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Silicon Valley investment landscape for 2014, including Cleantech

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At the Smart Money Silicon Valley 2014 interactive event this week, entrepreneurs, startup founders, and a number of venture investors and angels gathered to talk about the investment landscape in 2014.

There are about 5000 professional venture capitalists in the U.S. today. However, venture funding has a tiny impact on entrepreneurship. Bob Pavey from Emeritus Partner Morgenthaler gave a brief description of the investment history in Silicon Valley (SV). The valley has become a post World War II phenomena. At that time venture capital, which was founded on families' wealth and angel investors, as well as a few roots in the banking industry, has been established. Over the years, as SV gradually became an innovation & entrepreneurship hub, the venture capital (VC) institutions started to move into the area from other parts of the U.S. The combination of technology innovation and development along with venture investment, have set the tone for today's funding environment in the valley.

Approximately 700,000 new businesses are started in the U.S. each year. About 10% secure angel funding. But the VCs portion is even smaller, where most ventures choose one new business to invest in a year. Venture main motivation is scaling. Pavey suggested that when pitching to investors, the entrepreneur should strive to build a good successful business, regardless of funding. In any case, entrepreneurs need to prepare a scaling outlook and show how their 'going big' formula. This approach conveys to potential investors the clear message: here is what I can do with my business if I get the big dollar funding.

What is the criteria for investors to select a company for funding?

Most of the VC successes lie in a business that can scale, that is solid and doesn't require much hand-holding, with skilled management and team.

Partnership is a key word in the relationship of investors and entrepreneurs: there are challenges, there are issues, but through trust and mutual effort the differences need to be worked on and resolved.

In the process of evaluating a business, investors assess who is the entrepreneur, his or her personality, their history, their drive. Since investors do not know what they really getting into - the judgement of the start up leader is key in gaining trust and respect from the get go. Having a good business plan is as important and establishing a good dialogue are all leading to a good start.

At which sectors are investors looking next?

  • Cleantech, energy efficiency, energy, and green transportation:  The energy sector is immensely capital intensive and presents a problem to venture funding. Venture funding is in millions of dollars. However, energy investments, like solar plants, require billions to build the technologies, construct the infrastructure and define the successful business models. Such large investments usually come from government or from large corporations, not venture funding.  

    VCs are interested in less intensive investments in the green tech areas. It takes a longer time and more money to invest in Cleantech to see what will shake up and whom or which products or services will succeed. For example, battery management, energy efficiency apps and interfaces, various user interaction layers on mobile devices as a front end for managing and controlling processes, service providers, aggregators, etc. are more capital efficient and there are many opportunities today in these types of initiatives.

  • Mobile presents opportunities to disrupt. Mobile devices are driving applications and tools at everyone's fingertips. For example, most people do not carry cameras today and the current mobile devices (like a smartphone and tablets) have good cameras for the average person. Apps that cater to image processing, storage, editing, etc. are very appealing.
  • Media technology is a growing sector that attracts funding currently. Media technology companies are centered in SV and New York.

 About half of venture investments fade away over time, or fail altogether. The risks are factored in and VCs spread their successful investments versus their losses. Therefore, from an economic stand point most VCs are looking for returns of five to ten times more than their initial investment, when they evaluate pitches by startups and entrepreneurs.

What is the balance of money versus investment opportunities today?

There is an upside: some companies are able to raise a lot more money than they planned on, which indicates eagerness on the venture side (in other words - too much available money for funding). Then, valuations are inflated and this increases the risks. But there are abundant opportunities in SV for successful investments.


In the photo (L to R): Andrew Romans - co-founder and general partner of Georgetown Angels; Roger Rapporat - Emerging Growth and Technology Practice Group at Proccopio; Bob Pavey - Emeritus Partner Morgenthaler.