Opinion | "Cleantech entrepreneurship 2.0 meets venture building 2.0"

We are witnessing the rise of globally-connected locally-operated venture builders and the unlocking of an entirely new “launch-stage” asset class.

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Introduction

Entrepreneurship is messy and risky. Entrepreneurship is being prepared to repeat the build/fail/pivot cycle until you succeed. While this approach does stimulate amazing innovation, we need to collectively recognize is that this type of entrepreneurship is tremendously wasteful. Time, money, talent and even promising technologies are wasted in adopting this classical trial-and-error entrepreneurial journey.

Now let’s face it. If we ever want to solve our climate emergency, we will need to drastically cut down on wasting opportunities for emerging cleantechs to have a positive impact on our biosphere. In short, this means improving the speed and efficiency at which promising clean technologies are promoted from R&D to startup all the way to scale-up. We need entrepreneurship 2.0.

This is not an easy problem to solve. This requires us to look beyond the currently available intermediaries that support our innovation ecosystems (i.e. incubators, accelerators and investors). This requires a new way to look at this global problem and an alternative business model. One of these alternatives is venture building 2.0.

Venture builders (also known as startup studios or foundries) are known for offering extensively wide support to its portfolio companies. Unlike other innovation ecosystem intermediaries, this includes direct and hands-on strategic, operational and capital support. It results in systematic de-risking of the startup launch-stage. It also results in superior returns than traditional venture capital while generating lower waste (quantifiable as the % success rate of their portfolio companies achieving Series A financing).

So, if venture building as a model has existed for more than 25 years (1), why has it not found wider institutional investment support? Why aren’t more entrepreneurs adopting this path to commercializing their ideas? These are some of the questions we will now address. This is how we can help solve our climate emergency.

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Entrepreneurship 2.0

For the past decade, there has been an ode to the lone-wolf entrepreneur. Do-it-all-yourself was seen as a right of passage for young risk-hungry entrepreneurs looking to brave the gauntlet of the startup launch-stage. Successful entrepreneurs have been celebrated as heroes of capitalism and unicorns have been the ambition of all. In a period where demand for technology, access to early-stage capital and rise in valuations were unparalleled, this was the perfect environment for the classical entrepreneurial approach.

That said, out of this tidal wave of success, we have witnessed a new wave of entrepreneurs. Socially-conscious, impact-driven entrepreneurs are now coming out on mass and are setting the stage for a new entrepreneurship 2.0 model.

These new entrepreneurs are not risk-hungry lone-wolves. They view entrepreneurship as an effective method to release promising technologies into the world in a manner which can have tangible impact in solving real world problems. Many of these are acutely aware of the climate crisis humanity currently faces and want to focus their efforts in solving this emergency. And so, entrepreneurship 2.0 is not about seeking risk but rather recognizing the collective call to action and the need for immediate cleantech solutions. In a world where time, money, talent and technology can no longer be wasted, this new type of entrepreneurs are a perfect match for venture builders in that they share similar philosophies towards de-risking their endeavours. For instance, speed (entrepreneurs’ best friend) is not used to accelerate the build/fail/pivot repetitions but rather to explore various corporate use cases and compound the positive impact that one’s solutions can have on the world.

According to GSSN reports (2), when entrepreneurs partner with venture builders (instead of embarking on a do-it-all-yourself journey), the following benefits are experienced for the underlying startup:

• the probability of raising a Series A increases by roughly 5x,
• the time taken to get to Series A is decreased by roughly 2x,
• the returns achieved is increased by more than 2x.

In simple terms, venture builders are professionalizing the venture launch-stage and such results are exactly what cleantech innovation ecosystems need to accelerate and become more efficient.

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Venture building 2.0

For the most part, venture building as-a-business has been operated at a local scale. Given the amount of hands-on support provided to its portfolio and the deep involvement in the structuring, governance and development of its startups, venture builders have historically found it hard to scale outside certain local perimeters (either regulatory, geography, culturally or other).

That said, we are seeing a new venture builder model emerge, one where multiple local innovation ecosystems are now globally-connected. More precisely, venture building 2.0 manifests an awareness that the startup launch-stage can be further de-risked and be even faster and more efficient when operational/tactical work being done at the local innovation ecosystem level is coupled with a strategic international commercialization scope.

