Entrepreneurs tend to see opportunity where others see the exact opposite. While most are battening down the hatches, gathering their rations together, and getting ready to wait out the economic storm, entrepreneurs are getting ready to go big fish hunting. With the Obama Administration making sustainability such a priority, there has been a marked increase of interest in green investment among venture capitalists, angels, and private equity firms. But with the collapse of the financial sector, investors are dramatically scaling back. So if the storm is the time to fish, then what kind of bait should entrepreneurs in the green space use to catch the big, well-funded fish? What can they do to hook the best investors?
I talked to a couple of big fish from the world of green to get their perspective. Both multiple-time entrepreneurs in their own rite, Andy Funk of Funk Ventures and Adeo Ressi of The Funded had some really great insight to offer up entrepreneurs.
Let’s start with the bad news.
Investment is down. According to a video on The Funded, from Q1 to Q4 2008 funding has dropped by approximately 75%. This will drop an additional 2/3 by Q1 2009. The investors’ investors don’t have any extra capital and no one is in the mood to spend. Ressi estimates that as many as 75% of operating venture funds will close, if not by the end of 2009, than certainly by 2010.
Competition for funds is so fierce that if you’re a new business looking for funding, it’s no longer enough to just have a good idea, or a great team, or an amazing product or service. You have to have everything. “This makes everything a lot more binary now,” says Ressi. “Don’t even take the meeting with a potential investor unless you’ve aced all the fundamentals. Your business must execute flawlessly.”
If you do take the meeting, you have to remember that you’re not just there to impress the person in the room with you. You have to win your investor’s investor, or their limited partners. Investors have to work harder to raise their money, so as Ressi sees it, “you have to think about what you can do or say to make the investor in the middle look good to his or her investors.”
Funk has slightly different advice for different entrepreneurs. For the first-time entrepreneurs, he advises patience. It might be best to stick it out in survival mode and not raise money right now. But if you are indeed able to snag a fish, be ready and able to step aside once the fish is on-board. “First-time entrepreneurs are very passionate about their business.” And with passion comes emotion. “To maintain funding a business must perform, and for that you need an extremely capable CEO to steer the ship, especially in times like this when hard decisions must be made.” Sooner or later the decision will have to be made – step aside and potentially let another, more experienced CEO steer the ship, or stay at the helm and risk sinking with the ship.
For more seasoned entrepreneurs, Funk says it’s all about timing. “Execute your business plan and calculate for the next two years.” But above all, avoid raising more money under bad terms.
There is a certain "flight to quality" occurring right now as investors divert their resources from the risky and unproven to the safest possible investment vehicles. But all in all, the prognosis for entrepreneurs is not all that bad. As Ressi points out, green investment will remain one of the largest sectors of investment, despite the downturn.
“The likelihood (for a green entrepreneur to obtain funding) relative to peers in other areas of the economy is proportionally more.”
That’s positive, right?
Funk, who started his company during a downturn, says it all depends on how long this economic storm lasts. “At some point it’s easier to give up than fight. We haven’t gotten to that point yet but some people will have to walk away. Right now, you just have to be very patient.”
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June 21, 2009