VC feedback on startup pitches (notes from the NREL Industry Growth Forum)

For the past few days, I've been in Denver at the NREL Industry Growth Forum, where cleantech companies ranging from pre-seed startups to more funded companies present to panels of investors, get feedback on their pitches, and network and try to raise money. As in my previous blog post about the 24th EU PVSEC, this post will focus on information and impressions you can't just get from press releases after the fact, distilled from Q&A sessions and informal one-on-one discussions with companies and investors. In fact, I won't even talk about any of the specific companies that presented.

Let's jump right in:

The questions VCs most frequently asked included: 

Who are your customers?

• Do you have a clear idea of what the primary product and target market are? Or are you a 'technology in search of a problem'? 
• Do you have specific feedback from potential customers on your product or technology? ("The best way to answer a VC's question is with the customer's words.")
• Is this a need-to-have or nice-to-have for your customers? If you're selling to businesses, who gets a promotion, makes money, or doesn't get fired because they choose to work with you or buy your product? Does anything negative happen to companies if they don't work with you?

What is the exit strategy?

• How much capital will really be required to get the company to an exit (IPO, or more commonly these days, M&A) for the VC? Are significant manufacturing scale-up or project development finance part of your path to exit? (Requiring significant future capital isn't necessarily a bad thing long term, just be ready to defend your value pitch compared to less capital-intensive investments the VCs will be considering.)
• How many years will this take? (VCs have seen their timelines from first investment to exit steadily increase over the past decade.)

Do you have an experienced team, especially on the executive side?

• Do you have anyone with experience running a company (not just experience at the MBA level or in a sales organization)?
• Do you have people with experience scaling up R&D and manufacturing organizations?

VCs know they're always taking technology risk; they don't want to also be taking basic risks in the areas of ability to run a company, make deals with large organizations, and execute on sales. In particular, VCs gave positive feedback to a technical founder who said he would step down as CEO in a few years once the company grows.

Less common investor questions included: 

Who are your competitors? Do you understand the competitive landscape, who has momentum, and where competitors will be in the several years it takes you to get to market?

Do you have a strong IP position, and are you working in a market where customers and competitors will respect this? 

What are your cost models, margins, and 5-year revenue projections? When do you hit first revenue? When do you become profitable? 

What market and % penetration are built into these projections?

Finally, some of my personal opinions: 

Feel free to take the following with a grain of salt-- my focus is really more on engineering and technology development than business. That being said, I've worked with dozens of startups and other cleantech companies, and worked full-time at two early-stage startups in the past. And my recommendations are: 

Pick one technology and product, and do it well. Sure, you have to be flexible and willing to make a major course change if an early path doesn't pan out, but don't spread yourself thin by pursuing many products in parallel, or pursuing a low-value, unexciting product in the near term "just to generate some revenue". It will take longer than you think to develop even a first product, and delay your long-term focus.

Be ready for resistance to capital-intensive business plans. In the past, some VCs haven’t fully understood energy businesses or appreciated the magnitude of capital and time required for scale-up compared to IT/software/web businesses. So expect a near-term backlash against business cases that will require $100M to execute (one investor was overheard asking a company if they could develop some sort of software related to their industry instead). At the same time, this is a backlash and not a fundamental reason to avoid this type of business: energy is a huge, growing industry, and building anything large and physical at scale takes a lot of capital.  Ten years from now when you look at the energy companies that grew orders of magnitude and became billion dollar businesses, behind them will have been investors with a vision. But VCs may not always be the best investment match for these types of businesses.

When presenting to investors, confidence is key. But there's a fine line between projecting confidence and ignorance.

Do positively present your value proposition, cost models, team capabilities, and timelines. If you can't don't believe that your company is a huge win for everyone involved, why should investors believe you, and believe you'll do whatever is needed to succeed?

Don't appear ignorant of the competition (including established companies and other startups, even stealth-mode ones), or of history and past investments that did not pan out. As just a few examples to illustrate the point:

• To be blunt, if you're starting a solar photovoltaics company, what is your competitive proposition compared to First Solar's 2012 projections? Sure, their projections are just that, projections, but they and other competitors have track records of executing operationally and growing a business year after year.  
• If you're working on a non-Lithium battery technology, how do you stack up against future improvements in Li batteries, and are any weaknesses of Li batteries you mention fundamental ones that you can be confident won't be solved? 
• If you're pitching in the area of algae biofuels, what is your explanation for why the large amount of investment to date has not led to any runaway successes? How are you different?
• If you're working in medium-concentration PV, what were the fundamental issues with EUCLIDES and how does your technology address them? 

I think all of the above questions have reasonable cases that can be made as answers, and not always technical ones, but they aren't trivial.

Conclusion

Overall, the conference was positive. While the current economic situation is still very challenging for investors and companies, and we are still below the levels of investment and valuation in 2007 and 2008, cleantech investment has been rising over the past six months. In addition, several investors mentioned that there is significant additional capital “waiting on the sidelines” for conditions to improve, so it seems possible that once the market recovers further, there will be an inflection point and sudden uptick in investment.

As always, I welcome feedback here or by email to mdavis at greenmountainengineering.com