Ray Lane: Kleiner is not moving away from greentech
Fisker represents one of between six to eight greentech companies that Kleiner thinks will deliver big returns for the firm (out of its 70 or so greentech portfolio companies), and potentially make back a good portion of the hundreds of millions of dollars its invested into greentech over the last several years. Lane thinks over the next two years some of Kleiners half a dozen top bets will start to bear fruit via IPOs.
While theres been a perception that Kleiner has been moving away from greentech investing, Lane told me in an interview after the Karma event that Kleiner is not pulling back from greentech investing. Weve committed a third of our 12th, 13th and 14th funds to greentech, we have 14 active greentech investors, and I just did two more deals this morning, said Lane.
Heres our lightly edited interview with Lane, who discussed, among other issues, why investing in greentech isnt like investing in the Internet, what happened to Kleiners Think electric car deal, and why hes more excited about greentech than software.
Q). Have the returns been what you thought they were going to be for greentech? Did you think when you started that it would take a long time?
A). I didnt expect them to be any different, other than that there was a recession. When we first started investing in green heavily in the 05 and 06 timeframe, we went to our limited partners and we said greentech is going ! to have longer returns than digital. Every limited partner signs onto a 10-year contract with us and 10 years is about what they expect. They are not in a hurry, by the way.
In the VC industry, weve gotten used to investing in software companies, which is a lot easier development process. You get a couple of programmers, you get a product out in the first six months, and for the Internet you get customers really fast. And in a year you have a company. Google was 4.5 years. So in digital, they are used to thinking 4 to 5 years.
But when we got into greentech, we said we think it will be longer than digital, it will be more capital-intensive than digital, there will be more government policy involved, and also the fact that were trying to replace an existing infrastructure like coal, gas, and oil. And you have to scale it first. For the internet, like Google, Facebook, Twitter, they start small and they just keep going. But you cant do that with a gas plant, or a car plant. The first car that comes out my new car for example cant kill anybody. Facebook doesnt risk killing anyone when it first comes out. You cant build a car company in 3 to 4 years, its impossible.
Then you stick a recession in the middle of it. I dont want to blame the recession, but it did slow everything down. Capital raising was tough. People just went to sleep and left the market. There is no question.
Our expectations were always in the 6 to 7 year time frame. That time frame would really feel good to us. Were about to get there with some of the early companies, with the 05 investments. We expect returns, IPOs and liquidity events over the next two years. And were seeing them.
Q). When you look at Zynga, and they can make back the green fund in an IPO. How does that feel?
A). Sure. So can Fisker. Fisker has the potential to be the same value as Zynga.
Q). In theory youd think it would be the car company that would be valued higher, right?
The reason is, the business model of the Internet and software is unique. There are no other industries like it. You cant apply the rules of it to greentech. Its a totally different world. Most software companies have 90 percent margins, and after you include development, and services, maybe 50 percent to 60 percent margins. Youre never going to get that with a car company. Id be thrilled with 20 prcent gross margins for a car company.
Q). Does that make you lean more towards green software, or green IT plays, like an OPower?
A). Not exactly lean, but yes, what we want to do as many of those as we can. But theres not enough of them. It doesnt make a portfolio. Well continue to aggressively invest in the area, but there are just not enough software companies out there.
Q). What are areas that will continue to be attractive in the greentech space for Kleiner?
A). So, we started out with biofuels, solar, wind, those are some earluy ones. We did then a lot in conversion tech, coal to gas, and thermal electrics, heat to energy, waste heat to energy. Now were doing a lot of storage, electron storage batteries. Weve done a lot in water. Two years ago we hadnt done anything in water and now weve done 3 investments in clean water. Were starting to do a bunch in agriculture. Everything from changing the productivity of seeds to making fuels and producing sugars.
Q). What big returns are you banking on?
A). Im not going to comment on who files and who goes public. But I think youll see 6 to 8 IPOs out of our cleantech portfolio. In terms of big opportunities for companies, though not forecasting IPOs, I think there are big opportunities with Bloom Energy, Miasol! e, Silve r Spring Networks, Enphase Energy, Macoma, Fisker, and GreatPoint Energy. These companies I think will be huge. Theyll probably all IPO but Im not forecastin when, but these companies will be huge.
