Funding a Green Business

I gave a talk on funding green businesses at the Green Business Expo last week. This week there is an article on greenbiz.com the topic from a VC perspective. Some of it mirrors what I talked about:

AC: You outline 5 types of investment capital in a business: self-funding, friends and family, angel investors, venture capitalists, and traditional lenders. Which strategy is most appropriate for seed stage, early stage and late stage companies?

BK: Seed stage is really just an idea and a business plan. Early stage is when you have a product or service ready to handle sales and customers. Late stage is when you are up and running, you've got customers, and are further along in generating revenue. Most venture capitalists are early and late stage investors because seed stage deals carry greater risk to the investor. For these seed and early stage companies, self-funding, friends and family, and angel investors are the best bets.

But it does get more into the VC perspective than I discussed.

One key lesson - get out there, start the business and focus on generating revenue. You're not going to get much investment without proven sales.

Creative Destruction of the Auto Industry via the Bailout?

Yesterday one of my students, Sam Cook, and I were talking before my Sustainable Business Venturing class began about the $25 billion that the auto industry wants. We both agreed that the money would be better spent supporting entrepreneurs. Some have suggested that the $25 billion come from money set aside for loan program for fuel-efficient cars. But with $25 billion, the government could foster a wave of innovative start ups in the auto industry that should do a much better job of developing and marketing more environmentally-friendly/fuel-efficient cars.

I don't think I'm the only one that doubts the automakers' ability and willingness to truly develop fuel-efficient cars. To do so would mean drastic changes and cannibalizing their existing product lines, which companies generally avoid doing, even when it means they could improve their company overall. On the other hand, there are several start ups making tremendous progress towards better cars. The most common example being Tesla Motors (most recently seen on a new Sci Fi channel game/reality show Cha$e). Besides Tesla there are many others around the world developing great new technology and if large sums of money were made available, many of the foreign-based companies would likely move to the US. The only way for the Big 3 to catch up would be to buy those companies. But why should these aging giants that clearly forgot basic business knowledge of market scanning to see trends take over these rising stars.

If you've studied economics it's likely you've been introduced to the term creative destruction, which is the basic idea of old industries being replaced by new innovative ones. One example that I remember from class, ironically, is that the auto industry 'creatively destroyed' the buggy industry. Once autos became commonplace, those making anything to do with the traditional horse and buggy went out of business. There was no bailout for them. The wise companies saw the trends and changed. The unwise? Well, they went on to become examples for future business students.

So here is a radical proposal: Set the $25 billion for a government-backed new venture capital (VC) firm to specifically invest in clean tech automakers willing to develop primary operations in the US. With that kind of money, companies like Tesla Motors can buy and modify production plants from the Big 3 and foreign-based companies would move to the US and hire US workers. That would keep jobs here, indirectly give the Big 3 some money to possibly stay in business, but also give them tremendous market pressure to improve the environmental performance of their vehicles (since I doubt that they will change much if the government tells them to change).

Investment in Green Tech

I've been reading a few articles lately about the increasing volumes of venture capital money flowing into green tech ventures. John Doerr has been the central character in just about everyone one of them. This morning I read about a speech he gave this weekend at MIT. One quote I found interesting is "There's too much money chasing too few good ventures, despite the size of this problem." In that speech and other articles, like this one in Fast Company, Doerr describes the green tech sector as bigger than the Internet. The problem is that while the problems being addressed by green tech are considerably large and have enormous market potential, they will take considerably longer to materialize compared to Internet companies. Hopefully investors will have the stomachs to hold on long enough to see the returns and we won't experience a collapse similar to the dot-com bubble.