This post originally appeared in my newsletter: Electrified
In the last month, a new theme has emerged for startups working in the energy transition — exits!
Good friend and subscriber to Electrified, Craig Lawerence posed a question on Twitter: what do some of these exits say about the future VC opportunity in energy software?
It’s a great question and one that all investors and founders should be thinking about.
Here’s what I am taking away from these exits in particular:
- The timelines from funding to exit need to decrease
- Funding dried up from 2012–2018 increasing exit horizons
- The price acquirers can pay is still smaller than generalist VCs will accept
- Capital efficiency matters, don’t over raise or spend too quickly
Exit timelines and returns
The average time horizon from Series A to exit for startups in the energy transition is running roughly 7 years.
Of all the things I didn’t appreciate about my time at Choose Energy, the exit timeline is increasing in importance. We built and successfully sold Choose in 4 years post-Series A funding.
The longer the exit horizon, the higher the return hurdle to make sense for investors. Most venture investors are targeting at least 3x return, the longer it takes to create liquidity the higher the multiple needs to be.
Net, everyone will wait 10 years for a 20x, but no one wants to wait 10 years for a 1.5x.
The Cleantech bust
From 2012–2018 energy was a four-letter word in the VC community. If you raised early-stage capital or founded a startup around the beginning of this period limited capital was available for subsequent rounds.
For a lot of startups, this meant sacrificing growth simply to survive. Those who did survive are the ones we are seeing exit today.
I suspect the timelines mentioned above will naturally decrease by ~1 year due to the increase in available capital and the velocity of funding returning to normal levels.
We need more…
large exits before generalist VCs actually commit to the sector. If I had to pinpoint the 2 reasons we have yet to see more generalist VC activity in the energy transition (even though many like to tweet and blog about it) they would be:
- Growth-stage (Series B-D+) investors don’t have evidence of large exits
- Early-stage (Seed-A) don’t understand what traction looks like in energy
I suspect point one will be changing very soon for a multitude of reasons including SPACs and M&A from OEMs/utilities with declining costs of capital.
More on this later, but utilities like Nextera are a great example of non-traditional entities who have the balance sheet and stock price to support M&A at attractive prices.
I don’t believe number 2 is changing any time soon without enticing exits. That is, investors will take more risk early if the possibility of a 50x multiple-on-invested-capital is in the cards. For the time being, it’s more likely investors don’t understand the second point, and thus will pass. Which leads me to…
I’ll never forget walking into a Craigslist furnished, repurposed dentist office for my first interview at Choose.
But, what I didn’t understand at the time was that the office set the tone for how the finances should be managed. We hadn’t yet reached escape velocity, so there was no reason to spend like it.
Too often, the pressure of building a team and spending capital on marketing mounts post early-stage funding. We’re all incentivized to put capital to work.
But, what is the point of spending before you know exactly what the customer wants you to build and how to position your business?
Additionally, sales cycles in the energy transition world are a) long, b) not exponential, and c) often include services — I’ve just listed 3 non-starters for generalist VCs.
Be patient, seek capital that understands your business, and raise a little more in the early rounds in case the next raise takes a little longer or the sales cycle drags by a quarter or 2.
All of the themes I mentioned above are moving rapidly in the right direction.
The market craves good businesses in sustainability. For evidence, look no further than Array Technologies IPO this week, up 33% after adjusting expectations up over 2x from their initial target, or Enphase’s run over the last 6 weeks.
The energy transition is on a roll, and the lessons we’ve learned from the last decade are paying off in the form of real returns. These last 2 weeks of exits are soon to be the new normal, but even better.