Tuesday, October 4, 2016

Two Technologies to Improve your Laundry Operations

There is a lot that goes into running a laundry operation efficiently; however, there are two areas which if not given proper attention could have a significant impact on your bottom line - disinfection and water heating.

No matter the environment, the presence of harmful pathogens is an everyday reality with a greater number of them becoming resistant to common treatment schemes. Our portfolio company, Advanced Diamond Technologies (ADT) is commercializing on-demand oxidant generation systems that enable users to safely and efficiently disinfect using water and electricity as the only system inputs.  Powerful oxidants help control the spread of pathogens while reducing chemical, cleaning and operational costs for facility owners and operators.

Water heating makes up 80-90% of the energy costs of a washing machine. Our portfolio company, Intellihot, has been able to cut its customers energy bills in half while lowering capital expenditure and space requirements.  The company provides commercial and industrial scale on-demand water heating technology, which is backed by more than 30 patents. 

For more details please contact - Laurence Hayward, 312-953-3174 or at lkh@theventurelab.com.

Tuesday, July 12, 2016

Value Creation and Corporate Survival in the Digital Revolution

By Pierre Leroy and Ryan McManus


Digital’s impact on value creation and company valuations across industries is vast, with estimates including the global digital economy accounting for 22% of the world’s economy in 2015 and forecast to grow to 25% in 2020 [i], $19 trillion of value at stake from the emerging Internet of Everything [ii], to some estimates of digital’s market impact as high as $100trn [iii]. Whereas digital first emerged as a marketing tactic and progressed into the operations domain--offering opportunities for cost efficiencies--it is now a major strategic imperative evolving at a staggering pace.

The term “digital” is used in a myriad of ways in today’s economy, but its basic definition is relatively straightforward—it refers to the information intensity and connectivity of resources. While the definition is simple, digital’s impact on an organization is exceptionally broad, affecting a company’s product portfolio, functional and investment strategies, business and operating model, and potentially its very survival. Digital business strategy therefore requires a combination of reengineering, creating an agile company, innovation, personnel talent and capabilities, cyber security and reimagining business models.

In this new environment, the companies that win will have a Board of Directors supporting a broad digital strategy led by the CEO, including a focus on financial performance and company culture. This article provides directors with a board-level strategic overview of the digital revolution and its implications; as well as strategic considerations for investors concerning the structure, leadership and financial promise of a company in an economy where winners and losers are more and more defined by their digital prowess.

Considerations for Directors and Investors

This article addresses the following five points:

  • The speed at which digital is creating, transferring and destroying value is unprecedented, with significant and measurable implications on culture, strategy, competitors, revenue, profitability and share price.
  • Digital is no longer evolutionary, it is revolutionary with ramifications similar to the Industrial Revolution.
  • Digital’s power lies in creativity and collaboration. Creativity, which has been given lip service but not serious investment in many industries, is the most important element in collaboration yielding results. 
  • Cyber security is an extremely important risk but needs to be managed like any other risk, namely without missing digital opportunities. Superior management of cyber risks will create opportunities for competitive advantage.
  • Digital requires new investments in innovation, as well as directors who support experimental investments that may require rapid and unforeseeable changes midstream. Only CEOs can lead the enterprise-wide strategic and cultural change to realize a successful digital strategy, and it is almost impossible for them to do so without board level support and understanding.

Triangulating Digital‘s Impact on Enterprise Value

An emerging body of research describes how leading companies across industries employ differentiated digital strategies to create competitive advantage. These companies are outperforming their competitors in financial terms. Financial indicators include:

·         Large companies on average are looking to invest $100m in digital initiatives annually.[iv]   
·         Digital leaders address both growth and cost efficiency in their digital strategies, but they are twice as focused on growth than are digital followers.[v]   
·         Digital leaders significantly outperform their competitors in financial performance (figure 1).[vi]

Figure 1: Digital Leaders Outperform their sector average 
Shareholder and Analyst Attention

As digital leaders continue to outperform their competition, this data provides a new lens through which analysts, investors and other stakeholders can evaluate a company’s future growth outlook and its management. As digital’s impact on competitiveness and markets is better understood, and more and more data correlating performance and digital strategy becomes available, digital leaders across sectors will garner higher valuations while digital followers will draw activists and unfriendly takeover attempts. Indeed, one of the authors was invited by a major global asset management organization to discuss the subject of digital and emerging valuation models, attended by portfolio managers with over $1 trillion under management.

