MICHIGAN CLEAN TECHNOLOGY CLUSTER MEETING

1
MICHIGAN CLEAN TECHNOLOGY CLUSTER MEETING

• Now, Why Would I Invest in this Sector?
• Lindsay Aspegren
• North Coast Technology Investors, LP
• Ann Arbor, MI
• lindsay_at_northcoastvc.com
• February 18, 2002

2
What is Venture Capital?

• A classic financial intermediary.
• A successful venture fund must earn a compounded
  cash on cash gross return in excess of 30 over
  its ten-year life (22.5 net).
• This return on investment is driven by multiples
  (10x or greater) not the time value of money.
• Core economics are based on (i) the pre-money
  valuation of the next round, an estimate of (ii)
  the number of financing rounds required until
  liquidity, and (iii) the amount of money needed
  in each round.

3
The Venture Capital Industry in the Late 1990s

• Historically unique time of wealth creation.
• In 1995, 9.9B was raised by venture capital
  funds and 5.1B invested in private companies. In
  2000, 104.6B was raised and 99.6B was invested.
• Prior to 1995 it took a company 6.5 years to go
  public. In 2000, it took 1.7 years.
• 70 of all venture capital invested in the last
  20 years was invested in 1999 and 2000.
• The best product to sell is stock (never make a
  product, never make a profit the
  price-to-dreams ratio).

4
Then The Comet Hit the Earth

• Historically unique time of wealth destruction.
• The NASDAQ fell from 5027 on March 13, 2000 to
  1397 on September 21, 2001.
• In 2000, there were 226 IPOs valued at 21.1B. In
  2001, there were 37 IPOs valued at 3.2B. With
  some exceptions the IPO window will be shut for a
  long time.
• In 2001, only 40.6B of new capital was raised
  by the venture capital funds and 36.5B was
  invested in private companies - this was the
  third largest year ever.
• And a lot of dinosaurs are feeling really sick
  today.

5
What Does All of This Mean for Venture Funding?

• You dont have to compete against those web guys
  anymore!
• There is 100B of uninvested venture capital
  raised by funds that has yet to be invested in
  private companies.
• Multiple reasons to be optimistic
• Economy is bottoming
• Considerable evidence of sectoral tolerance for
  new targets
• Less competition for classic economic inputs and
• Gloomy investment climate leads to more
  reasonable valuations for early-stage
  investments.

6
What Does This Mean for Clean Tech?

• Most Clean Tech companies are presumed to fit
  in the NVCAs Energy/Industrial category. This
  is not a good thing.
• In 1995, 0.3B or 0.6 of venture capital
  investment went into Energy/Industrial category.
  In 2000, this increased to 1.4. This is falling
  back to 1.0 in 2001.
• The number of Energy/Industrial category IPOs has
  declined from 16 in 1996 to 6 in 2000 and 1 in
  2001. The trend is toward less mature,
  speculative companies which is a double-edged
  sword.
• Clean tech is a statistically marginal category
  of investment for the venture capital industry.

7
What are Venture Capital InvestorsLooking for. .
.

• A growing market of reasonable size with an unmet
  need for a product or service.
• Novel technologies where you can quickly get to
  proof of concept and create barriers to entry.
• A strategy for partnering so that the risks
  associated with market acceptance and timing can
  be shared with someone else.
• Clear economics and capital efficiency.
• A kernel of a management team.

8
Still, There Remains Unlimited Potential for
Mistakes. . .

• Investing in a technology that has not achieved
  proof of concept.
• Investing in a technology that works, only to
  find out that no one cares.

9
Still, There Remains Unlimited Potential for
Mistakes. . .

• Backing a company with weak management or board
  of directors.
• Investing as part of a weak syndicate of
  investors.
• Botching the estimated market size and/or
  botching the valuation.

10
Still, There Remains Unlimited Potential for
Mistakes. . .

• Betting on the timing of a customer deal,
  corporate partnering deal, or IPO.
• Investing in a company where success is dependent
  on changing the way the industry works or
  customers behave.

11
Still, There Remains Unlimited Potential for
Mistakes. . .

• Investing in a company without doing careful due
  diligence.
• Firing, then aiming or aiming, and not firing
  waiting too long, or not long enough, to change
  management.

12
Still, There Remains Unlimited Potential for
Mistakes. . .

• Bad timing

13
So When They Look at Clean Tech Venture Capital
Investors See

• Markets that are dependent on regulatory events
  and/or governmental actions to trigger growth.
• A bias that novel technologies core value
  proposition usually adds cost in exchange for
  indirect benefits.
• Poor industry structures and predatory partners
  who demand control for customers/supplier access.
  
• Unclear economics and capital inefficiency.
• A comparative absence of managerial talent.

14
But Investing in Good Ideas is What Venture
Capital Investors Do.

• The long term demand drivers for clean tech seem
  to be clear despite the problems of market
  definition and industry structure.
• A clear value proposition ought to exist for many
  customers and investors as a result.
• Most of the other problems can be fixed if there
  is a clear commitment to run the enterprise as a
  business and not a science project and/or social
  good.
• Good managerial leadership and common sense never
  go out of style.