Why Are These Cleantech VC Investors Smiling?

Despite recent mainstream media reports, cleantech venture capital is alive and kicking at the start of 2014.  

Just ask Peter Nieh and the cleantech team at Lightspeed, KPCB's Randy Komisar, Venrock's David Pakman or Shasta Ventures' Rob Coneybeer.

That group, along with Google Ventures and Al Gore’s investment fund Generation Capital, just turned the $150 million or so of venture capital invested into smart thermostat and software company Nest Labs into a $3.2 billion Google acquisition. Nest is estimated to have a run rate of $100 million per year, so Google paid 30 times revenue, and the VC investors get a very, very strong return. 

Aside from the home-run multiple, there are a few remarkable aspects to the deal.

Shasta Ventures

This kind of perfect exit created more than $200 million for the early-stage venture investor, according to reports. Rob Coneybeer, the lead for Nest at Shasta Ventures wrote on his blog that "[Google] just acquired the best hardware team on the planet."

Shasta is not by any means a cleantech investor -- the company invests in enterprise and consumer technology startups. Coneybeer notes, "We invested in Nest over three years ago in 2010, when they were experimenting with hundreds of different sensor technologies. Together with KPCB, we were the only two venture investors in their Series A round."

The original Shasta investment in Nest came from a fund of $250 million, so the $200 million returned makes up for a lot of possible mistakes in that fund's portfolio. (Note: one of the firm's current investments is Dollar Shave Club. I have not tried its blades but the video is pretty brilliant.)

Optical networking professionals might find the $3.2 billion sale price of Nest oddly reminiscent of the $3.2 billion paid for the Shasta and Coneybeer-founded Xros, a MEMS optical switch company bought by Nortel more than a decade ago. Nest is a much better deal for the acquirer, in this case, as the Nest product is already shipping to customers in volume.

Coneybeer writes on his blog, "I served on the board at my favorite stage of early company growth, between Series A and Series B. I could never talk about the company -- in fact, Tony’s direct involvement was a closely guarded secret at the time.  During the last three years, I’ve gotten to know many of the people at Nest. I’ve learned a lot from several of the best entrepreneurs and startup execs on the planet. It’s an awesome, dedicated team full of current and future Silicon Valley leaders and entrepreneurs."

Kleiner Perkins

Sources close to the deal claim that Kleiner Perkins gained a 20X return on its investment of $20 million. That return gets some of the Kleiner and John Doerr cleantech mojo back and smooths over some of the pain of MiaSolé, Fisker, and a number of other less-than-lucrative cleantech bets. Randy Komisar (below right) was the lead investor for Kleiner. The KP investment came from the $650 million KPCB XIV fund. Doerr and Komisar declined to comment.

Venrock

Investor Venrock is realizing a strong cleantech return just as it is trimming down its cleantech practice. Partner Matt Trevithick and VP Matt Nordan were involved with Venrock's Nest investment, but both have recently left the firm.

Lightspeed Ventures

To a great extent, this is a classic case of VCs betting on the jockey, not the horse. Peter Nieh, Lightspeed's lead investor in Nest and early colleague of Nest CEO Tony Fadell, wrote on his blog:

I had a longstanding “joke” with Tony that whenever I would run into him, I would tell him I had Lightspeed’s checkbook handy and was ready to write him a check whenever he wanted to start a company.  Not sure he knew, but I was dead serious.

He goes on to say:

I first met Tony Fadell, co-founder and CEO of Nest, in the summer of 1991. I was an intern at a then 30-person startup called General Magic while I was a student at Stanford Business School. Unbeknownst to the rest of the world because it was in deep stealth, GM was trying to create what we now know as the mobile Web with the world’s largest telecom service providers and consumer electronics companies based on GM’s technology. Tony was a fresh U of Michigan grad and part of a small team that worked on low-level software and hardware to develop prototypes of PDAs (the ancient predecessors of what is now an iPhone) that companies like Sony, Panasonic and Motorola would manufacture. As I look back, Tony’s success throughout his career starting at GM has been his uncanny ability to make software and hardware meld together as one to create a sublime user experience.  In a company full of talent (the founders of eBay, WebTV, Android all came from GM), Tony stood out even at a very young age. Not only was he exceptionally gifted technically, he gained everyone’s respect for his integrity and strong convictions about the company’s product direction and overall strategy. Tony even as an individual contributor in those very early days of his career was already a leader with vision and capability.

Nieh called Nest "a VC's dream" in his recent blog post. We spoke with Nieh this morning. He noted, "We were looking at other companies in the space. We thought the thermostat [could be] the energy-efficiency control point of the home. There are a lot of clever things you can do if you win the trust of the consumer."

Nieh said that Fadell "had a larger vision." Nieh said that the thermal inertia and energy usage of a home, if controlled, "could turn every house into a battery." He spoke of the potential of Nest to be integral in demand response and the chance to change the one-time thermostat hardware purchase into a recurring revenue energy management service.

Nieh added, "If you create a device that consumers love, then you can sell demand response on your own terms," without the suffering of endless utility demonstrations. The investor called this "a win for cleantech." But he made an interesting observation: "We were right that cleantech can provide venture returns." He noted that at the moment it seems somewhat "binary. You can have an enormous success like Tesla or SolarCity or Nest," or you have to sell MiaSolé, the CIGS solar vendor, for a loss "at $50 million."

"You have to be really precise," said Nieh, noting that imprecision was "amplified in this space."  He added, "You can find the trend -- but there's always luck involved."

Tony Fadell circa 1992                                                            Peter Nieh, product manager

***

(Disclosure: Lightspeed is an investor in Greentech Media)