by Hilary Kramer | October 24, 2013 11:02 am
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.”
Translating High Altitude to High Impact
If anything, the Aravaipa team has been relentlessly discriminating in order to acquire only the best of what the Rocky Mountain technology community has to offer.
Over the last five years, the fund has only taken a position on nine companies – eight in the clean space and a legacy investment inherited from a predecessor – but eight of the nine have thrived.
Fenwick-Smith considers that a strong validation in an industry where traditionally 98% of venture-backed starts never see a public exit and even mezzanine funding has been scant in the post-Solyndra chill.
“The difference is that we were never looking for disruptive home runs on every investment,” he says. “We simply want to build companies that can generate real social and environmental impact and generate annual sales of $20 million to $100 million along the way.”
Fenwick-Smith believes that the big funds sputtered because their scale required them to place hundreds of millions of dollars in multi-billion-dollar programs that may require a decade or longer to turn on the lights.
With a horizon of five to seven years, traditional VC hit a hard wall when it came to incubating large energy infrastructure projects, much less more fundamental but less advanced R&D. Aravaipa welcomes early exits but is committed to spending at least 10 years nourishing its holdings to the point where they can stand on their own or win an acquisition bid from a larger rival.
And the VC numbers have shrunk as the deals get moved back toward the ground. At the 2008 peak of the green boom, the average placement in this space topped $14 million – more than double the $6 million moving into a typical clean tech play early this year – so it’s evident that managers are no longer hunting global disruptors.
Fenwick-Smith is not working with billions, so his stakes are smaller still. His average position is just under $1.3 million and the total valuation on the portfolio as a whole is well under $100 million.
But his conviction easily outweighs the capital invested. While he can talk for hours about glass coatings that let windows exchange heat more efficiently, natural peroxide disinfectants, better weather modeling systems, what he really loves about the portfolio is the business drivers: subscription revenue, OEM licensing, margins up to 95%.
Retail investors looking to make a difference in their portfolio as well as the community can follow his cues. Look for the revolutionary stories like Tesla (TSLA), but then dig deeper to find the angles that offer the best odds for real commercial success.
For example, about 500 all-electric Tesla sedans are rolling off the assembly lines every week. While they are sleek and eerily quiet, like riding in spaceships, they only hold a charge for about four hours of highway driving before needing to plug in.
Where do you plug in on the road? A few start-ups have been trying to build networks of charging stations, but the company that may reap the rewards is utility NRG (NRG), which has already committed to build at least 200 plug-in points in ultra-green California alone by 2016.
At $10 per 265-mile charge, that proposition stands to take big money away from traditional filling station and hand it to the power company instead. And at a steep discount to gasoline in terms of both cost and environmental impact, this is going to be the real way electric cars transform household budgets.
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