Digital is Revolutionary, not Evolutionary

Despite digital’s impact on business performance, many companies consider the advantages of digital as limited and functional. They continue to think of digital in terms of tactical marketing/channel, operational efficiencies, customer applications, or specific SMAC technologies (Social, Mobility, Analytics, Cloud). Other companies consider multiple elements but do so through isolated, disjointed efforts.

Figure 2 describes the cycle of digital transformation and its impact on businesses.

Figure 2: The Digital Transformation Cycle

During recent years, digital has evolved through the convergence of consumer expectations, sensors and SMAC. "What's new about the digital enterprise is the emergence of all these new technologies coming together at the same time," says George Westerman, an MIT research scientist and co-author of the book Leading Digital: Turning Technology Into Business Transformation.

What’s Changed Since the Internet Bubble

Massive increases in data and computing power, combined with the digitization of previously analog resources across industries, create exponential opportunities to commercialize new value creating combinations. It is faster, easier and cheaper than ever for companies of all sizes to innovate and experiment, resulting in a wave of startup and non-traditional competitive products. During the Internet Bubble companies needed to invest substantially to create their own technology infrastructures and code base, hire their own talent, and stand up the enterprise. Now companies can rent or acquire just the resources they need, in most cases at a cost advantage. Scale is no longer a barrier to entry and may even be a handicap if it represents expensive and antiquated infrastructure.

For example, companies like Instagram, Spotify, and Netflix operate on a third party’s cloud platform. Firms now have access to speed and scale without having to pay the considerable costs of their own full infrastructure. They can rent a bundle of infrastructure services (SMAC and more) and scale up or down to meet demand. 

Furthermore, Clive Longbottom, founder of Quocirca, notes non-cloud IT platforms run at approximately 10% server utilization, 30-60% storage utilization and 30% network utilization. Cloud-based services provide 80% utilization rates in most cases [vii]. These utilization rates drive lower operational costs which most companies are not able to replicate internally, creating a huge advantage for subscribing companies as they pass these savings along to customers in an effort to disrupt traditional players. During capital reviews for additional IT capacity, directors may want to ask about current utilization rates and if cloud-based solutions would be preferable to purchasing additional hardware or building another IT center.

Digital Business Strategy

As digital’s impact eclipses marketing and operations, winning companies evolve both their business and digital strategies. Figure 3 describes the four levels of digital strategy and the competitive impact associated with each level.

Figure 3: Four Levels of Digital Strategy

Characteristics of the four levels of digital strategy:

Customer centricity—understanding, anticipating and delivering new value to meet customers’ continuously evolving digital expectations—should be the focus of any digital strategy. Customer centricity in the digital revolution means more than customer satisfaction or giving the customer a great experience, although it includes both of these. In the new environment customer centricity starts with the question, “What new and enhanced value can we provide to both our current customers and customers in new markets?”

These four levels of digital strategy are not mutually exclusive, i.e. digitally savvy companies will generally address all four levels. Furthermore, every digital strategy depends on operational efficiency, user experience, a combination of SMAC technologies and data--and more and more importantly, big data.

Big data can be understood as the massively sized combination of a company’s internal and external data as well as data it has acquired from other sources, organized such that it can be analyzed and repurposed. Data needs to move seamlessly within and outside of a company, including to customers and partners; and potentially represents new monetization opportunities through either entirely new analytics-based revenue streams or analytics offerings added to existing products. Companies must also plan to stay abreast of the continuing rapid developments in big data, including data lakes, machine learning and other applications of artificial intelligence.

Successful companies start to distinguish themselves from the pack at the product and services and business model levels, which bring greater opportunity for competitive advantage. Companies which focus their digital strategies at the products and services level look to either add a digital element to an existing offering (e.g. mobile banking) or create new offerings from newly available digital combinations.

The first instances of business model disruption largely occurred in media and communications, but now impacts every sector: 
  • Automotive OEMs need to reimagine vehicles as part of a broader, connected information ecosystem as well as adjust for changing models of ownership as companies like Uber or Google’s self driving vehicles challenge traditional notions of vehicle ownership.  
  • Consumer financial services firms see their revenues under threat as startup and nontraditional competitors take bites out of specific elements of their value chains (e.g. Wealthfront in wealth management or Venmo in payments). 
  • Even staid utilities need to grapple with changing business models, as more consumers install alternative energy solutions and sell energy back to the grid—their relationship is now bidirectional in terms of both energy and payments.

