Flipswap

We are happy to have our partner Harsh Patel here guest posting about our recently-announced investment in Flipswap. – EDW

Harsh Patel

It’s probably safe to say the current climate for startup venture financing has been thoroughly documented over the last few weeks, both here and elsewhere. I think you get it. But as my partner Stuart mentioned in a recent post, despite this climate we still see opportunity and we are still doing deals. We recently announced our investment in Adaptive Blue and now I’m happy to announce another new investment in Flipswap, a Series B financing co-led by RRE and NGEN Partners.

This investment reflects an evolving thesis we have in Fund IV around “Green Technology”, where traditional information technologies and associated business models intersect with a new set of global challenges. Recyclebank and Flipswap developed unique business models that generate real economic incentives that allow consumers, businesses and governments to act more sustainably while still acting in their own self-interest. Tendril is attacking the demand side of the energy problem by directly linking energy consumers to utilities, enabling both sides to proactively manage energy usage and reduce cost. So while financial markets may be busy painfully remaking themselves in the near term, they will not affect this macro thesis (or many other macro trends which underpin our investment decisions).

But of course macro alone is never enough. Underlying trends and investment theses are only academic unless embodied by entrepreneurs who can execute. Sohrob Farudi and his team at Flipswap did exactly that. Even as we all consult our tea leaves and crystal balls to see where the markets are headed, the best entrepreneurs know they don’t have that luxury. So instead they control what they can and react quickly when they have to. One of the simplest but most compelling points of evidence I look for as a VC is that an entrepreneur continues to perform throughout the fundraising process the way they said they would at your first meeting. Even in the best of times fundraising can be a lengthy process, and your ability to accurately forecast your business and execute against it is critical. So while any investment decision can be complex and the diligence process long, it very often comes down to this – do we believe in the market and do we believe in the team? We said yes on both counts and we’re delighted to welcome Flipswap to the portfolio.

Is Green the New Black?

By far the largest trend in technology venture capital over the last two years has been the extraordinary shift in attention from traditional areas of focus like security, telecom and semiconductors into the area known as “cleantech” or “greentech”. This has resulted from both the decline in some traditional sectors as well as from increasing awareness that there are real problems to be solved around energy consumption and production, and that they are the types of problems that might be addressed by high-growth technology companies (and hence the purview of venture capital).

I think it’s safe to say that all VCs have at least noticed this transition, but there have been a number of different approaches to the new opportunities proposed by cleantech. To borrow analogy from poker, here are a few ways firms have chosen to play the clean technology hand:

1.    “All in” – Some firms have essentially pushed in all (or virtually all) of their resources, betting that cleantech will replace traditional IT sectors. These firms have either repurposed their existing IT investors to focus on cleantech subsectors or they have hired additional personnel: materials scientists, chemists and others with energy sector expertise. Some of have raised new funds specifically to address cleantech while others invest out of their primary funds.

2.    “Fold” – Other firms take the view that their value-add as investors would be compromised by an out-of-scope shift of focus to the energy sector given the disparity in underlying technologies (biofuels, thin-films, photovoltaics, etc…), and so they continue to look for opportunities in sectors where the investment team has expertise and contacts in traditional IT areas.

3.     “Smooth call” – The third approach is to view the energy sector as a vertical market that is partially addressable by information technologies. This view holds that the economic, business and environmental problems being solved by cleantech companies are too large for investors to ignore, but that certain areas of clean technology are not a fit for the relatively small funds raised by venture capitalists. The play here is to map these new opportunities to the current VC evaluation process – size of problem, quality of team and appropriateness of technical solution to that problem. The additional layer here is the evaluation of technologies outside of software, networking, semi-conductors, etc… that have comprised IT investing for the last few decades.

We here at RRE pursue this third approach, selectively deploying our capital toward “green IT” companies that are solving serious energy sector and environmental problems using technology and business model innovations in ways that we’ve valued since long before the cleantech movement began in earnest. Today we have several investments that can be described as “green” investments: Recyclebank, which is building an infrastructure to enable incentivized consumer recycling, Tendril, whose software powers smart meters that enable consumers to manage their energy use, and Ember, whose chips and suite of products enable the sensors and devices that will power the awareness and reduction of energy use by consumers and businesses. We have a couple of others in the hopper, too, but this isn’t the place to announce them.

In each case, we have invested in a business we understand (software, semiconductors and technology-enabled networks), but which seeks to solve a green problem. We are not the right investor for capital-intensive project finance, and are unlikely to get involved in those types of businesses. We probably couldn’t tell you which type of algae can convert waste into oxygen faster than another and don’t want to try. But just as the mainframe computer solved large problems for enterprises, and personal computers solved large problems for consumers and small business, and the way the internet solved problems for everyone, we think technology can effectively address a lot of the problems associated with energy use and efficiency. And we will continue to aggressively pursue great companies solving these critical problems. We think that venture-backed startups can be as important in the green sector as they have been in other IT areas, but we’ll be selective about which hands we’re willing to play.