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Technology Multiples for Trillion Dollar Markets

Technology Multiples for Trillion Dollar Markets

Where has the vast majority of cleantech venture capital funding flowed over the last decade? The answer is "trillion dollar markets" such as electricity, fuels, chemicals and building materials. Several prominent cleantech VCs have proclaimed that the immense size of these opportunities offset the investment realities of time, significant CAPEX and entry barriers. Indeed these are massive markets that dwarf the size of cloud computing, SaaS, mobile and social media. But unlike these traditional VC segments, these are commodity markets where the public markets and corporate M&A departments are not used to paying the high margin and rapid growth multiples that have become the foundation of venture capital funding success.

The Price/Sales ratio of representative companies includes 1.05X for Exelon, a whopping 0.14X for Valero, 0.80X for Dow Chemical and 0.75X for USG. If a start-up is aiming to enter these markets directly, the margin and growth mentality in these industries creates a barrier in either raising sufficiently low-cost growth capital, or selling a growth story to logical acquirers. So what is a VC backed start-up to do if it aims to build a business that can attract the valuations of its IT focused peers? Here is my four-step plan:

Step One – Lock-up IP: One of the most capital-intensive activities in the world is gas-to-liquids processing. Price tags for commercial plants by Shell or Sasol start at $5BB. Despite this fact, Pangaea has just placed an initial bet on a company that has developed a unique biological approach for gas-to-liquids. Yes, the relative CAPEX promises to be drastically reduced. But what put us over the fence was that this company has essentially spent the last two years building castles with moats within a green-field patent space. The unique skills of the team and supporting technical data will open doors, but the IP platform is what will enable them to execute on a technology business model. They won't have to worry about building plants.

Step Two - Partner Smart: We talk a lot about value chain here at Pangaea. Poor consideration of value chain issues usually ends up being the Achilles heel of even the most exciting materials technologies. Finding the right set of partners that compliment the core value proposition are vital for eliminating the cost and time of reinventing the wheel. At the same time technology and supply chain risk is reduced in the eyes of the customer. It is for exactly this reason that Pangaea has assembled a strategic limited partner network that spans the value chain across most of our target markets for investment. In fact, the majority of our portfolio has established some sort of supply chain partnership with one of our strategic LPs. Even those that haven't are thinking along these lines. For example, while many thin film solar companies were guilty of building customized processing lines almost entirely from scratch, our solar portfolio company RSI focused on scaling up two differentiated processes while relying on standard tools and processes for the remaining 90% of the process flow. This not only allowed them to scale up faster and cheaper than any of its thin film start-up competitors, but it has allowed them to go to market with minimal growth constraints using a "Virtual Turnkey" and license business model. By partnering with a set of trusted equipment suppliers, the growing pains faced by others are greatly minimized and the need to raise $40-100MM venture rounds has been eliminated.

Step Three - Become Ubiquitous: Instagram attracted a $1BB valuation (with a Price/Sales ratio approaching infinity) just over two years following seed financing. This remarkable outcome was simply due to the rapid acquisition of users and the threat that placed on other social platforms. While no materials company will ever achieve exactly this outcome, the lesson about having a plan to become dominant is telling. Recently one of our companies pitched a JV model to a $15BB revenue company with the motivation and chops to rapidly grow into the dominant player of the target industry. They were not disappointed when the discussion turned to a technology license model for Generation 1. A classic case of a smaller slice of a much larger pie. Furthermore, by working with this partner, other customers will no longer have the luxury of "wait and see".

Step Four - The Denominator Effect: This probably should go without saying but the reality is that using equity capital for welding steel and pouring concrete will never yield the commensurate numerators that venture capital investors are seeking. If the early days involve developing rock-solid IP, robust technology and a comprehensive value chain strategy, then the requirement for large VC funding rounds to support first commercial production and even pilot production should be minimal.

So it's as easy as four simple steps to a runaway success! Well of course not. This idealistic blueprint would be impossible to achieve with many advanced materials technologies and markets. But considering these issues from the start should serve as a guiding light in picking the right markets, technologies and strategies to pursue and will surely for the basis for discussion with potential VCs.

Partner, Pangaea Ventures Ltd. Andrew has over 12 years of energy and industrial experience, recently leading several of Pangaea’s investments in the energy generation, energy storage and energy efficiency domains. Andrew holds a Bachelor of Applied Science (Mechanical Engineering) and a Masters in Business Administration degree.View Andrew Haughian's profile on LinkedIn

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