Examples of emerging digital business models exist across nearly every sector. They require leaders to reconsider not only products and services, but the entire strategy of their organization across corporate, business, operating, talent, culture, risk, legal and functional levels as well as how their company fits into rapidly changing and converging value chains across sectors. In fact, more and more organizations are looking to nontraditional ecosystem partnerships and acquisitions in an attempt to create customer value.

For example: 

  • IBM and Apple work together and with the startup Box to create a new analytics offering providing file sharing, cloud services and analytics services on Apple devices.
  • Santander teams with mobile payment company Monitise to jointly invest in and build new Fintech startups.
  • Audi, BMW and Daimler purchase the mapping service Nokia Here for $2.7bn to own a key element behind self-driving cars.[viii] 

A successful digital strategy defines new opportunities to create new value for companies and their customers. It aligns the technology, functional, cultural and operational considerations in service of these new value outcomes, potentially rendering obsolete or reducing the value of what previously existed.

Digital Directors

The understanding of digital and digital strategy is varied among directors, which can lead to gridlock in the boardroom. Some directors view large investments in people, systems and cultural change as a waste that doesn’t create shareholder value. In addition these directors are hesitant in experimenting and investing in projects more experimental in nature. Others understand without transforming the organization it will not survive.

Digital director searches are becoming more common with boards primarily seeking directors from Internet companies, former CIOs or directors with digital marketing backgrounds. These profiles may not fit culturally with the rest of the board or, worse, may even perpetuate an outdated and exclusively tactical digital perspective. Digital directors should have demonstrated digital creativity, a broad understanding of digital business strategy and be “culturally-bilingual” in that they are able to bridge any gaps within the board while serving as the CEO’s digital champion.

Representing Shareholders in a Digital World

It used to be that change was the only constant. Now the only constant is dramatic, rapid change where digital is the primary driver.

When digital was primarily concerned with marketing or incremental improvements to operations it was appropriate for it to be a minor item on the board agenda. When cyber security became a major risk issue, digital became a more important agenda item. In these times of digital disruption, a lack of creativity and a fear of experimentation will prevent companies from succeeding.

As digital has evolved into a major driver of value creation, business strategy and competitive differentiation, some boards have created a digital/technology committee. Given digital’s importance to a company’s competitive advantage and in some cases their survival, establishing a board-level committee with members who are or will become digitally savvy is prudent. As investors incorporate digital’s importance into company valuations and governance, they will insist on it.

About the Authors:

Pierre Leroy is the Founder of the Aspiture, a Venture and Strategy Consulting firm. He currently serves on the boards of Capital One Financial Corporation and Rocore. Previously, he was the CEO of Vigilant Solutions (a digital software and hardware company) and served on the boards of Fortune Brands, RSC, and United Rentals. He is the retired President of Worldwide Construction & Forestry Equipment and President, Global Parts Division, at Deere & Co.

Ryan McManus is the SVP of Partnerships and Development for EVRYTHNG, an IOT smart products platform, and currently serves on the board of Nortech Systems. He is the co-founder of Aspiture and collaborates with TheVenture Lab on digital strategy and transformation topics including new ventures, growth, product development and innovation for startup, growth and large companies. He previously founded Accenture’s Digital Business Strategy practice and served as the Accenture Strategy COO and a leader in the firm’s Corporate Strategy, M&A and International Expansion businesses. He is the author of several publications and a frequent presenter on digital and business strategy.

