(This post originally appeared at Greentech Media.)

Been caught up in a number of year-end projects and thus am way behind on topics I’ve wanted to write about, so here’s a quick set of thoughts on a few unrelated topics, Peter King “Monday Morning Quarterback” style:

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Had dinner last night with several of Boston’s most active cleantech angel investors (thanks to Bic Stevens for the invite).  No, none of this went on — just some thought-provoking conversation over a great Italian meal. One thing that struck me, though, was hearing that Boston-area cleantech VCs are now doing only around three or four Series A rounds per year, and yet at that table were angels who had done eight and six deals over the past year themselves.

This tells me that for cleantech entrepreneurs in this region (and I suspect it’s the same elsewhere), angel funding is now the new-normal way to get started. A few cleantech startups here will take in VC dollars as their first dollars, but many more will have to make significant progress on smaller amounts of money before the VCs will jump in with their multimillion-dollar checks. I suspect this is doubly true for first-time entrepreneurs, as opposed to entrepreneurs who’ve already got a relationship with a VC or three.

So for emerging entrepreneurs out there, don’t automatically build a plan/pitch requiring a $5M or even $2M Series A to get started. Have at least an alternative plan in your back pocket that allows you to make progress with $250k to $500k. And start figuring out how you can network your way into the local angel community.

That isn’t as easy as it should be, despite the good efforts of Bic and others like him. So one takeaway for me is that we need to work even harder to make the Cleantech Open Northeast a venue for regional entrepreneurs and angels to get to know each other.

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Matthew Nordan is one of my favorite cleantech VCs, not least because he’s “wicked smaht,” as they say around here.  If you haven’t read his recent four-part evaluation of the current state of cleantech investing, do so.

I find myself largely in agreement with Matthew’s points, and in fact have already stolen a couple of his charts for various purposes. So rather than go through the entire four-part series in detail with just a lot of “amens” from me, here are some quick thoughts and reactions, for what they’re worth:

1. This is one of the better illustrations of the decline in early-stage cleantech investing I’ve seen. It basically shows that Seed/Series A activity has fallen off by about half — driven, of course, by the general retrenchment of cleantech venture capital and exacerbated by the continued shift to later-stage investing by VCs. Angels and even corporates are filling that void somewhat, so the picture must look even more dire for cleantech venture capital firms.  The pendulum may be starting to shift back, but still — it’s striking.

2. I disagree with the illustrations by Matthew and others that extrapolate past patterns of capital needs to project future capital needs into later-stage investments in the sector and say there’s a huge gap. I understand the logic of it, and it may end up being right. But we’re seeing a real shift in the industry. Fewer of the early-stage companies will “graduate,” and in some cases rightfully so. Just because all those companies will continue to burn cash, doesn’t mean investors should continue to feed them more cash. I’m already seeing a decline in the number and amount of follow-on deals and dollars VCs are willing to put into their companies, except in the case of clear winners — “pruning the tree” is happening more strictly and earlier in VC portfolios, somewhat out of necessity. Plus, there’s a definite shift away from capital-intensive investing in the sector. So while Matthew’s basic point is still right — even as the VCs shift to later stages, there’s still going to be yet more need for later-stage capital — I disagree that it will happen nearly to the extent projected here. Matthew and others who do this type of projection essentially send an implied message: “Hey, there’s lots of need for later-stage funding; jump in and fund a fab!” I would tell investors, “Hey, be really careful about being the 100th institutional investor to jump into late-stage cleantech investing, and be especially careful about funding construction of a fab and expecting venture-type returns.” There is room for both perspectives alongside each other.

3. Matthew compellingly illustrates that cleantech venture returns haven’t underperformed returns for the entire industry, that there’s no “cleantech returns gap.”  I agree.  But what I really take away from his analysis is that venture returns have sucked across all categories, cleantech and non-cleantech. I don’t find the cleantech fund returns he describes to be particularly compelling, as a group. The median IRR in that group he shows is negative.  And yes, that’s on par with VC returns across all sectors over the past decade. Still, I wouldn’t want to back an index of cleantech venture funds based upon this performance — and that’s essentially how many of the bigger LPs out there will view the question.

4. Matthew’s breakdown of the three trajectories is very well done.  In fact, it resonates with a similar analysis I did a couple of years ago that showed even more starkly that “last money in before the exit” rounds have rarely led directly to the anticipated exits, thus necessitating further funding, presumably often at down valuations. Common-holders, even founders who are still in the management team, can be the most hurt in such instances, as the preferred investors have various protections and options available for reducing their pain in down rounds.  And angels and founders no longer in the senior management team get crushed. Of course, in this scenario it’s quite common for founders to no longer be part of the management team after that happens. So I think the real lesson learned here is that founders and angels need to be more wary of big upround valuations when times are good. Yes, dilution is a concern, and rightfully so, and so I wouldn’t argue for artificially holding down valuations, either. But run really, really lean (i.e., smaller rounds needed) and don’t over-hype your company. Because if you raise a really big round at an unwarranted valuation, there will be really big and probably unrealistic expectations — and you will get crushed when they aren’t met. At least, that’s how I would think about it were I in their shoes.

Great work by Matthew. Thanks to him for doing this and putting it out there.

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I think this is one of the most exciting times in cleantech venture investing that I’ve ever been a part of. Yes, there are some scary things lurking out there. But while we’re seeing the “dabblers” back out of the sector, those investors and entrepreneurs still active in it are really committed to it. And at the same time, I’m seeing a next wave of investors like Nordan and Rachel Sheinbeinwho are willing to re-examine even core and hard-held assumptions about how cleantech venture capital should be done: in some cases (like Rachel) to re-affirm the existing model, sure, but it’s still really healthy and energizing to see the examination being done at all.

And the dealflow has never been healthier, at least from my perspective.  It’s a great time to be investing.

Plus, I really do feel like we’re on the verge of a wave of market reinvention that could finally unlock all the value created during the last decade’s worth of technology reinvention. If we can finally start to see entrepreneurs introduce new channels and new business models out there, that could unleash a huge amount of latent growth for the sector.

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The federal government is incompetent and absent on energy policy, but the states have been stepping into the void.  I continue to hear about interesting new policies and programs being implemented at the state level to encourage implementation of clean technologies, even in states you wouldn’t think of as being particularly “green” leaning.

But what I’m also starting to see is a wave of attacks at the state level against these policies. There’s some real “swiftboating” going on right now, even in states like Massachusetts that have been among the most solid leaders over the past few years — misinformation campaigns and thinly veiled partisan attacks.

Watch this trend carefully.

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I’m headed to the Greentech Media holiday party tonight.  Seems a good excuse to thank them for continuing to put up with my shenanigans and for being a great partner over the past few years.  Thanks, guys — looking forward to sharing a cup of cheer tonight!

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Rob Day

Rob Day is a Partner with Black Coral Capital, based in Boston. He has been a cleantech private equity investor since 2004, and acts or has served as a Director, Observer and advisory board member to multiple companies in the energy tech and related sectors.

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