Talking on our climate emergency requires a global approach to the problem. To illustrate this with an example, we can cite that a limited number of global companies are responsible for roughly two-thirds of the GHG emissions (3). Thus, to have an opportunity to bring promising cleantech in front of such corporates, you typically have to be in the same local ecosystem and leverage strong direct ties. Without these, you are generally condemned to having to first validate your technology at local, regional and sometimes national scales before being ready to approach those corporates with global influence.

Herein lies the major advantage of new globally-connected venture builders. They can cut down time to commercializing international markets and increase the impact new promising cleantechs can have in the world. For the new socially-conscious, impact-driven entrepreneurs, this is a very attractive value proposition. In fact, venture builders focused on cleantech and other impact sectors have no choice but to migrate toward a globally-connected locally-operated model. Their technological solutions will continue to be sourced locally while the most impactful corporate use cases will remain global.

This new breed of venture builders 2.0 is emerging. Leading the pack, BXVentures is dedicated to the development of new clean technologies (4). It is the first venture builder to connect local North American and European innovation hubs together to help address the global need for impactful solutions for our biosphere. Its ambition is to create 100 cleantech ventures with exponential impact within the top 10 innovation hubs in the world.

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New asset class

In all thriving asset classes, cash is king. As a practice, venture capital (VC) has done an incredible job at professionalizing investment in different stages of the private markets. They have stimulated capital flow, deal flow and their own underlying innovation ecosystems for years. By creating an investment thesis and mandate around their target asset class, they attracted both private and public funds into a rapidly growing pool of capital ready to be deployed.
This is not the case for venture builders. Historically, venture builders have suffered from lack of institutional investments. Being too early in the startup life-cycle and stuck in an investment-barren no man’s land between direct and indirect investing, many venture builders resorted to a dual entity model whereby a classical fund supports a venture builder’s operations (5). Given the amount of capital currently made available for various sectors such as cleantech and impact, this is becoming a popular mechanism for venture builders to attract new investments and promote their business models.

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That said, throughout the years and in search for additional returns, VCs have progressively migrated toward earlier and earlier stages from buy-out/growth, to late-stage, to early-stage. Unfortunately, there is a natural barrier preventing VCs from going earlier into the startup life cycle. That barrier is one where the risk associated with direct investment into the launch-stage is far beyond the capacity for any VC to manage. In fact, the only entity capable of systematically de-risking the launch-stage is not the VC but the venture builder.

This is how all gets tied together. Venture building 2.0 presents an opportunity to ‘professionalize’ the institutional investment into the launch-stage. Globally-connected, systematic diversification of the portfolio is further increased. Locally-operated, systematic de-risking and professionalization of entrepreneurship 2.0 is the core of its value proposition. The result is a structure which provides indirect access to launch-stage startups (and returns) without taking on the full risk normally associated to this ultra-early asset class. In short, venture building 2.0 breaks the normal risk/return correlation for the launch-stage, making it now accessible to institutional investors searching for new types of returns.

Ultimately, additional capital flows towards venture builders 2.0 translates to a healthier, faster and more efficient pipeline of cleantech solutions promoted from R&D to startup all the way to scale-up. Consequentially, this results in international and influential corporates having earlier assess to new transformative technologies, enabling them to start playing an active role in achieving their sustainability objectives. Finally, institutional investors backing this new asset class enjoy new diversified returns while stimulating high-quality cleantech deal flow for classical VC funds. In short, everyone benefits, even our biosphere.

As it stands, there are vast amounts of funds supporting the cleantech R&D sector and even more capital in cleantech institutional investors (such as cleantech-focused VCs) but there is a limited number of strategies to connect the two together (without significantly wasting time, money, talent and technologies). Venture building 2.0 presents a new way forward. By providing de-risked access to a new type of launch-stage asset class, new sources of returns are unlocked and new technological deal flows are unblocked for the rest of the innovation ecosystem. Now is the time to invest in venture builders 2.0 as a mechanism to help us solve our climate emergency.

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Call to action

As entrepreneurs, we must evaluate the benefits of professionalizing the startup launch-stage. As an innovation ecosystem, we have to embrace the new model of venture building. As a community of investors, we need to inject capital into this new asset class. The future of our biosphere depends on it.

This article was written by Marc Guilbert, co-founder BXVentures Canada.

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Sources

• (1) https://medium.com/collider/state-of-the-digital-nation-2020-venture-road-22de4377836
• (2) https://www.gssn.co
• (3) https://www.science.org/content/article/just-90-companies-are-blame-most-climate-change-carbon-accountant-says
• (4) https://www.bxventures.com
• (5) https://medium.com/futuresight/understanding-startup-studio-structures-e4482dd3b6a9