found companies and have a deep intuitive understanding of the challenges and opportunities in the market but aren’t limited by the incumbent beliefs in that market.
Oftentimes we’ll back a founder who’s not directly from the market but they have a connection—to start a company and build a product that doesn’t come from the market but comes from the customer community. Isilon is a wonderful example of that. Paul [Mikesell] and Sujal [Patel] came from RealNetworks and they were buyers of storage. They knew very little about being a storage company, and it was to their credit because they built one like no other one we’ve seen in 20 years. That authenticity can sometimes be missing from founders.
The other thing is, there has to be alignment between the type of company you’re building and the type of market you’re targeting. It’s perfectly fine to build lifestyle businesses. But if you want to build a really big company and you’re focused on a market where not a lot of money changes hands, it’s very difficult to get the flywheel going that builds a truly large, enduring, profitable entity. Also understanding the dynamics before you come and talk to us.
The third area is we don’t expect you to have all the answers. By definition, it could be years before any of us have all those answers. We expect that you as a founder have done the due diligence to know that it’s worth your time. There’s usually one or two first-order questions that when put ourselves in the founder’s shoes, we say, we would have asked that question. As a founder, you want to have those questions answered.
A broad example is a misalignment between, “I want to build a big, long-enduring company,” and focusing on a market, if it’s a consumer business, where only a small portion of the population could really participate. Or if it’s an enterprise market, we’ll talk to folks who are solving very meaningful enterprise problems, and they’ll have even talked to one or two very, very large companies, and we’ll dig into it and find out that out of the Global 2000, only the top 20 care about this. We don’t want to be in the position of identifying those sorts of issues. What it tells us is the founder has not answered his or her own questions terribly well.
X: Switching gears, can you talk about what seems like a mass exodus of venture capitalists from cleantech and alternative energy investing?
GM: A lot of people want to talk about cyclical reasons why cleantech is less attractive than it was two or three years ago. To be certain, there are some cyclical things that are different now, but I sit on the board of a cleantech company [Achates Power]. They make an engine that is considerably more efficient than traditional engines. And there’s more demand than there was three years ago.
What’s happened is the realization that it’s a complex ecosystem that’s almost defined by legacy relationships. Very different from a networking business or other businesses where venture has been successful in building companies. So I think the slowdown in investing has less to do with cycles. It usually takes a venture business about three or four years to figure out whether or not broadly what they’re doing is working. And we’re about three or four years into a broad push into cleantech. Folks are saying, it’s not as easy to get the first dollar of revenue into these companies; raising money is not as easy as we thought; they tend to be more capital intensive; there are different team building challenges here. There’s a little bit of a sobering of the market.
X: What are the lessons learned from this?
GM: There were a lot of mistakes made in the investment community. Venture has never been a great source of funds for pure manufacturing businesses where the output is a commodity. The definition of a commodity is you differentiate on price. A lot of the cleantech companies, at the end of the day, they produce fuel, silicon-based [solar cells], and then what do they run afoul of? Major shifts in the cost infrastructure, whether it’s access to very low-cost silicon, or in the case of liquid fuels, artificial movements in the oil price that create short-term periods where petroleum products appear cheaper than they really are.
We’ve tended to stay away from those categories and focus on the equivalent of the router. Something that leverages a lot of IP and the equivalent of software, and is more of a lever, an enabler in the ecosystem. It’ll still take a while, but we see a potential to build some pretty big and interesting companies, but most importantly, big gross margins. Which is something you wouldn’t have said about most cleantech investments over the last three or four years.
X: So how does it play out from here? You’re still optimistic, it seems.
GM: One thing I want to emphasize is that we don’t have more oil and energy resources today than we did three or four years ago. This is my value-added comment for the day. We don’t have fewer consumers globally looking for those resources. If we had a challenge three or four years ago, we have a bigger challenge today. And if it was hard for the traditional incumbent companies to address those challenges, it’s no easier today. The opportunity to leverage venture into that community was greatly overstated three or four years ago. But it existed then and it exists to a greater degree today. At some point, the decline will catch up with the secular trend, and we’ll have some reasonable balance in the cleantech venture business. It’s not going to go away.
