The Future Of Venture Capital: Trinity Ventures Partner Gus Tai (Part 4)

SM: Since the dot-com crash we have seen a few different things come together. The SaaS market has really developed, and the Web 2.0 and cleantech markets have also developed. SaaS and Web 2.0 are not capital intensive areas which have had a lot of investment while cleantech is very capital intensive. What is your evaluation of trends now? A classic model like the one your firm follows will have a hard time with cleantech because it is so capital intensive and has such a long gestation period. Clearly you have a different thesis; what is that thesis?

GT: We view the name cleantech as equivalent to the label ‘information technology’. It encapsulates a bunch of different types of market sub-segments. We will look at companies that will fall under the cleantech umbrella as long as they are specific. We will look at companies around consumer-oriented services [that] enable consumers to have an affiliation with green tech.

SM: You intend to leverage your expertise in consumer Internet while looking at cleantech trends?

GT: That is an example of looking at a sub-segment of the cleantech trend. We will look at enabling technologies that have great leverage. We will not look at companies that require project financing to get up and running. That does not make economic sense for the structure of our fund.

In the traditional sectors we believe there continues to be innovation, but the innovation in this type of time period around digital media and how consumers engage with services needs to be linked to fundamental business models. There was a time, from 2005 to 2007, when the development of technology could provide important strategic value to inquirers. Those can be legitimate companies to fund.

In this climate in which a large number of the incumbents have made purchases, the market is recessionary and nobody is looking to do M&A, it is very important for companies to figure out how to monetize. On the consumer side we think that there is continuing to be innovation in digital media and paid entertainment.

On the enterprise side there are not clear discontinuities to us. Often, you cannot sense a discontinuity until you are well into it. We believe firmly that the way employees within the enterprise are engaging with IT is fundamentally changing. The broader trend is that the deployment of applications in the enterprise will move from the CIO and the purchasing department providing the criteria to assess these applications to applications which are brought in [by] the end user and move to departmental and then divisional adoption. Freemium as a business model is an interesting one and there has been innovation on the open source side.

SM: What is the prognosis for these very capital intensive, high value-add opportunities for innovation that clearly need financing? The entire cleantech domain is an example of this. How does that innovation get brought to market from an industry structure point of view?

GT: Outside of the management risk, there are also technology and market risks. It is a combination of looking at how comfortable you feel with the risk associated with the opportunity against the likelihood and amount of time. As a venture firm engaged in those marketplaces, you also have the portfolio effect of knowing that some of those companies may not be successful, but that is OK because you are looking for the runner effect.

Assessing these larger companies is not that much different from assessing companies which are not as capital intensive. The difference is that these newer capital intensive companies have financing risks. That is the model you have to figure out, because it has not been forged before. How do you get the hundreds of millions of dollars to manifest a new opportunity? That is what the industry is trying to figure out right now.

SM: As a venture capitalist, if you see a high-capital, high-potential idea, how do you start structuring that? When I see a very capital intensive idea, I can’t bootstrap it because it will only get diluted. If I go out to raise money on a PowerPoint, how would I structure that and not lose the company altogether?

GT: Venture capital is a form of financing a company. It is not the only form, and it is not the right form for many startups. There are a set which are well served by venture capital. It is well suited for ideas which require more money than what is readily available, and which can have funding raised in various chunks based on milestones until a profitability point is reached or an exit has been achieved. For something emerging like cleantech, financing risk is an issue. It is a new type of risk that venture has not dealt with. Fortune favors the bold.

This segment is part 4 in the series : The Future Of Venture Capital: Trinity Ventures Partner Gus Tai
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