SAIL-backed cleantech startups to secure $3B in government funds

Cleantech investors are adapting to a new reality, says Tom Cain, a partner at SAIL Venture Partners.

The changes go far beyond the immediate impact of the economic crisis. Venture capitalists are finding that they're now being asked to guide the placement of massive amounts of new capital coming from the U.S. and local governments, Cain said.

SAIL dove headfirst into the space. The investment firm's portfolio companies in the cleantech sector are in the process of securing $3 billion in government grants and loan guarantees to commercialize their technologies.

The lessons can also be applied across the globe as governments seek to place $400 billion of economic stimulus allocations in clean technologies such as renewable energy, improved electric grids and cleaner cars (see Cleantech investment drops but stimulus funds soar in 1Q09).

Cain shared the details of SAIL's sucess with the Cleantech Group:

Tom Cain says VCs should create partnerships with governments to guide stimulus spending.

VC investment was down across the board in 1Q09, but less so in cleantech (see More deals, fewer dollars for cleantech in '09?). How has the economic downturn changed venture capital for cleantech in particular?

It has crushed venture capital investing because firms now have to reserve 4X to 5X their initial investment for follow-on support versus the traditional 2X. This takes half the available money away from new investment. On the other hand, we are flooded with investing opportunities at reasonable valuations as all other forms of capital have become scarce. It is the best possible time to invest and gain extraordinary returns for LPs (see VCs evolve role in cleantech).

Why are the investment mechanisms different for cleantech?

Cleantech typically requires factories. This means capital requirements and time frames are much greater than typical IT, pharm, and nanotech. Two of our companies are starting the construction of factories costing over $1 billion each. Cleantech has become a social and governmental priority world-wide, and thus funding through federal, state and local programs is a huge competitive element.

Those cleantech companies that can gain access to governmental funding have a capital efficiency advantage to over those without that can make all the difference in ultimate success.

So how do state and federal governments decide between companies to award the grants and loans?

They define logical programs with great detail due diligence. But in the end, they are ill-equipped to make such a determination, and their track records are usually pretty bad. When highly paid, career VCs with enormous resources can’t seem to do better than two out of 10 investments working out, how are governments supposed to do better?

I think they have two choices: One is a shotgun approach, spreading meaningful money to all credible applicants. Two is to align with some professional investors in the sector and follow their lead. This alignment needs to be formal and continuing—based on trust, teamwork and results.

What’s the role of startup companies in this decision making process?

Startups simply don’t have the time or resources to work through government bureaucracy and typical strings attached. Well-intentioned government programs can exhaust startups and, in fact, kill them. So VCs have the opportunity to play a critical role in bridging government programs with breakthrough startups the economy needs. SAIL has been fortunate in that its portfolio companies are poised to receive almost $3 billion in various government support programs.

You’re talking about the creation of a new role for cleantech VCs to play in their portfolio companies?

Yes. It is a new kind of VC organization that makes partnership with government a core competency and asset. Risk taking and government agencies simply don’t go together. Yet this is what is being attempted. Perhaps looking back, it will be determined as a waste of time, but at SAIL we are betting otherwise.

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