[i] Digital Economic Value Index, Accenture, January 2016
[ii] https://www.weforum.org/agenda/2014/01/are-you-ready-for-the-internet-of-everything/
[iii] http://reports.weforum.org/digital-transformation-of-industries/an-introduction-to-the-digital-transformation-of-industries-initiative/
[iv] http://sites.tcs.com/stateofdigital/
[v] https://www.accenture.com/us-en/insight-doubling-down-drive-digital-transformation
[vi] MITs Center for Digital Business and Cap Gemini report “The Digital Advantage: how digital leaders outperform their peers in every industry”
[vii] http://www.cybertrend.com/article/17307/managing-cloud-disruption
[viii] http://www.wsj.com/articles/bmw-daimler-audi-agree-to-buy-nokias-here-maps-business-1438580698
[ix] https://hbr.org/2015/03/why-data-breaches-dont-hurt-stock-prices
[x] http://money.cnn.com/2014/12/15/investing/sony-stock-hack/

Wednesday, June 22, 2016

Sourcing Strategic Investment, Part II

Thoughts on funding your business with corporate venture capital

Make a wish that corporate venture continues to grow.  It is an increasingly vital source of capital for many companies.  How many financial venture capitalists are investing in material science these days?  Or cleantech?  Or hardware? In Part I of this series we discussed why this is so important, as well as considerations for entrepreneurs who are pondering corporate investment (see Part I).  In Part II, we discuss finding corporate investors that understand entrepreneurs’ needs for flexibility and ubiquity.


In a strategic investment, the corporation typically seeks to gain a strategic or operational advantage by investing in emerging technology.  The company seeks access to new markets, a large customer, a dedicated supplier and other benefits in addition to capital.  Sounds like a match made in heaven, right?

Well, it’s complicated. Those additional desires often make their way into forms of agreement; not always, but often.  Separate from “agreements” there is “the relationship”.  And any good relationship requires ongoing trust and mutual benefit.

In Part I we made reference to common types of agreements such as: distribution and supply agreements, license agreements, exclusivities, non-exclusive rights to product/technology, right of first refusals (ROFRs) for sale of company, preferred pricing arrangements and favored-nation clauses.

If there are no agreements beyond the investment, then what is expected from the
relationship may be vague, but there are expectations nonetheless.

So, as both parties seek advantages beyond capital, it is important that the manner by which they are achieved is compatible with the way the entrepreneur plans to run the company.  Is there a common vision for where you want to go and how to get there?  The latter is notoriously mutable.

If the entrepreneur changes business models, is there reason for both parties to continue working together?  What about a change in product mix?  Is the strategic a supplier and the entrepreneur needs to also use other suppliers?  Is the strategic a customer and the entrepreneur wants  to sell to their competitors?  Is the strategic a distributor and the entrepreneur needs channels they don’t cover?  Is the strategic a potential acquirer and the entrepreneur wants to make sure he can still obtain the highest possible bid when you sell the company?  Likewise, is the strategic pursuing certain lines of business that the entrepreneur may see as competitive?  Can you do all these things within the framework of the relationship and keep it intact?  The two parties want to assume the best going into a relationship, but a frank conversation around each of these issues may go a long way in management expectations and ensuring alignment.

A critical need for entrepreneurs is flexibility, whether that is to change strategies, business models or product mix.  Many strategics need flexibility as well,.  Corporate objectives and personnel shift more quickly today than ever before.  How will changes in management or corporate objectives impact the relationship?

Strategic investors that have been in venture investing for some time understand an entrepreneur’s need for flexibility.  Others may understand it conceptually, but still need to put the interests of their organization first.  Finding a comfort zone among potentially conflicting goals is an important part of the discussion. What are your expectations for this relationship?  And what if you need to make some of the aforementioned changes?

Early in my career, while negotiating a strategic investment, I remember someone using the phrase “the imagined horribles.” It had to do with attempts to document away bad things that could happen.  The utterance of that phrase released some pressure. We all realized we were investing way too much energy in negotiating things that probably wouldn’t occur. 

That’s not a suggestion to be a Pollyanna.  We did include language in that agreement to protect against some imagined horribles, but we curtailed it.  The suggestion is that building a venture requires flexibility.  It might not be in the interest of either party to document every aspect of the relationship.  The relationship, like the business, will change and adapt. Allow it do so. Focus on the most critical needs of each party.  If there is reason to continue working together, the parties will do so. If there isn’t, an agreement may bind, but will it benefit?  Or does it prevent the deal from getting done in the first place?


Seeking ubiquity of one’s product requires vision, guts and more than a bit of confidence. A desire to achieve it is a trait common among great entrepreneurs. 

So, in taking on corporate investment, a key assessment for any entrepreneur is whether the investor will help augment or restrict the achievement of ubiquity.  Will the strategic help the entrepreneur reach new markets or customers?  On the flip side, will the strategic ask for exclusivities or restrictions on what the entrepreneur can do? 

