SURGE is taking time to smell the roses
The industry was also ripe for change. I saw four large trends when usually one is enough. First, the industry titans outsourced most of their R&D to the oilfield service companies and replaced it with active M&A teams. Second, there was an energy renaissance going on in North America unleashed by shale oil and gas. Not only did this increase technology adoption but also drove the rest of the world back to Houston to understand this new phenomenon; the technology buyers were back. Third, there was a great generational crew change happening in the industry. About 40% of the industry will be retiring within the next 5 to 10 years (and this is on the conservative side). And finally, software was attacking the rest of the world and had finally come to energy’s front door.
Because of these observations and trends, I founded SURGE.
SURGE raised its first $1M fund in 2011 to launch Class One, even though having no industry support yet and no government support (and this always comes with strings attached). But while garnering support as trends and momentum kept strong, it became clear that the path for SURGE was to prove our 3 hypothesis: Deal Flow, Corporate Partnerships, and Investor Returns.
- Deal Flow: can we attract the best entrepreneurs from around the world solving an energy problem using technology?
- Corporate Partnerships: can we engage the support of the largest and most technology forward industry customers as investors, sponsors, and mentors?
- Investor Returns: can we generate the right risk adjusted returns for our investors?
As SURGE approached its fifth year anniversary, I took some time this summer to take inventory of these items.
My conclusions follow.
Deal Flow (Check)
I believe that SURGE quickly built a deal flow engine that is unsurpassed. The industry itself validated this belief. Other accelerators focusing on the marginal smaller markets of cleantech could not compete with our location nor relationships. And the rest of the industry investors were focused later down stream. And none of them built an arsenal of capital efficient technologies (many of them software). We have not even started our push for SURGE 5, and already have over 400 companies that have applied to our program. We are not the size of TechStars, but for an industry vertical, I am not sure who else compares. In other words, the deal flow box is checked.
Corporate Partnerships (Check)
Corporate partners increase the number of winners and lower the time to market. During SURGE 4, we brought over 50 of the industry’s top customers into the SURGE building to meet with our current class and alumni. Shell led our investment into the SURGE 4 fund. Aramco, Baker Hughes, Chevron, ConocoPhillips, ExxonMobil, Schlumberger, Shell, Siemens, Statoil, and many more either invested into our funds or sponsored us. And the other titans sent their experts as mentors and participants. And if you look at the 200 mentors on our bench, our network maybe bar none when it comes to access. If you want to validate your business, SURGE can help. And our results prove this; checking off this box, too.
Investor Returns (NOT Checked)
SURGE has invested into 43 companies since we started…and 34 are still in business. These companies have gone on to raise almost $50M in additional funding and many of these companies have bootstrapped instead. Our unrealized returns for our funds is impressive and tracking above venture returns. HOWEVER we do not have any EXITS. Let me pause here and come back to this.
The logical path of a for-profit accelerator is to accomplish two objectives: raise enough funding to sustain operations and raise a larger fund in order to invest into the winners that come out of their programs. And you need this extra powder to keep your prorata rights and even increase your ownership in the winners. TechStars has their larger venture fund. Y-Combinator has an army of funds either directly or indirectly related. At SURGE, we decided to raise a larger fund ($30M - $50M) in order to accomplish both objectives. And despite the market conditions, we were having success raising the fund. SURGE 5 (SURGE 6 & 7 as well) was going to be powered by this new fund and the majority of the fund was reserved for next round investments (Seed and Series A).
But as the summer progressed and SURGE geared up for a Class 5, I began to notice, and subsequently study, another round of industry changes on the horizon.
Therefore, SURGE will not be raising a larger fund and will not be taking on a 5th class this coming Spring.
SURGE is taking a breather and I will spend the rest of this year deciding how best to help our existing portfolio companies. Let me explain.
- First, the current market conditions have delayed the growth of our existing portfolio companies and they still need real help. Our first core value at SURGE is "Entrepreneurs First". I did not believe it was prudent nor wise to focus on more incoming companies when our existing companies need help, especially during $40 oil. I get calls daily from the 34 companies. Yesterday, I had to turn them down to look through new investment opportunities. Today, I am taking their calls.
- Second, the lack of a realized track record gave me pause to raise a larger fund until I could show that our math was built upon tangible data. As the largest investor to date, this has been a decision from an LP point of view not just a GP; as having significant skin in the game as a GP changes the decision process. It is easy as a GP to raise a fund (which pays management fees although small for our fund size but still a distraction) when there is little to no real personal investment. However, as an investor on the same side of the LP’s, I want to see CASH RETURNED. In our original investor pitch, we explained to the angel investors and a few institutions that we would see results within 5 years knowing that a majority of the success would come in years 7 - 10. The 34 companies are doing well, but none of them are close to exit nor should they be in our market. The timeline has significantly shifted out to the right. And this also shifts return expectations down. In other words, the math just got a lot worse.
- Third, I did not believe that we had the complete team with the necessary experience to ensure that the risk adjusted returns were going to be there. I am an entrepreneur, but I am not a proven energy technology investor. And although I believe in myself, I cannot look into the eyes of a fellow investor confidently. Investing is not about picking unicorns. There are probably few to no unicorns in Energy, but the space is a great place to invest if you do so wisely. Our model was to have more winners, smaller exits, and an excellent risk adjusted return. The math is there; HOWEVER our math is just on a spreadsheet. And cash speaks louder than excel. Our SURGE team had no experience in long-term investing. I know we have picked correctly, and this is supported by the 34 companies still standing, but realized return would require finding a partner with a proven track record as such; not just a team of "smart" kids. A larger fund would require having a team member whom has been there/done that with strong results. So despite the enthusiasm by investors, partners, and the ecosystem, I see the price of oil scrolling across the flat screen on a daily basis and hear about the trenches from our entrepreneurs. These companies need real time help, and that is my forte.
As a result, I am circling the SURGE wagons and focusing on the existing 34 companies in our portfolio that need help. I am also sitting down with our industry partners and investors to determine how SURGE can best assist them with deal flow and other services that we have built over the past 5 years.
SURGE is on the correct path to prove my original three hypothesis. And rest assure, SURGE is not over! Instead, we are just taking some time to smell the roses in our own basket of success before expanding our garden.