Identification – Friend or Faux

The old military acronym “IFF” takes on new meaning today. In this very difficult economy, one of the most important resources any of us have is not just our money but our time. We need to know where to spend the one asset we have no ability to grow.

That is why it is so critical we all seek to quickly identify who is a “friend” and who is not a just foe (those are easy to spot), but a worse character - a false friend (or “faux”).

For our portfolio companies, it means a laser focus on figuring out which customers really have budget to spend, and which ones are happy to spend their time with no intention or ability to generate revenues and cash. Customer qualification is paramount.

For those of us on the venture capital (VC) side of the table, we are about to be deluged with well-meaning, reasonably experienced entrepreneurs or would-be entrepreneurs who have either lost their jobs, or have lost their way. Many startups are not entering this period of stress with enough capital to make it out the other side. Many will have compelling stories, and our venture capitalist sense of what is “right” or compassionate will say they “deserve” to get funded, or at least get a good hearing. (For those who never thought they’d see the words venture capitalist and compassionate in the same sentence, our apologies).

No one deserves anything – we all have to earn it. We need to focus on an unflinching adherence to ruthless prioritization. That is the only thing that gets you through periods such as these. Whether it is triage within our portfolios, or triage among those competing for a share of our work day, we need to be tougher than ever to make every minute and every dollar count. It is a faux friend who takes up our time, time we could be spending helping a portfolio company find that one great customer or strategic partner on whose shoulders we ride out this storm.

A lot has been made about some draconian PowerPoint decks circulating around our industry. Have the “good times” gone forever? More on that in an article below.

In the meantime, all of us owe it to our masters, be they Limited Partners or VCs (depending on our place in the food chain) to make sure 100% of our efforts are directed at things which bring us out the other side of the recession, no matter how long or deep it is.

Winners write the history. Let’s all be there to do so.

Spend your time with friend, not faux.

A Storehouse of Power

As new sources of power and more efficient transportation alternatives become viable, the Clean Tech industry has to solve the critical challenge of how to store and discharge energy quickly. Current energy storage alternatives fall short for a wide range of applications from power tools & portable electronics, to forklifts & industrial equipment, hybrid/electric vehicles, and peak power & uninterruptible power supply solutions.

Ultracapacitors have the promise of becoming the next big energy storage technology. Their advantages over batteries are many, including:

• Up to 100 times more instantaneous power than batteries
• Store & release energy ~1,000 times faster than conventional batteries
• Much longer lifetime (~1 million recharging cycles vs. only ~1,000 for batteries)
• Broader temperature tolerance (-40^oC to +70^oC)
• Better reliability and maintenance free
• Long shelf life
• A safer and more environmentally friendly technology

But ultracapacitors have two major disadvantages compared with batteries. They have lower energy density (~1/10th the energy storage capacity), and they cost 3-5 times more than batteries.

If these shortcomings can be addressed, the ultracapacitor market could grow from $500 million in 2007 to over $10 billion in 2012. The automotive industry is the mega market, representing ~90% of the long-term forecast. But even if you exclude hybrid & electric cars, it’s over a $1 billion opportunity in 2010.

The major technology hurdle has been the quality of naturally derived activated carbon – the key material which represents >50% of ultracapacitors’ costs. OVP's latest new investment, EnerG2 (see below), solves this problem with their nano-engineering processing technology. They can construct very pure, synthetic activated carbon, which improves the power performance of ultracapacitors at a much lower cost than the best commercial carbons available today. Ultracapacitors are poised to ride a very big Clean Tech wave!

Is it Doom or just Gloom?

OVP's perspectives on the latest machinations in the economy are simple:

• Markets go up and they go down. As long-term investors, we don't get too excited either way.
• Certainly, it pays to be prudent on the burn-rate side of the house as we see just how long this down cycle lasts. But, worshiping draconian cuts for the sake of "surety" is a false god. Some VC slide decks (and VC doomsday behavior) seem more designed to gather press coverage than dispense wisdom.
• This is a time as ripe as ever to make those tough personnel changes you might put off in better times. Rather than suffer along with a B or C player, step up and remove that person now and hire an A player when you find them. There probably will be more A players floating around, thanks to companies that take the draconian approach above.
• Cash is always king. Right now, it is ace, king, queen and jack. If you have money, hoard it. Slow down your payables. If your bank offers you a loan, draw it down. If you are raising equity money, take more. And don't for a minute confuse low dilution with success. No company ever fails from dilution. The only thing that will kill you is running out of cash. Grab every bit you can.
• Assume your customers' budgets will be under duress for at least the next year, and more likely the next two. Figure out what you can do to become a have-to-have rather than a nice-to-have. Expense reduction sells much better than revenue enhancement in tough times. Pain killers always outsell vitamins.
• Regarding IPOs and a venture slowdown - with the exception of a brief period in 1983-1984, and a slightly longer one from 1997-2000, IPOs are not the way most startups, even venture-backed startups, ever achieve liquidity. But go ahead and build your company as if you were going to be a stand-alone public entity some day. It will make you stronger. On the other hand, especially in these times, develop regular, systematic connections with the top business development people at the leading companies in your field. They are the ones who will be most likely to offer you an M&A exit ramp.

OVP just closed our ninth new investment this year. For us, that is a record. We see no slowdown in great entrepreneurs, great ideas or great technological advancements. And by the way, the new companies we are backing today we hope will achieve liquidity in about 2015. Today's crises are meaningless on that timescale.

Doom and gloom is overrated.

Heads down, sleeves rolled up, let's get back to work.

More than a few from the U

Many people are unaware of what a powerhouse the University of Washington (UW) is when it comes to technology research. The UW ranks as the top grant-funded public university in the country. Out of that engine come some very exciting company ideas. For the last two years, OVP has been working inside UW with a team of scientists and entrepreneurs in the field of energy storage.

Now, we can announce the recent funding of EnerG2 in Seattle, a firm using nano-engineered carbon to produce a new generation of ultracapacitors, promising to bridge the gap between traditional capacitors and battery storage.

OVP led the $8.5M Series A round in EnerG2, along with Firelake Capital. Gerry Langeler has joined the board of the company, backed up by OVP Venture Partner Dr. Rick LeFaivre, who shepherded the process for OVP over the last two years.