For example, strategic investors may want exclusive right to a product or technology, providing an advantage in the market versus the competition. This doesn’t seem like an unreasonable demand in exchange for capital and distribution.  And it's a tradeoff that has been made.  However, many entrepreneurs recoil at the suggestion of any kind of exclusivity because it inherently conflicts with the ubiquity they seek. 

Fortunately, in this era, many corporate investors don’t require entrepreneurs to make this choice even when it would seem in their best interest to do so.  Why?  Because gaining access to the very best entrepreneurs and technologies requires terms acceptable to not only the entrepreneurs but also to the other investors.  And for many important technologies, a syndicate of investors is required to get the company to the promised land, however that may be defined. 

Besides, there are several ways to “win”.  If the strategic wants to own a technology or product outright, they are in the best position to understand its value and acquire or license the technology.  Even without exclusivity, a strategic typically gains a first mover advantage if they are working with an entrepreneur to commercialize a new technology.  There are the intangibles of a culture of innovation that comes with a program of working with entrepreneurs.  And, like all the other investors, the strategic has the benefit of their equity value if the product succeeds.  In sum, a strategic can win in many ways if the technology becomes widely available, even to direct competitors.

For entrepreneurs who are still concerned about a strategic limiting his/her options to sell product to anyone (or just the perception of being linked to one customer), they may consider strategics on the supply side rather than the buy side.  A strategic that supplies raw materials to an entrepreneurial venture also wants that venture’s product to become ubiquitous.  They may instead seek exclusive rights to supply or to match other suppliers, which is another point for negotiation.  For now, let’s just say redundancy in the supply chain is critical for most businesses that intend to scale.

Ironing It Out

So, here is the challenge: finding common ground amidst mixed motivations.  The entrepreneur seeks to protect his needs for flexibility and ubiquity.  The strategic seeks to serve the strategic objectives of his corporation.  They both seek to generate a return on investment (ROI).  Focusing on that common objective is something that tends to align all the key stakeholders.  It can help parties move beyond provisions that would otherwise impede flexibility or ubiquity.   If you’d like to discuss any of these matters, send an email to lkh@theventurelab.com to schedule a time.  Until then, best wishes for a prosperous venture.

Wednesday, November 11, 2015

Sourcing Strategic Investment

Sourcing Strategic Investors, Part I

Thoughts on funding your business with strategic or corporate investors

I've participated in transactions with strategic investors ("strategics") as both a co -investor (venture capital fund) and as an entrepreneur. It is perhaps most common to think of strategic investors as larger, established corporations that make equity investments in entrepreneurial ventures (and that is precisely how the Kauffman Foundation defines it). However, the reasons they make these investments vary and are more subtle than the definition implies.
A somewhat obvious reason is that the corporate investors seek to gain a strategic or operational advantage by investing in emerging technologies.  A friend of mine who has worked in multiple large corporate venture groups offered a bit more color. Corporations set up venture units to (1) serve as a single contact point for emerging technologies, which historically could get lost in the organization, (2) fill the gap in the capital markets where meaningful innovation needs to occur, and (3) align interests between technology companies, which bring valuable innovation, and the corporate enterprise. 

This article focuses primarily on direct equity investments in emerging companies, however, corporations have also been active in setting up in open innovation programs and becoming limited partners in independently managed venture capital funds (sometimes with co-investment rights).  So, a corporation need not have a dedicated fund group in order to be actively involved in the world of venture-backed companies.

Also to avoid confusion, when I refer to “venture firms” or “venture capital funds” in this article without the word “strategic” or “corporate” in front of it, I’m referring to non-strategic venture investors. These are typically venture capital funds managed by a team of professional asset managers backed by limited partners as part of a financial return strategy (rather than to gain a strategic or operational benefit).  I’m a partner in such a venture capital fund called Independence Equity.  In many cases, the limited partners want the exact opposite of strategics: little or no connection to the assets in which the managers are involved (a wall) just as the average investor doesn’t tell his mutual fund manager what to do. These lines are blurring in some cases, so stay tuned.
Setting the Stage

Corporate venture capital is experiencing a bit of a renaissance. According to National Venture Capital Association, corporate venture groups invested $5.4 billion in 2014 accounting for 11% of all venture dollars invested, marking the strongest year since 2000. I experienced this first hand in the late 90's where seemingly everyone caught the private equity bug. Many large companies, including my former employer Arthur Andersen, entered the venture game. This time it feels different and more circumspect (it was $15 billion in 2000). My former employer wasn't an experienced venture investor and the targeted companies weren't necessarily strategically aligned with its product and service offerings. Back then, service firms including accounting and law, were exchanging fees for equity. It didn’t end well and many of these initiatives were terminated. Today, I see corporate investors taking significant efforts to ensure business unit alignment, in short, to ensure there is an operational benefit in addition to a financial one.

