Recent VC Funds may have brighter future

According to a 2009 Global Insight study, venture-backed companies accounted for 12.1 million jobs and $2.9 trillion in revenue in the U.S. in 2008. In the last 30 years, the US venture capital industry has established itself as bedrock of innovation-led growth of the US economy, and a model of success that other countries around the world have sought to emulate.

In recent years, however, phlegmatic returns have given rise to the criticism that the US venture model is bloated, or at worst, broken. I came across a recent paper published by veteran industry researchers – Professors Steven Kaplan of University of Chicago and Josh Lerner of Harvard University – that counters that notion. They contend that the industry may be strongly positioned for the years ahead. Some interesting findings are –

a) Historically, the industry returns have been strong when LP commitments have declined. This suggests that 2009-2010 vintage year funds should perform well.

b) Major corporations are reducing their central R&D facilities and are instead relying on acquiring technology through purchase of small entrepreneurial companies. This is a positive long-term trend for the venture capital backed companies.

Can Cleantech companies achieve escape velocities?

Many investors in the Cleantech space have been soured by lackluster industry returns in the past few years. Startup companies in solar, wind, batteries and electric cars, even when successful, are not known to generate 10x returns that sustain the VC industry. To compound the problem, too many companies and investment themes appear to have low survival rates – witness the micro-bubbles in fuel cells, corn ethanol, and algae.

I do believe in the promise of the Cleantech industry, but clearly the current practices are not working very well. To understand why, let us define a logical framework that adequately captures the industry's unique challenges and opportunities. One such framework is offered by the elementary principles of space flight.

The launching of a startup company can be compared to the process of launching a rocket. The startup attains success when it achieves enough velocity to escape the earth's gravity. Now, the principles of Physics state that a spacecraft’s ability to achieve escape velocity and reach its destination depends on four important factors:
1. The force of gravity
2. The quantity of fuel and rate of burn
3. The weight and design of the spacecraft
4. Careful alignment and timing between launch and destination sites