The next generation of Silicon Valley’s sustainability investing needs strategic corporates

By allying with corporate investors, venture captalists are thinking several moves ahead.

Silicon Valley’s cleantech boom and bust cycle has been well chronicled, but some venture capitalists are working on new methods for funding the next generation of sustainability startups. And it turns out the formula requires strategic corporate investors

On Tuesday morning, four investors — formerly of storied Silicon Valley venture firm Kleiner Perkins Caufield & Byers — announced a $350 million fund offered through their new firm G2VP that will back startups focused on the digital transformation of energy, transportation, agriculture, manufacturing and logistics. The new fund includes money raised from a combination of strategic corporate investors, as well as family offices and financial institutions.

Building relationships with a range of corporate investors is a key lesson learned, said the investors. Corporate investors in G2VP include oil giant Shell, energy gear company ABB, Danish power firm Orsted and Japanese conglomerate Mitsui.

As venture capital dollars have moved away from cleantech over the years, corporate investors have started to pick up some of that slack, according to a report out last year from Brookings. The transportation sector, in particular, has had a growing amount of strategic investors in startups, notes the report.

"The incumbents in these industries are actively seeking to work with tech companies to modernize," said G2VP partner and co-founder David Mount. G2VP’s other co-founder and partner, Brook Porter, said, "I think it’s gone so far as if you’re the CEO of a major strategic, and you don’t have an active strategy to engage [technology startups], you’re at risk."

The partners also point to the transportation industry as an example of an industry where corporates are starting to move quickly. "Look at what’s happening with [General Motors] and SoftBank," Porter said, "these are some very bold moves." Last month, the investment arm of Japanese group SoftBank announced that it plans to invest $2.25 billion into GM’s autonomous division Cruise.

G2VP partners say the firm has been working with its strategic investors to create partnerships and "do deep dives together." Investments can help the corporates provide customers for emerging products and help the companies navigate rapidly disrupting industries, say the investors.

So far, G2VP has made two investments in transportation-related startups, including used auto startup Shift and carpooling startup Scoop; it has closed on five investments in total. G2VP plans to make 15 to 20 investments over the life of the fund, and it plans to write checks of between $15 million and $20 million. Many startups will be somewhat later stage (series B or C), and most already will have customers and some proof of commercialization.

Investing in really early-stage startups is a riskier endeavor than backing later-stage ones. Another lesson learned with cleantech investing was that too many investors (with not enough domain knowledge) bet on companies that carried a lot of early-stage technology risk.

Kleiner Perkins was one of the Silicon Valley venture firms that aggressively bet on cleantech startups and had mixed results. The company had some high-profile losses in solar and electric vehicles, but it also had some wins with digital-based companies such as data firm OSIsoft, smart grid company Silver Spring Networks, energy startup Opower and cloud software company ServiceMax.

Kleiner Perkins ended up moving away from investing large amounts in cleantech companies but maintained its Green Growth Fund, which the four G2VP partners helped manage. Some of the partners still sit on those portfolio companies’ boards.

Kleiner had some great liquidity events behind the thesis of how digital technology is changing industries such as energy, agriculture and logistics, Porter said: "We created a fund around this trend."

Kleiner Perkins partner John Doerr supports G2VP both as a friend and an investor, Porter said. "He [Doerr] saw what we were doing firsthand and said as Kleiner Perkins narrows its focus, why don’t you form a fund and we’ll back you."

G2VP isn't the only new fund that's launched to try cleantech anew. Earlier this year, Congruent Ventures formed to invest in early-stage sustainability companies, with partners formerly from Prelude Ventures and RockPort Capital Partners. 

Congruent Venture's co-founder Abe Yokell said that new programs such as Cyclotron Road are helping young cleantech-focused entrepreneurs. At the same time, low-cost and ubiquitous computing technologies are reducing the overall costs to create new science and hardware startups. "The costs to start these companies has dropped dramatically," Yokell said.

Other new Silicon Valley funds focused on sustainability investing include Breakthrough Energy Ventures, a billion-dollar fund from John Doerr, Bill Gates and Vinod Khosla; and Green Bay Ventures, a fund from NEA co-founder Dick Kramlich. There's also 1955 Capital, a fund from former Khosla Ventures partner Andrew Chung, which is looking to bridge the gap for sustainability-related startups between China and the United States.

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