Corporations are playing an increasingly critical role in financing important technologies.

I hope this approach proves sustainable because corporations are playing an increasingly critical role in financing important technologies. Let me offer some personal perspective.  Our venture fund invests in sectors such as cleantech, agriculture, material science and advanced manufacturing. In these circles, there is regular lamenting over the availability of venture capital. I suppose one might suspect that entrepreneurs in any sectors might state there isn’t enough venture capital, but in sectors like Cleantech, the investors themselves also feel this way (you could say they actually want a bit more competition). A combination of several factors, including capital intensity and extended sales cycles have led many venture firms away from sectors such as Cleantech and back into traditional areas of focus such as Infotech. 

Fortunately, strategic investors have stepped in where financial investors have exited. This matters a lot, because many of these companies are commercializing breakthrough innovations that benefit mankind. And, they can't all be brought to market solely on government research dollars. I'm reminded of a cover of MIT Technology Review BusinessWeek featuring Buzz Aldrin, "you promised me Mars Colonies, Instead, I got Facebook".

So, many entrepreneurs in sectors such as the aforementioned (as well as those in infotech, biotech and others) often ask me whether and how to work with these types of investors.  

It is important to understand that just like other types of investors (angels, family offices, venture capital firms, etc.) there are a wide spectrum of strategic investors, and with it, how they approach deals.

Types of Strategics

Many strategic investors begin by making investments from their balance sheets through operating divisions within the company. It's not clear to me that all these investments are captured in the aforementioned statistics, which represent more formalized venture groups. The balance sheet approach can add some complexity in terms of reporting requirements for the strategic and how entrepreneurs perceive their motivations.

Other firms have taken the step to set up a separate venture capital unit, in some instances as a separate corporate entity or business unit. This is done for a variety of reasons including internal organizational ones for the strategic, but it is also done to address a key concern of many entrepreneurs: "will the strategic attempt to tie me up in some meaningful way?"

Separate venture capital units are, in part, designed to avoid these concerns. These dedicated units take other steps as well at time such as eschewing Board of Director positions in favor of observer roles or other advisory roles. However, this is not always the case and the concern remains a real one for many entrepreneurs. 

In most of the strategic transactions in which I've been involved, the strategic sought some special rights in addition to the purchase of equity. These can come in the form of distribution and supply agreements, license agreements, exclusivities, non-exclusive rights to product/technology, right of first refusals (ROFRs) for sale of company, preferred pricing arrangements and so on. It is critical for the entrepreneur or the co-investing financial investor to understand the implication of these agreements before beginning discussions with a strategic. Many of these agreements can have a significant impact on a company's ability to pivot, exit opportunities and exit valuations.

For example, most venture capital funds will advise their entrepreneurs that ROFRs are a non-starter. And with good reason, a right of first refusal in the sale of the company can make a competitive bid or auction process impractical. Why would a competitive buyer delve deep into diligence if they know the deal can be swept away from them at the last minute by the company holding the ROFR? The potential buyer would also wonder how deeply entrenched the company is with the other strategic and be concerned with competitive disclosure issues. In short, a ROFR could restrict an entrepreneur's ability to maximize value in an exit and to create a true auction-like environment.

Remember the objective of most venture-backed companies is extraordinary returns, not average returns. From the perspective of the entrepreneur and the non-strategic investors, it is not about seeking a fair price in an exit, it is about getting the best price possible.  

