My Energy Venture Capital Investment Thesis: An Introduction
We ran four classes, raised 4 funds, and invested in 46 companies between 2011 and 2014. In 2014, we started to raise a larger fund to build on the success of the accelerator programs. I decided then that the timing was too early and that my investment thesis was not playing out as originally planned. And the past has yet to prove if venture capital works in energy.
The market needed time to mature. And I needed more data to refine how to consistently beat the market. Over the intervening years, the market has undergone incredible shifts and changes. I will be sharing my observations and learnings from over the past decade and how it has and is impacting my investment thesis.
An investment thesis is the sine qua non of a venture capital fund. It defines how a fund manager is going to (out)perform the opportunity cost of investing into a like investment that shares similar risk (and private equity investments are benchmarked against the public market equivalent or index). Without it, an investor has no reason to give you money unless they want to destroy capital. According to Pitchbook's recent report on fund performance, VC funds historically have struggled to beat the market. Between 1997 - 2015, the top 25% (quartile) of funds were unable to beat the market 6 years out of the 19 vintages (for VC funds, the "vintage year" of a fund is the milestone year when the capital is committed). Your investment thesis, track record, and integrity is all that you have to raise capital from investors who have a better chance at generating returns by doing nothing. It is this realization that convinced me that raising a fund is much harder than raising money for a specific idea.
This is an introduction to a series of observations that will go into what I was thinking a decade ago to what is happening now as an investor and entrepreneur in the energy industry.
Why Am I Still Doing This?
As Mark Manson, author of the clever series of books including my current favorite, "Everything Is F*ucked, A Book About Hope", states, "We suffer for the simple reason that suffering is biologically useful. It is nature's preferred agent for inspiring change. We have evolved to always live with a certain amount of dissatisfaction and insecurity because it is the mildly dissatisfied and insecure creature that will do the most work to innovate and survive."
It's not easy. It is, however, well worth it (or is it? Nevermind.)
I am privileged to observe from the inside one of the greatest transitions that our world may ever see. I also love outside and believe in defending the joy it gives me on a daily basis. And while these points should be enough, I also have an insatiable appetite to prove that value can be created in energy technology. And I take my social responsibility seriously.
The Fundraising Environment
As stated in my post a few weeks ago, The MIT Energy Initiative found that VC funds poured $25 billion into the industry between 2006 and 2011, but by 2016 had lost more than half their investment. Of the 150 startups founded in Silicon Valley over the previous decade, nearly all had shuttered or were on their last legs.
While energy, especially natural resources, has been a difficult category for raising funds in general, it's important to consider how investor focus has shifted. Of the $500+ billion raised for energy and natural resources globally between 2000 and 2017, only $15 billion has been earmarked exclusively for services. Technology is a subset of this. As I found with many institutional investors, venture capital as a category into the energy sector gets lost between the natural resources and the private equity teams. Natural resources have no expertise nor interest in technology nor venture capital. The private equity teams are allocating only a subset of their capital towards venture capital in general and would rather chase funds that diversify their risk away from the natural resources allocation. In other words, venture capital in energy was back in 2010 and still today a lost soul looking for its people.
While cleantech was out in 2010, the movement that culminated into the Paris Agreement in 2016, cost reductions in renewables, and our future generation's ambitions have changed the fundraising environment. Institutional investors are signaling that impact investing (that is, clean and green) is the preferred focus. Oil and gas, on the other hand, is not.
Raising funds is still a struggle. There are quite a few funds struggling today to raise money in the oil and gas market for services and technology despite the amazing (stay tuned for my qualification of this blanket statement) opportunities currently being offered. Cleantech and impact investing are much better received by institutional investors than oil and gas but more difficult, but not impossible, in finding the risk-adjusted returns (another series of posts). We are watching it play out in real-time through a battle amongst the world's largest sovereign fund.
Opportunity? For wise investors, yes. However, can you raise the capital?
Stay tuned as I dive into the myriad theses that shape how I approach and measure investing early into energy entrepreneurs both clean, dirty, and somewhere in between.