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July 15, 2008
My investment criteria
Ok, enough bitching about what I don't like in biofuel companies. While I intend to post later about what i DO like about next generation biofuels, I thought I would provide a bit of transparency on my investment criteria for green energy investments overall. While I am a bit of a numbers nerd and internally I have a spreadsheet with all sorts of weights, averages, and trendlines, that is a bit TMI for this blog. Here, in no particular order, are some of the traits I am looking for:
Market:
- Big ($1B+) existing market for the product you are going to replace or add capacity to. I don't want to build primary demand for products on a venture budget.
- Many non-ologopoly customers. Markets with only a few big customers tend to have purchasing price power and deny start-ups meaningful margins.
- International customers, ability to reach them. The US is behind the energy/carbon game and with the weak dollar, US companies many times have superior international opportunities in renewable energy markets.
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Business Model:
- a leveraged business model. Basically the ability to improve margins with scale and technology. Many business plans I see are basically integrators selling professional services by the hour. While maybe a decent business, it should not be venture funded.
- Positioned with pricing power in the value chain. If you don't control enough of the value chain to set price, you are toast.
Product:
- no "miracle" inventions required to develope the product.
- No serious physics, chemistry, mechanical, or material science unresolved issues.
- Can be manufactured with existing off the shelf equipment (no custom fabs, expensive yet to be invented stuff, etc.)
- has some IP protection, but company has primary IP defense rather than offense strategy.
Team:
- Fundable CEO.
- World class technical tallent.
- Not their first start-up.
Deal Terms:
- Valuation and money raise appropriate for stage and raise sufficient to meet valuation milestones.
- Lead money gets a board seat with standard class protective provisions. I never invest without a board seat.
Other:
Major risk execution versus market, policy, or technology. Basically going into a deal I want to believe (true or not) the major risks to be around how the team executes on the opportunity with my dollars versus what happens in the overall market, policy, or if the technology works or not. Many times things happen around the company that have nothing to do with execution (see Imperium), but that is part of the deal.
i will come up with more stuff, but these are the major points.
Posted by Martin at July 15, 2008 9:39 PM
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