For investors, the real inconvenient truth of the clean technology boom has been that too many of the business models were less sustainable than the ideas. The next wave of venture capitalists is differentiating itself by internalizing innovation, building synergies at home before changing the world.
When the Aravaipa Venture Fund opened in 2008, massive global stimulus had opened a $9.2 billion banquet for the VC industry to carve up among hundreds of projects that collectively promised to transform the way the world generates, stores and uses energy.
Three years later, the high-profile failure of Solyndra generated more tax loss credits than either profits or power, chilling the “green shoots” of solar (which at the time was the biggest theme in the space) in particular and turning “clean” into a dirty word in many quarters of Wall Street.
The green boom failed because the truly transformative projects required long incubation and intensive capital investment, neither of which aligned well with the VC industry’s mandate to drive high-impact exits across a relatively short time frame.
So it’s not especially surprising that Aravaipa manager Robert Fenwick-Smith rejects labeling his $10 million fund either green or clean. But beyond the positioning, the model he’s evolved may well deliver more sustainable alpha than his predecessors – blazing a new trail for venture capital as well as the environmental sector.
Modern Innovation Starts at Home
The core of the Aravaipa proposition is that funds don’t have to be run out of New York, the Connecticut Gold Coast or Silicon Valley to have access to world-class portfolio opportunities.
Fenwick-Smith is based in affluent Boulder, maybe an hour’s drive from Denver but well removed from the coasts. He considers it a strategic advantage when it comes to prospecting and guiding start-ups in his own backyard – less competition on the ground to drive up deal valuations, easier access to management – and an operational edge as well.
“Modern venture capital began with the highly localized and also highly successful Silicon Valley boom,” he explains. “So the idea of the local focus is really part of the industry’s DNA. We are simply emphasizing Colorado instead of California. I think we are extremely lucky to be here.”
Boulder is laid back by New York standards, with office rents alone coasting at barely a fifth of what a comparable fund might pay for a Midtown Manhattan address. The entrepreneurial community is small but extremely open and cooperative.
As part of that community, Avaraipa can not only stay in close touch with its holdings but nudge management toward mutually beneficial cross-cooperation. The synergies may be strategic or mundane – portfolio companies have been known to recommend hires as well as share sales contacts – and since founders come into the fund proper through share swaps, all have a vested interest in each other’s success.
With incubators and academic facilities densely packed throughout the territory, Fenwick-Smith has ample opportunities to review without leaving his backyard.
“Doubters ask whether you’re giving up returns or whether there are enough VC-grade companies in Colorado,” he explains. “The only thing that question proves is that you don’t know Colorado.”