I think Id be close if out of the 70 greentech companies weve invested in, 20 of them will make no difference as in we tried and it was fun, but it didnt work and its not going to be a big company. Maybe 15 to 20. Then I think theres another 15 or 20 that are IPOs, big outcomes, return the fund kind of thing. Then everthing else is kindof like, we dont know theyre too early, or were still removing technical risk. Thats the profile of venture capitalists. We take so much risk so early that we never expect all of our companies to make it. The Kleiner model is that 1 or 2 will return the fund.
Q). So its going as you expected?
A). So far, its as expected. But again with a big headache around the recession. I would have expected some early, not on time, but early IPOs. I think without a recession, we could have seen a few of these companies IPO last year.
Q). Do you feel like the greentech investing space as a whole has learned lessons. A lot of the generalist VCs that moved into greentech investing and havent been as aggressive as Kleiner have moved out.
A). We had all of the challenges for greentech on the first piece of paper for our limited partners: government policy, capital intensive, regulation, that its tough to invent a new business. The only one we didnt put down was a recession. Actually a recession would have been fine, this was a depression. Kleiner went out and raised extra funds just as an insurance policy, but we never used a dime of that.
GreatPoint Energy is a good example. They were on a capital intensive plan to build plants in the U.S. The combo of a recession and shale gas finds in the U.S. meant that GreatPoint was looking at a very tough time building their plant in the U.S. So we sent! them Ch ina to start developing partnerships there. So that is where they are going to build their plant: in China. Where they pay three times what we pay for natural gas.
If you and I sit down two years from now and we dont have a single IPO from this group, Id say now we are behind. But we do expect IPOs out of a bunch of companies.
There have been other funds that followed us and Khosla in and the recession took them out of it. I also think they are feeling the overall crunch of venture capital. We have always said that the VC industry is too large. Its got too much capacity. There are 900 VC firms in US, there needs to be 300. Youre seeing this macro trend of LP passing on new funds.
Q). So for Kleiner maybe theres more opportunities now that there are less general investors in cleantech.
A). Thats exactly it. I like it. We dont like to have VCs that copy ideas or be me-too. Valuations go up. Theres more competition. You have to have a thesis when you are investing in greentech. When I did Fisker and another car company, my partners thought I was out of my mind. But I had a thesis. We can invest in a car company and either have a way to get the valuation high enough so you dont get crushed on dilution or get low cost loans that are high leverage for equity investors. Or buy cheap assets, which I did not know going in. I did not know we could go to GM Disposal corp and buy a plant for $20M, that as a big deal for us and Tesla at the NUMMI plant.
Q). What happened with Think?
A). I should probably explain this to the market. think did not turn out well. I did not invest in Think and I passed on it several times. And I got a call from Rockport and they had come up with an idea to invest a little bit of money, $5 million $2.5 million each to buy the North American rights to Think if they ever come here. So right from the beginning I did not see it as an American car. I saw it as a European city car, and to t! his day, I think Europeans will pay $35,000 for a little car to be able to park it in small spaces and scoot around the cities in it. They sold 3,000 of those no one has sold that many EVs.
So I thought our investment was pretty cool, and we owned some of the rights for $2.5 million dollars if they brought it here to the U.S. Then when they were starting to restructure Think Inc, they wanted to buy the American rights back, and I said OK, for $2.5 million. But we ended up getting 1.5% of Think for selling that back. So I thought that was a pretty smart investment.
Q). Anything else I should know about Kleiners greentech future?
A). I was one of the first ones to say: this [greentech] is what I want to do. I just did two digital investments because I knew KP wouldnt do them without me getting involve. But Im not out there looking for digital investments. I dont want to do them. I have no interest, I dont go to the meetings, and I dont follow all of those social stuff. I volunteered to lead this greentech practice. This is my day job and I like doing it.
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