How Technology is Impacted by Investment
From Eric Dobson, our Managing Partner and CEO:
I recently gave a talk at a workshop on clean and renewable energy, to an audience made up of academics, scientists, and students from UT, Clemson, UC Davis, Osaka University and Tokyo University. At the event, discussion revolved around the central idea that clean and renewable energy is a critical part of the future strategy for power grids—I was invited to provide a perspective on how financing these companies works and will impact the evolution of these grids in the future.
As I listened to speakers discuss technologies, policies, and the challenges of ensuring a reliable, responsive and hardened grid, I realized that I needed to change my presentation to fit—I give talks on capital funding frequently to business audiences, but rarely to scientists and academics.
With a quick pivot, I presented on the “normal” topics: challenges of clean and renewable technology like infrastructure development and modification, regulatory and policy uncertainty, market volatility, competition, long payback periods and long-term ROI. I also highlighted the many opportunities: strong capital markets, the declining cost of technology, diverse investment avenues, and consumer and corporate demand. As I spoke, it occurred to me that a deeper discussion was needed to really discuss the way technology introduction is optimized and funded.
What roadblocks are there, and how do we get over them?
The biggest problem with investing in new technology, especially in these clean energy spaces, is that investment is centered around returns to investors—not around a problem, technology, or impact. Those variables come second to investment returns, and this central focus of investing explains a lot about how some inferior technologies prosper while superior ideas falter.
How technology is planned, packaged, presented and marketed to investors tends to define how the capital is distributed. It’s not necessarily a merit-based system, and the underlying technology often a secondary consideration...if it has been demonstrated to work in the target environment. This is one of the many reasons we believe being a syndicate group is the best structure—we collect investors from a variety of backgrounds with wide expertise and experience. We believe in deeply understanding and selecting the best technologies with the best plans and teams.
We actively manage eight areas of risk when evaluating an early-stage investment. Each step is what we refer to as a “stage gate”:
Structural – foundation, contracts, prior rounds of capital
Planning – product plan, business model, marketing planning, sales planning financial projections
Execution – team, HR plan, compensation plans
Market acceptance – competition, competitive advantage, timing, early adopters, willing customers, scalable market
Barriers-to-Entry – against the company and erected by the company
Capital – other investors, valuation, terms, use of funds
Legal & Regulatory – FDA, EPA, FCC, UL, liability, etc.
Exit – M&A landscape and exit strategy
At Community Equity Partners, we mitigate risk by actively coaching leaders and teams towards success, adding further value to our investments. In an industry where failure is part of the model, we’re watching for teams that turn problems into opportunities and operate efficiently even when their structure is less than ideal.
Who ultimately decides which technologies fail and which become the standards of tomorrow?
When we talk about the future “grid,” your initial thought might be that public policy, which drives governmental action and spending, is at the center of new technology adoption. However, there is a disincentive to what is needed versus what is popular. Few policy makers understand the science or market dynamics, so instead, this decision is abdicated to the capital markets. Those technologies that receive capital are the ones that ultimately get implemented.
Although there are exceptions, the vast majority of technologies we see in action today were validated through private equity funding, and that’s not likely to change anytime soon. At the end of the day, this means future technologies are chosen by unrelated third parties: angel investors. As technologies mature, pressure will be placed on the policy makers to institutionalize those that will form the grid of tomorrow.
This is how technologies of our time evolve. The key takeaway is that technologies that will be deployed in the future are only indirectly related to the merit of the underlying science and only allowed to benefit society if the first constraint is satisfied - returns to investors. Angel Investors live at the intersection of market needs and the innovations necessary to meet them. If you want to influence the future, make informed investments today in the technologies of tomorrow.