While I'm on this subject, I should carefully note that many of the strategic investors with formal venture capital units do not necessarily seek to become eventual acquirers of the companies they invest in. And as highlighted previously, they often avoid some of the aforementioned conflicts by avoiding ROFRs and other issues. The strategic or operational gains can be found in other ways.
Separating Equity from Everything Else

For example, they could be a customer, distributor, supplier, etc. They could be first to market with a new technology. A distribution or supply agreement could be of great benefit to both parties. For example, imagine a small company that quickly gains access to global distribution of a large corporate enterprise. So, a key consideration becomes determining the value of any arrangement that is outside of or in addition to the exchange of equity.  
First, it is important to account for any exchange of value above and beyond the equity (as if the party was not an investor). For example, if there is a license, then that license provides some value via access to technology. License agreements often include upfront payments and royalties for the value of the technology to the strategic. A company will want to clearly capture and specify this value. 

Second, an entrepreneurial venture often will require multiples types of investors over time.  So, if an angel, venture capital firm and a strategic invest in the same company, how do you ensure they have equitable value especially if the strategic is getting “extras”?  On the one hand, access to the emerging company technology might provide the strategic a major competitive advantage in the marketplace. On the other hand, the strategic investor might bring added value that the angel investor can't. What is one to do? Account for it in discrete standalone agreements separated from the equity arrangement. For example, if there is access to technology involved then structure a separate license agreement. On the flip side, if the strategic is providing access to new markets, a distribution agreement might help ensure fair compensation for selling the company's product. In other words, price “extras” separately where possible.

Third, equity interest and operational interest may at some point diverge. For example, a strategic may at some point elect to exit an equity position, but might still want to have an operational relationship such as a license with the company. If those were intermingled, separating them may be a challenge.

In short, operational or strategic benefits need to be properly accounted for and they need to be valued separately from the price of equity. After all, the price paid for equity involves a fair exchange in percentage ownership in the company just as provided to any other investor (angels, VCs, etc.).

In Part II we will continue the discussion about alignment and how to ensure that interests are aligned between the strategic and the other company stakeholders. We will also discuss how one finds the right investor. 

As I’m habitually late in issuing these newsletters, if you’d like to discuss any of these matters before the next newsletter, send an email to lkh@theventurelab.com to schedule a time. Until then, best wishes.

Tuesday, March 3, 2015

Generally Accepted Truths of Cleantech Investing…Debunked

It is generally accepted in Cleantech investing that (1) the companies are capital intensive, (2) there is a sustainability premium associated with buying the companies’ products and (3) the adoption of the companies’ technologies requires a change of behavior.  All three can slow adoption and negatively impact scalability and internal rate of return.  Certainly this can be true for many Cleantech companies, but it isn't true for many others.

There has been an evolution and broadening in the definition of Cleantech, call it 2.0.  Cleantech 1.0 involved funding solar, wind, battery and biofuel technologies.  Many drew parallels to biotech investing in which large sums of capital and extended timeframes preceded product viability.  Then add in the need to build factories and infrastructure.  The faint of heart don’t change the world.

Often these 1.0 technologies required the end user to pay more for their use, many required subsidies or incentives to be competitive.  For example, there is a generally accepted “sustainability premium” associated with receiving power by solar relative to coal or natural gas.   The technologies also required a change in behavior, such as installing new infrastructure on the roof of your building.  Ironically, many of today’s demand response applications require the consumer to monitor or use energy in response to new information (i.e. creating more work).

So, these three so-called truths have validity, but now let’s debunk them with some real life examples in the world of Cleantech 2.0.

Every year billions of dollars in corroded metal hit the scrap heap.  Some are recycled.  Besides filling our landfills with pollutants, these metals and their coatings require enormous inputs of energy to create and recycle (been to a steel mill lately?).  Various coatings are added to metals to help them last longer; there have been remarkable improvements.  The old rust-bucket automobile is a rare sight today.  But, coatings get damaged after which corrosion ensues.  What if the coating could last several times longer?  It would reduce the need for chemicals used in cleaning and recoating metals and keep more items out of the scrap heap.  Today, self-healing polymers can be added to a coating in small quantities to prolong the life of the coating and underlying material.  Manufacturing can be outsourced to established suppliers and the paint can be applied like any other without a major behavioral change.  The sustainability premium is small relative to the performance gain and the reduction in painting cycles.

