What can cleantech learn from Google?


The Google money machine.

Oh, if only it were that easy.

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.

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7 Responses to What can cleantech learn from Google?

  1. Alex,

    Cool post. Interesting to see your VC math in this context, bridging the gap (expectations?) between cleantech and internet.

    Could you explain what you mean by Google having network effects? I don’t really see Google or other search engines having the same kind of network effect as say, the telephone or Facebook. It seems like Google’s competitive advantage was in delivering a much more compelling user experience through quality of search results and minimalist design. And creating buzz.

    On the user side, there is not much incentive for me to refer a friend to Google. Sure, my friend may incrementally improve Google’s algorithm, but that is all very much behind the scenes and lost in the billions of queries Google processes. There is no direct benefit to me if my friend uses Google search, unlike say with the telephone or Facebook, where I want them to pick up the phone or Like my photos. This seems more like a network “advantage” than a true network effect.

    On the advertiser side, I am certainly interested in returning to AdWords to improve my quality score, but I may actually be dis-inclined to tell others about this amazing advertising medium, since inviting friends, some of whom may be competition, may actually drive up prices. In 2006, when I worked at a search marketing software startup, the best CPC was on Yahoo! and MS Live, which were still contenders at the time, even though the volume was very low.

    Alex

    • ataussig says:

      Alex,

      While it’s true that a search engine itself doesn’t t exhibit network effects, many of the additional products Google introduced to monetize search traffic did. Once example is AdSense, which matched various blogs with different advertisements. The more blogs on the network, the more advertisers joined, which further increased the value for blogs, which further increased value for advertisers, etc.

      -Alex

  2. Matthias Wagner says:

    Great post. I think it is generally impossible to go from materials/device technology to Google-sized IPO in a 5-year timeframe, except if a giant speculative bubble forms (the last time this happened for that category was optical communications components where there were multi-billion dollar exits for lab prototypes). With materials and devices, unless it’s a re-spin of something, you are simply looking at 10-year projects before profitable manufacturing. That doesn’t preclude IPO… but requires a pool of true believers in the public market.

    A little quibble with the table (it’s great to have blog posts with real data though!!): “enterprise value / VC raised / years to IPO” should maybe be “(enterprise value / VC raised)^(1/years)”… puts a premium on a quick exit of course!

    • ataussig says:

      Matthias,

      Maybe this is the subject of another post, but I’ve intuitively felt that VCs have tended to invest too early in materials technologies, assuming the ramp up will be similar to that of IT deals. The mismatch in that 5 year horizon wouldn’t be so stark if the VCs came into the deal 2-3 years later than they originally did, maybe at a slightly higher valuation if necessary. Depends on a case by case analysis, however, which is why it’s so hard to draw sweeping conclusions.

      You’re right about the table. Directionally correct though!

      -Alex

  3. Dave says:

    Hi Alex,
    It’s a little unfair to look to Google for a precedent for cleantech, which I think you hint at here. Maybe you should do a blog post on possible companies to look at (eg Dell, NetApp, Intel, maybe a company like Micron; I think some asset intensity is mandatory for drawing the best analogies) and then a post about what to learn from “the winner”. I’d read that!
    Dave
    PS–I’d vote for Dell, pre-2000. It had a relentless focus on reducing cost and asset intensity.

    • ataussig says:

      Dave,

      That’s almost the point. It’s more that looking for Google itself isn’t meaningful. It sounds nice to say, but it’s more insightful to look for features of cleantech businesses that have produced successful results in other industries…specifically IT and certain types of services.

      I’ve often thought about IT hardware and semi’s since both are areas we focus on at Highland. They share some of the capital intensity and design-in/design-win issues and are difficult to invest in unless you really know what you’re doing. We’ve certainly seen billion dollar outcomes, however, so while the venture model may be challenging in these areas, it certainly still works!

      Thanks for the thoughtful comment.

      Best,

      Alex

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