bail at the first opportunity? Do they hang in through a few stages? Of course, the golden calf is going to be the CVC that is willing to scale up its startup until it’s time to hand it over to the corporation through a merger or acquisition.
The two biggest advantages of working with a CVC are:
- You gain access to the expertise and customer base of the corporation as you develop and test your product or service.
- You are cultivating a potential buyer for your company as you build out your ultimate product or service.
Expect to Educate Your Potential CVC Investor
Back to the Wendt-Spaulding analogy.
As a disruptor, you’re excited to stare into the face of the “unknown unknowns” and pull together the solution to a problem that a company doesn’t even recognize is waiting down the road. That’s what fires you. That’s your passion. That’s not the corporate mentality (or is it changing?).
A VC that’s been down these roads before, maybe even across a spectrum of industries, doesn’t have to be convinced that the unknown lurks out there in the darkness. They’ve seen the magic before. They trust the entrepreneur to shine the light into the darkness.
Corporate leaders, on the other hand, may have seen plenty of evolution in their industry over the years. But they’ve never had to experience the kind of rapid change and disruption the corporate world faces these days. The good ones recognize it’s happening. They realize they need to look beyond the horizon. That’s why they created a CVC, but they still need some convincing when it comes to making that leap into uncertainty. That means you need to be ready with a 10,000-lumens, high-intensity LED flashlight to lead them into the future.
And if your product/service is disruptive, be ready to explain how disrupting a customer’s business model could be key to their future. You’ll also need to recognize the corporate approach to due diligence likely will be based off their old M&A experience, rather than the looser due diligence often practiced by VCs. This means a more heavily populated paper trail must be laid out when you approach a CVC.
Consider What’s at Stake
One final challenge of dealing with a CVC is determining how large of a stake you’ll need to give up as you work your way through funding rounds. As an entrepreneur, you don’t want to give up control of your baby until she’s ready to walk or run or graduate from college.
Corporations aren’t used to taking a minority stake. When they put up their money, they are ready to take control. Part of your educational effort may require convincing corporate leaders that it’s really in their best interest to accept a minority stake. They will still have a place at the table. They need to be included in your board. You certainly need to welcome their advice.
But taking the risks necessary for a startup to succeed and move them ahead in the industry is best done by the entrepreneur. You are the one who sees the “unknown unknowns” and envisions the solution. And you can’t be held back by a conservative corporate mindset if you’re going to succeed.
Having a seat at the table and a minority stake is a good thing. It positions the corporation to ultimately benefit from your vision — as long as you can convince them that the glow they see shining beyond the horizon is a sunrise to new business and not a raging wildfire that will burn down their industry.
If you’re looking for more ways to appeal to energy CVCs, step into their shoes and read about the secret to becoming a corporate venture capitalist. And if you think I missed something, let me know. There’s more than one way to succeed in clean energy, and I want to know what you think will work.