Tech and internet entrepreneurs frequently ask me when we’ll see “the Google of cleantech.” While the phrase means different things to different people, I define it as a cleantech investment so profitable it can return a $400M+ venture fund all by itself. Recently, Vinod Khosla even proclaimed there will be 10 of them.
I think that’s a bit aggressive. In fact, this whole Google-envy thing misses the point. The actual goal should be to determine the relevant drivers of Google’s success and apply each one to building businesses in cleantech. It’s a tall task, but I’ve attempted to kick off the discussion here.
First off, let’s put Google in perspective as a venture investment.
We’re talking about a company that raised two institutional rounds of financing — a $25M Series A in 1999 and a $15M Series B in 2000 (source: ThomsonOne). According to Google’s amended S-1, the company was cash flow positive in excess of capital investments from at least 2001 until its IPO in 2004. Revenue ramped from less than $1M in 1999 to $19M in 2000, $86M in 2001, $440M in 2002, to $1.5B in 2003. At the time of the IPO, the annual revenue run-rate was $2.8B. By the end of the day of its IPO, Google had a market capitalization of $27B on the NASDAQ, or about 10x trailing revenues. Six months later — after the traditional “lock up” period that keeps VCs from selling their shares early — that value had climbed to $48B on $5B of annualized revenues.
In short, Google created $48B of equity value for its original investors and almost $5B in recurring annual revenue in a little over 5 years with only $40M of invested equity capital. Wow!
Unfortunately, we haven’t seen that kind of meteoric, yet capital-efficient value creation in venture-backed cleantech IPOs to date. Here’s a comparison I pulled together (numbers are approximate):
What about those next in line? Greentech Media recently compiled a Top 50, which lists a bunch of contenders. Many of these, however, have raised so much capital that it’s hard to imagine an exit sizable enough to yield a 10x, much less a 100x or 1,000x (as was the case with Google). I typically see two counterpoints to this observation:
- If the goal is to return a $400M fund, then you don’t need as large a multiple if the dollars invested are high. The rub in that, of course, is that your fund gets highly concentrated in a few investments without commensurate risk reduction. One bankruptcy can easily wipe out fund returns in this situation.
- The metric “enterprise value per dollar of VC invested” understates ownership of early investors. I concur; it’s at best a proxy for the overall deal. However, the more venture rounds a company has to raise, the higher the likelihood that any particular round will be “flat” or “down.” When you raise six rounds of financing, in other words, it’s not always because you wanted to. It’s because you had to, and you’ll probably get penalized for that.
So, it’s really hard to be Google in cleantech, but maybe you can still be like Google in some respects. Aside from hiring unbelievably smart people, here are a few things that made Google successful:
- Strong network effects that built high barriers to entry
- Low marginal costs
- Low capital expenditures
- Laser focus on a single, market-leading product out of the gate
It’s hard for me to imagine a massive venture success story without some combination of the above because each of these helps a company grow its top line quickly without using a lot of cash. Why should cleantech be any different? Instead of speaking in hopeful generalities, let’s look at the specific features of successful companies like Google and decide which of those characteristics will ultimately drive venture returns in cleantech.
Question of the day: What lessons can cleantech entrepreneurs learn from prior successes in other fields? Please comment below.