25 years young!

Just a quick note to let you know OVP is celebrating our 25th anniversary this year. Feel free to send silver…………………

Clean-tech, Green-tech…

Over-invested or Under-analyzed?

We have all seen the rush to invest in “clean technology” over the last few years. That begs the question, “Is this the next big thing, the next big bubble, or the next place to pick your spots carefully?” Our analysis says it is probably all three.

Certainly, the issues of global warming, energy independence, finite fossil fuel reserves, and the move to higher efficiency are important to all of us. That secular trend will underpin significant opportunities in the clean-tech sector for savvy investors.

But let’s also be wide-eyed about the pitfalls. Many of the companies being venture-backed today fall well outside the traditional venture capital success model of low capital intensity, high gross margins, rapid revenue ramp once products are available, and high exit multiples. So, either the venture model has to change (and some think it must) or those VC-backed companies will be difficult to guide to positive returns.

At OVP, we’re still building-out our comprehensive point-of-view on the space, but some interesting conclusions are starting to emerge. We have an old expression that “topologies change, functions don’t.” So, we look for parts of the clean-tech arena that in some way mirror the areas that have lived long and prospered across the traditional IT and Bioscience businesses we know.

We did similar homework six years ago before diving deep into the area we call Digital Biology, where IT and Biotech intersect. That space is heating up in earnest. We now see like patterns in clean-tech. There are material science plays, components, software, and tools: and many places where value can get created.

To oversimplify a complex world, and with the caveat that we reserve the right to change our collective minds, here’s what we see today for VC clean-tech opportunities:

• Solar is hot, wind is not
• Panels are done, but selected components may be fun
• Don’t get drunk on ethanol
• Biomass is a pass, but tools to help it grow will last
• Fuel cells are hell
• Storage offers plenty of juice
• Controlling all this stuff will turn software loose

Another way to understand the puzzle is to look at the food chain. We see many similarities between the IT food-chain (materials, components, subsystems, systems, networks, middleware, applications software) and the clean-tech food chain. The key is to find the spots along the chain that are not over-invested yet, and yet offer high value capture. We think we see some already.

For now, we’ll keep the details to ourselves, but as you will note in the last article below, leveraging indigenous resources in the Pacific Northwest is one way for OVP to carve out a differentiated position in an otherwise crowded space.

Navigating the Channel Waters

Developing sales channels is a challenge for most start-ups, especially for companies targeting the small to medium-size enterprise (SME) market. To help three of our portfolio firms and test a few investment hypotheses, we recently interviewed a number of Value Added Resellers (VARs) and Managed Services Providers (MSPs). We gathered many insights from these executives, but here are a few highlights:

VARs’ criteria for selecting new product vendors:

• They are looking for vendors with a clear, focused VAR strategy.
• Some level of channel protection, especially from corporate resellers.
• Product margins of 20-30 points, reasonable volume and opportunities for services revenue.
• A stable, reliable product, which solves real problems and is easy to set-up/use.
• But most importantly, we heard, “VARs need consistent touches.” Good working relationships are critical.

When we asked if these criteria have changed over the past 5 years, one person responded, “The need has always been there. Vendors are just getting smarter about it. You have to think about which VARs would be a good fit for your product. The shotgun approach doesn’t work.”

MSPs have slightly different selection criteria than VARs:

• They are focused less on margins and more on reducing risk. MSPs are customer representatives – very solutions oriented and support driven.
• Some MSPs only recommend products to avoid conflict of interests.
• Like VARs, MSPs are looking for unique technologies which are reliable, scalable and easy to use.
• But they also require products that are built around MSPs’ need to manage from one central site and technologies that cover liabilities and provide back-up security.
• Service-rich opportunities are essential.
• MSPs also expect excellent working relationships, especially good training and experienced technical support.

This project underscored the value of talking with distribution partners. In addition to learning how to be more effective working with VARs and MSPs, we got a few great new product ideas, and many of the interviewees wanted to learn more about our three portfolio firms’ security solutions. Not a bad return for a few phone interviews!

Plan for Success – Prepare for Failure

All startups plan for success. It is the very nature of entrepreneurship to see the glass as not only half-full, but filling. However, startup teams need to recognize that the most likely outcome is failure, simply because creating and growing a major enterprise is one of the hardest things to do on the planet.

So, as CEO, how do you balance these diametrically opposed perspectives, and keep your sanity? Start by managing the downside things structurally from the moment your company begins its journey. Doing so will give you the latitude to have more degrees of freedom if failure’s hot breath is ever felt on your neck.

For example, one of our institutional lessons is to discourage any (or nearly any) employee vacation time carry-over from year to year. First, as much work as there is to do, and as much as you need everyone putting in the crazy hours that make startups the stuff of legend, your people need a break. Better to see them take some vacation than have dumb mistakes made by brilliant but exhausted engineers and scientists.

However, there is also an important economic reason to keep accrued vacation time to a minimum. If things don’t go well, and you and your venture investors have to think about shut-down costs, that vacation overhang will shorten the window you have to recover. One of our struggling portfolio firms was carrying on their books over $500K worth of accrued vacation. That was $500K we had to choose to allocate to shut-down cash rather than buying a couple of extra months for the ever-promised miracle to occur.

As with all employee benefits, start small and then expand as the company grows and as you leave the grim reaper in the rear-view mirror. Start with zero vacation carry over and improve the benefit as your sustainability becomes assured.

In the last edition of Northwest Passage, we mentioned the allure of motion-capture energy products and the prospect of transforming the way mobile devices are powered. This was not a casual observation. Shortly after publication, OVP closed an investment in M2E Power in Boise, ID, a firm with technology coming out of the DOE-funded Idaho National Labs. This was both our first investment in Idaho, and our first official clean-tech deal.

Initial targets for M2E technology are in the military, where today soldiers in the field are often laden with 20 to 30 pounds of batteries. Longer-term, mobile devices in the civilian marketplace are very much part of the plan.

OVP led the $8M Series A round in M2E Power, along with @ventures and Highway 12. Gerry Langeler has joined the board of the company, backed up by OVP Venture Partner Rick LeFaivre.