Where’s the Money–Will the Real Financiers Please Stand Up?

We have entered into a different cycle of entrepreneurship and opportunity.  That doesn’t mean the last cycle is ending.  The internet, the delivery of content at faster speeds and lower cost, the parsing of that content for greater benefit will present enormous opportunities for our health care systems, our energy systems and almost every other system of importance to humanity.  At the same time the world has embarked on a path of carbon reduction engendering new technologies, new challenges and new opportunities.  While the elements of previous cycles will be incorporated, as always, into the new cycle, this one has the added requirements of the intense application of the physical sciences, brute force engineering and re-engineering and real capital.

Over the last several years I have visited many alternative energy and clean-tech start-ups and reviewed many business plans of potential ventures in this area. At the same time I have continued my paticipation in some personal investments and others’ investments in ventures from the last cycle. There is a difference. Business models involving the movement of bits and bytes lend themselves more easily to continuous adjustment, typically have a lower capital requirement and have historically had shorter periods to failure or liquidity events, although that is changing as the industry matures. I take nothing away from the ingenuity or management talent required to succeed in these ventures, but it certainly seems different from some historical venture cycles and the carbon-reduction cycle we are now in.

Twenty years ago, Tom Doerflinger and I published a book, “Risk and Reward-Venture Capital & the Making of America’s Great Industries.”  The book detailed the start-up history of several industries–Steel, Railroads, Telephones, Autos, Computers and Biotechnology—in an effort to draw out some lessons about success or failure as it related to the role of venture capitalists/financiers.  While there were many lessons a primary one related success or failure to the relative patience of the financiers–the more patient and unintrusive the financiers the higher the rate of success.  For the most part, these were industries that required commitments of significant capital, time and technological and engineering innovation. In its early days the Auto industry may have come the closest to the characteristics of internet-related investing—small amounts of capital, quick evidence of success or failure, high gross margins and growth. After early years of high and rising prices for the products, it also experienced the pattern of declining prices and improved performance. There were many start-ups pursuing different technological paths (including electric) and distribution models.  We think of the industry today as made up of a small number of behemoths. In the early days there were many companies. A study at the time said that between 1900 and 1908, 485 car companies were started with over half failing during that period and many more in years to come. Sound familiar?

What some of the carbon reduction entrepreneurs are doing is truly amazing.  Those ventures that are moving ahead include first class engineers and scientists as well as experienced businesspeople. Watching how they deal with the typical (and some atypical) engineering problems that such operations confront daily in start-up and production modes is a real testament to these individuals and the academic and real-world training they bring to bear. It is inspiring and gives one great hope that there are solutions that will be funded, produce substantial returns and make a difference.

For the most part—and I admit this is an overstatement—the generation of venture capitalists that got their experiences only in the last cycle, don’t quite get the time and capital equipment and the technologies that have to be applied in this cycle.  Or, maybe they do, and this is just not where and how they want to invest.  Some companies are getting funded, but many promising ventures are struggling and some will disappear or at best go into hibernation. If we are counting on the classic venture capital industry as the source of funds for carbon reduction technologies and companies, the pace of innovation and implementation in the United States in particular, may be too slow for the country to be a leader in this space. Is there a new model that must emerge or will it simply be the case that the smaller number of companies that do get funded in the next few years will produce some of the best vintage year returns that we will see in this decade? That, likely, will not make us the leader, but at least we will be a participant.

This entry was posted in Venture Capital and tagged , , , , by Jack Rivkin. Bookmark the permalink.

About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

3 thoughts on “Where’s the Money–Will the Real Financiers Please Stand Up?

  1. Jack – I added this comment to your first post, when I meant to add it to this one. Here it is.

    Memo to President Obama – HIRE JACK!!!

    Everytime I read your blog I hear a clarion call that the U.S. is going to get our clock cleaned on green technology by China and the rest of the world. I know President Obama has gone further on this issue than his predecessors but I still don’t hear the compelling economic argument for green technology across the spectrum in the U.S. that I hear in your blog. We not only could lose a leadership role, we might be down the list behind several other countries and consume green technology the way we consume oil. Can you imagine the hue and cry if you ever heard a politician saying “in this election year of 2032 we must pledge to reduce our over-dependence on foreign wind turbines, solar panels and electric cars”. We’d all want to hang ourselves for our stupidity. Keep writing Jack – till they start listening.

    Andy (author of Owning Your Stage on Google)

  2. Jack,

    Spot on! People who cut their teeth in the virtual world VC biz do not “get it” when it comes to real-world cleantech development. I have reviewed 600 new technologies in cleantech, and maybe a dozen made sense. However, many of the others got funded (to the investors’ demise). Now, there are almost no true early-stage VC’s, and a whole herd waiting for companies to “clear the treetops”. Their is a HUGE opportunity for true early stage investors in cleantech – 100x between proof of concept and contracts.

    Glad to have found you. I loved your work back in the day at PW & Shearson

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