Could Cleantech Lead the Democratization of Venture Capital?

In my last column, I ran through recent numbers and showed that there are very few early-stage venture capital check-writers in the cleantech sector right now. By the time you peel out startups that wouldn't think of calling themselves "cleantech," follow-on rounds reported as first rounds, and stuff that's just not a fit, the numbers dwindle down to only a very few deals at that stage.

But there's good news. Crowdfunding seems to be providing some success stories out there.

FINsix, a cool company with power electronics innovations, raised its Kickstarter funding target in less than 12 hours.

Embue is another Boston-area cleantech startup that's just launched a crowdfunding campaign and already has 55 backers.

And heck, even this crazy idea apparently raised $1.4M via crowdfunding.

Limited partners may not be providing the capital for early-stage VCs to put money into cleantech right now, but the general public is still entranced and ready to put money to work behind cool and/or planet-saving ideas, sometimes as angel investors, and certainly in the form of donations or prepaid revenue through these crowdfunding platforms.

For a few years now, an argument has been made that such crowdfunding will "democratize" the venture capital industry. Essentially, venture capital has always been a fairly exclusive investment category, out of legal necessity, because it's a private equity asset category and thus restricted (in its indirect forms, at least) only to a small subset of high net worth individuals (at least in theory) and larger institutional investors like pension funds. But at the same time, venture capital firms have shifted to larger funds, which means shifting toward later stages -- and needing to write bigger checks even at earlier stages. And as always, professional VCs have mostly been looking for a very small number of opportunities that fit a pretty unique set of very lofty expectations.

Angels could in theory fill the gap left by the VCs that are exiting stage left, and that does happen to some extent. But in reality, too many angels just try to out-VC the VCs, funding the same kinds of companies. And aside from great platforms like AngelList, they're hard to find outside of the 3 Fs (friends, fools and family). Government grants and small business loans can be helpful, but they are also hard to access and typically pretty restricted in their application.

Basically, the idea is that crowdfunding, especially as now further enabled by legislative changes, could fill in the early-stage funding gap. But it's been slow to happen. Oculus was one success story (blowback aside), but many early-stage VCs in the tech sector appear able to hold their own, cherry-picking the best early-stage startups and backing them to the exclusion of -- or at least alongside -- crowdfunding. The democratization of venture capital is happening, but perhaps not as quickly as some may have expected.

Looking back at cleantech, the VCs have mostly headed off to greener pastures (pardon the pun). This has left the field wide open for crowdfunders, who now can not only avoid negative selection bias, but can actually cherry-pick the best startups themselves without much competition from reputationally advantaged VCs with bigger checkbooks. 

Perhaps, just perhaps, cleantech is where the democratization of venture capital will gain the exploitable bridgehead that eventually helps make a real impact on the venture capital world.

These examples suggest to me that all early-stage cleantech startups should at least consider crowdfunding efforts. Not only is it a potential source of some capital (although typically a smallish amount, the example of Solar Roadways notwithstanding), but it's also an important early test of how compelling your idea is and how good you are at selling it.

As FAKEGRIMLOCK so artfully points out, it's fine to fail as long as you do it quickly and try another idea right away. But it can be tough for hardware startups to fail quickly, and many cleantech startups are hardware-based, so failing quickly is tough.

But you can still test your application very quickly by trying to crowdfund it. If you can't articulate a compelling application for your technology, you're not really an entrepreneur; you're just an inventor. If you articulate your application and people won't throw some money at it, then maybe it's not such a compelling application, and you may have some more thinking to do. But if people get excited about your application like they did about FINsix, that's really valuable market validation -- and prepaid revenue. Not to mention PR -- heck, it seems like crowdfunding campaigns get more gushing press coverage than venture capital rounds these days anyway.

That said, it's important not to confuse such validation for technical feasibility, obviously. That's a whole separate challenge, and one you should seek to solve before initiating a crowdfunding campaign for your application (or you could end up pissing off a lot of disappointed people). And don't confuse validation from crowdfunders with customer validation if there isn't strong overlap between the two (such as would be the case with most B2B plays). So this isn't a recommended path for all cleantech startups out there.

But if cleantech could be the place where the democratization of venture capital gains momentum, you should think about getting on board, too.

Did you buy your ticket to NextWave 2014 yet? You didn't? Get on that! It sold out last year, so don't wait until it's too late this year.

Photo Credit: Venture Capital Democratization?/shutterstock

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Rob Day

Rob Day is a Partner with Black Coral Capital, based in Boston.  He has been a cleantech private equity investor since 2004, and acts or has served as a Director, Observer and advisory board member to multiple companies in the energy tech and related sectors.  Rob was a co-founder of the Renewable Energy Business Network (www.rebn.org), a non-profit organization which was acquired in 2009 by ...

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