When a 500-bedroom hotel wants to heat water, how do they do it?  They typically keep large tanks of water hot with a boiler system.  These systems are large, expensive and redundant.  They keep large quantities of water hot even during times when little is being used.  Enter on-demand technology, which only heats water when it is being used and has no storage tanks.  On-demand technology is now available for use in commercial and industrial environments. Interestingly enough, the system can be less capital intensive than the system it replaces.  It can cost the hotel the same or less to buy and install, avoiding the sustainability premium.  And, it doesn't require a significant change in behavior as it uses the same natural gas and connects in a similar fashion (it actually can be a little easier to install due to smaller form factor and cooler exhaust).

Beta Glucan is used to promote animal (and human) health and as an alternative to the potential overuse of antibiotics in our food sources.  The conventional method of production involves extracting beta glucan from yeast.  It is costly, messy and involves harsh chemicals.  There is now a proprietary method to produce Beta Glucan from algae in sterile fermentation tanks (not too dissimilar to the ones used to brew beer).  It is a cleaner and more energy efficient method of producing Beta Glucan and results in a product with greater purity and lower cost.  The sustainability comes with a discount rather than a premium.  The end product is used essentially the same requiring no change for the end user.  And the production tanks are inexpensive – just as it is relatively inexpensive to start a craft brewery today.

These are just three examples of technologies that contradict these commonly accepted truths; there are many more.

Cleantech 2.0 isn't “better”; it’s just different.  Many disruptive and important technologies come with aforementioned truths and our world needs the investors who support them.   A Tesla automobile doesn't exist without major capital investments and a willingness of consumers to change the way they source fuel for their cars (the sustainability premium is dropping).

Rather, the objective of this article is to cast light on these generally accepted truths that have scared away many an investor or acted like blinders covering the eyes of others. 

The unaccepted truth is that there are numerous options to positively change the world without having to settle for a less attractive investment profile.  As Cleantech investors ourselves, we don’t necessarily want too many investors back in the game, but a few additional kindred spirits wouldn't hurt.

Copyright 2015. The VentureLab.

Friday, May 10, 2013

Part 20/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)

By Laurence K. Hayward

This is the last part of a twenty part series on this topic.

20. What are the probable exit scenarios?

In most cases, VCs are managing other people’s money. The fund(s) they manage comprise investments from a variety of institutions (e.g. pension funds) that put a percentage of their investments into the high­risk/high­return private equity asset class. These institutions obtain diversity by investing in a fund (or funds) that contains a portfolio of companies, managed by private equity investors like VCs. The VC’s responsibility is to acquire and manage the portfolio, and ultimately to generate a return for their investors (the institutions). In order to generate those returns, VCs need liquidity from the assets (companies) in their portfolio, and they most typically achieve this when portfolio companies are subject to a merger, acquisition, buyout or public offering. VCs need to know how they're going to cash in on their investment, hopefully at an ROI of 50 percent or more ­­so the exit strategy after all is where the rubber meets the road. The VCs are not content to “figure out later” how they will exit their investments and generate returns. Before they invest in a company, they like to know the various exit options. As an entrepreneur, VCs will ask you about who would have interest in acquiring your business and why. Be both realistic (particularly on timing and valuation) and creative regarding merger and acquisition possibilities.

I hope you found the preceding series valuable. I welcome your thoughts on this content as well as your experiences raising private equity. Please feel free to contact me with questions and comments.

Laurence K. Hayward 
VentureLab Inc.

Monday, March 4, 2013

Part 19/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)

By Laurence K. Hayward

This is part nineteen of a twenty part series on this topic.

19. What is the planned "Use of Proceeds?"

VCs want to know that their money is being put to good use in order to directly accelerate the business opportunity, so that they will receive their ROI in a timely fashion. Generally new investors aren’t interested in paying for the exit of existing investors. They don’t want to see their money going ‘out’ of the business; they want to see it invested in areas that will increase the value of their investment.

You may have heard the saying, “calculate the amount you need and double it” with respect to estimating the amount of capital you should raise in a given round. A better approach is to build a projected cash flow statement and a timeline of milestones. Understand the amount of capital you’ll need to breakeven (depending on the stage of your business this may not be achieved with this particular round of financing) and the amount to finance your business for the next twelve to twenty ­four months. Understand that if you are successful at closing a round, you may need to begin the process of raising the next round of capital shortly thereafter.

Include a breakdown of how the money will be spent and what it will allow you to accomplish. While it is true that estimating capital needs isn’t an exact science (thus the “double it” phrase), estimate “uses of funds” as scientifically as possible and then develop contingency plans.

Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here