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Brookings – “Cleantech venture capital: Continued declines and narrow geography limit prospects”

Brookings – “Cleantech venture capital: Continued declines and narrow geography limit prospects”

Jun 7, 2017

The Brookings Institution has published a  review of VC investment into clean tech with some interesting conclusions.  As we have said before, venture capital may not be a very good source of start up money in the clean tech sector.  This report shows in detail how the investments have declined.  The good news is that $5 billion is still being invested per year, but it is concentrated in only a few geographies.  Corporate venture funds are also showing renewed interest.

Cleantech Venture Capital: Continued declines and narrow geography limit prospects

If you are looking for more effective ways to raise money for a startup, sign up for our June 20 class on crowdfunding.  This is a disruptive “technology” for finding capital, with great promise but also some pitfalls.  The class is the most comprehensive explanation of what crowdfunding can do for you.  Don’t miss it.

What are reasonable expectations of crowdfunding?

What are reasonable expectations of crowdfunding?

May 17, 2017

There are lots of kinds of crowdfunding–starting with asking for donations to selling stock in your company.  Clearly asking for donations is going to result in a lot less money than offering a discount for pre-ordering a product or selling shares of stock.

There are a lot of sources of information on the success rates of crowdfunding, and much of it aggregates a huge number of campaigns across a broad range of approaches.  These tell you that somewhere between 25% and 40% of campaigns are “successful”–meaning they raised money, maybe not as much as expected, but something.  And that is a pretty good success rate.  The average raise in this aggregation is about $7,000.

You might ask why do people bother for so little money?  Because these statistics cover up the important details.  The vast majority of crowdfunding campaigns are asking for donations–for a big birthday party, for someone’s surgery, to buy desks for schools in Africa, for paying expenses for a school band to travel to a contest.  These typically raise only a few thousand dollars at most.  They don’t reveal what happens when one uses crowdfunding for business.

Results for businesses are better than those averages.  Donation-only campaigns for business are a little tricky because one will need to establish a pretty compelling story about giving money to a business for next to nothing in return.  Sometimes it is for a small reward like a shirt or coffee mug.  Sometimes it is linked to raising money for installing a product to benefit someone in need.  Sometimes it is a promise of a discount on the eventual product if and when it is finished.  In these circumstances it is possible to raise over $10,000 routinely, and $25,000+ is clearly possible.  The better the reward, the higher the amount raised.

Selling shares is even a more compelling reason to write a check, but can entangle one in a lot of requirements for reporting, disclosure, and limitations on the number and kind of investors from which money can be accepted.  It also requires a lot of work to make a compelling case.  But in these cases raising $1-5 million is common for successful campaigns.  The failure rate for these offerings is also higher than for the simpler donation campaigns.  

Compared to the success rate of trying to win a prize of $50-100,000 in a business plan competition, or looking for money from venture capitalists, crowdfunding can be a much better source of capital for a business.  That’s why people bother.  It is something that they feel is more under their control and has a better chance of success.  Crowdfunding also tends to focus a start-up on making the case to customers more than just to investors, something that could be much more important to long-term success.

Want to learn more?  CleanStart is stepping up to provide help to tech startups that face this money-raising conundrum with a new series of classes launching on June 20th. Leveraging Crowdfunding to Fuel Your Tech Startup

Thomas Hall
ABOUT THE AUTHOR Gary Simon is the Chair of CleanStarts Board. A seasoned energy executive and entrepreneur with 45 years of experience in business, government, and non-profits.

Want to Fund Great Idea for New Tech Hardware?:  Look Elsewhere than VCs

May 4, 2017

by Gary Simon

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It is tough to find capital to build a business around a new piece of hardware.  VC’s have lost interest.  Why?  Here are some conclusions from some recent studies: 

  • Products that involve new engineering and new hardware invariably take longer and require more funding to get to a commercially viable product than expected.  The time horizon typically exceeds five years.  VC money is not that patient, even if the payoff eventually could be huge.
  • The track record is not encouraging.  VC investors typically receive less than 20 cents on the dollar once a hardware-based company does finally get to an exit.  There have been exceptions, but not that many.  Medical technology companies have better track records than clean tech.
  • Software companies are much more attractive, with returns frequently over three times the initial investment with exits in 18 months.  Unsurprisingly, capital is rushing to these kinds of investments, even if they do not create sustainable, long-term value.
  • Cleantech hardware VC investments, in particular, tend to focus on varying hot trends.  Right now, batteries and autonomous electric vehicles are hot.  Solar, biofuels, and fuel cells have fallen out of favor.  VC’s do not break out of these trends easily.

All of this suggests the usual pattern of proof of concept→excellent business plan→angel funding→A round VC money→B round growth capital→IPO or acquisition does not work well for a hardware company.  What then might work?

To the extent VC or private equity money is available, it is available mostly for companies that have revenue and enough sales to show market traction, plus being close to or beyond cash flow breakeven.  Where then are the sources of capital to get to this point?

  • Bootstrapping or the “Lean Startup”–defining a simple product with a small price tag and is profitable.  Using the profits from sales to keep growing to point where investors get interested.
  • Crowdfunding–raising money through appeals over the internet.  This is not necessarily the sale of shares in a company.  That requires a company to be fairly far along in getting commercial sales.  Instead, it could be a pre-sale of products at a discount…or even just an appeal to help get a good idea launched.

Clearly, the two are related.  Crowdfunding can be a form of bootstrapping.  The implication is that instead of spending time on an investor-focused business plan, it may be better to focus on defining a viable profitable product and a sales pitch.  The investor pitch comes later.  To date, more than 200,000 crowdfunding campaigns have raised an aggregate of over $2 billion for early-stage companies.  About 40% of the campaigns have been successful–a much better “hit rate” than pitching VCs.  

This amounts to a significant change in the focus of attention for the start up and means effort should be redirected compared to the usual business plan contest format.  

Thomas Hall

ABOUT THE AUTHOR

Gary Simon is the Chair of CleanStarts Board. A seasoned energy executive and entrepreneur with 45 years of experience in business, government, and non-profits.