(This post originally appeared at GreentechMedia.)
Walt Frick posted a good rebuttal to the Wired “cleantech bust” article recently, in which he points out that venture dollars going into the sector remain high.
This is true, but as one of my fellow panelists at the Kellogg PE/VC conference yesterday pointed out, a lot of those dollars are simply follow-ons into existing investments. And furthermore, corporate investors have really been filling the gap recently. One lawyer I spoke with recently who sees a lot of cleantech transactions told me that over the past 12 months, most transactions he’s seen have included a strategic investor as the predominant “new money” in the deal.
It’s clear that many large corporations have determined that there will be growth opportunities in emerging clean technologies, and at a time when many corporations have been hoarding cash they are thus able to put some money at work in venture investments in the sector. This is very encouraging for the sector, of course.
But corporate venture investments have a history of piling on at the end of cycles. Does this current wave of investments portend bad things for the cleantech venture sector, given the lagging indicator they’ve often been?
The alternative optimistic view says that “this time is different,” because various clean technologies are reaching a point of maturation where they are “ready for primetime” — and this just happens to be at a point in time where corporations have capital and VCs don’t. And in addition, the generally horribly ineffective channels for clean technologies mean that large corporate partners do indeed have value to add, as opposed to other “bulges” in corporate venture investing, where they were just buying late into the party.
At the risk of saying “this time is different” (famous last words), I do tend to believe this latter, optimistic view. Mostly because I don’t see a lot of evidence that corporate venture groups are dramatically overpaying to buy their way into ‘hot’ companies. Indeed, I see a lot of bargain-hunting and serious evaluation of underlying technologies instead of just momentum investing among corporate VCs. I do believe that many large corporations have determined that clean technologies will be strategic growth areas for them over the long run, and that this is a buyer’s market, so it’s an opportune time to forge some relationships, investment-oriented and otherwise.
But even if so, there’s still a significant disconnect going on. While these corporate venture groups are investing in growth opportunities, the operating units within these larger companies are adopting cost-saving clean technologies as slowly as ever.
A long, long time ago, a colleague and I wrote about four different ways “sustainability” can be used to create economic value for large companies. The first is simply to help ensure “right to operate” — that is, avoiding major environmental screw-ups. The second is as a means of identifying cost savings via waste reduction. The third is adding new products with resource-efficiency advantages, and the fourth is redefining the entire business. (You can learn more about this framework here.)
Corporate venture groups are primarily concerned with the third of these opportunities: new add-on businesses. But there’s a huge opportunity in the cost-saving category that is being missed by these same companies.
I see a lot of industrial energy efficiency startups right now, for example, that are having a hard time getting large corporates to act quickly to purchase new lighting, controls, and other systems that would be relatively easy to implement and have compelling ROIs. You would typically think that a two-year payback period is a no-brainer for a corporate operating manager to pitch internally, yet I’m seeing even six-month paybacks not get the traction you would expect. Why? Mostly because these aren’t strategic priorities.
The corporate world has shifted a bit so that C-suites are often focused on executing on a top-three set of priorities. And rarely is “make our facilities run more efficiently” one of these top three stated priorities. Without a specific strategic mandate, the plant manager fights an uphill battle getting the CFO to pay attention, and the CFO doesn’t want to spend time pushing these opportunities down on plant managers. And then there’s the “all the other stuff” dynamic — plant managers have three priorities themselves: production, safety, and all the other “stuff.” Energy (and other types of) cost savings fall into this distant third category.
I found it ironic that our cleantech panel yesterday was held at the same time as a panel on how PE firms can create additional returns by driving operational improvements at their portfolio companies. Ironic, because we should have combined the panels. Indeed, thanks to efforts such as the Environmental Defense Fund’s Green Returns project, PE firms are actually helping drive adoption of resource-efficient technologies pretty effectively within their portfolios.
That’s because they’ve made it a strategic priority (because it’s such low-hanging fruit with rapid returns). But too often I go out and talk with a corporate venture group, and we’ll be comparing notes on investment areas of interest, and they make it clear that their mandate only covers revenue growth opportunities — they have no ability to invest in technologies that could save their company money in terms of cost savings. Even at companies like Wal-Mart that are doing a pretty effective job of making a priority of resource efficiency in their operations, the venture group is forbidden from investing in companies that could become vendors to their facilities.
This is a major strategic disconnect — and in my opinion, a mistake. The most direct way to add to earnings per share is to reduce the costs necessary to create the same dollar of revenue. But some of the very same large corporations now investing into somewhat risky cleantech venture capital deals aren’t effectively adopting many of the readily available and proven technologies that could save their operations millions in costs. You, Gentle Reader, are a shareholder in some of these companies, no doubt, so how do you feel about that trade-off?
If corporate leaders are indeed serious about driving future returns through investments in cleantech, they need to make sure that’s an urgent priority for their Ops managers as well. Cost savings through adoption of new efficiency technologies should be a priority at every large firm.
If it takes your plant managers nine months to agree to purchase a system that has a six-month ROI, you’re doing it wrong.
