rEnergy Partners: Cleantech investors must stop relying on the power law

Cleantech investors need to stop expecting the typical VC “power law” to apply to their portfolios, where one investment out of 20 hits it big and pays for the rest. There are few large-scale exits in cleantech, with most startups making modest but predictable gains. These are the ones to double down on, says Greg Zavorotniy, partner at rEnergy Ventures, an investment firm newly spun out of German energy, agriculture and construction conglomerate BayWa.

“ If you want to have an actual portfolio that makes sense, you need to rely on taking a sizable position in the business, growing it to a point where you can exit 2, 3, 4x maybe, rather than hoping for that one outlier,” he says.

As rEnergy Ventures — formerly known as BayWa Energy Ventures —  begins to forge an independent existence outside of the corporation, this is the approach Zavorotniy is planning to take.

“We’d love to build an investment firm which is in the energy tech, infrastructure tech space, where we have a number of sizable players in the industry backing us to focus on earlier stage opportunities,” he says on the CVC Unplugged podcast.

The team has plans to raise over $200m for their first fund, which they hope will reach first close in Q1 or Q2 next year.

The spinout announcement was made not long after Energy Infrastructure Partners, a Zurich-based investment firm, acquired a majority stake in parent BayWa r.e.

Under an independent structure, rEnergy Partners, could have access to a larger pool of capital, which the team hopes to use to take much larger stakes in startups than they’ve been able to in the past.   

Currently, the unit’s portfolio includes startups like renewable energy offtake agreement structuring platform provider Pexapark, rooftop solar startups Zolar and Roofit, and Circadian, which has a heavy focus on decarbonising telecoms towers.

“ We need to know that with our capital, we can get them to the state where they’re more or less breakeven. We don’t need to rely on other investors to participate,” he says.

Less is more

The strategy it will be pursuing is one of less risk compared to typical VC strategies, so as to avoid the historical pitfalls of cleantech investors, where a critical mass of hardware-focused cleantech funds have in the past struggled in returning money to their LPs.

“We have to realise that this is the environment we operate in. The funds that at least return the money – I’m not talking about any kind of 2x or 3x type of returns. I’m talking about just returning 1x – have already done well,” he says.

“If you look at the 10-year history from the first cleantech [wave] starting around the early 2000s, I think the average return was less than 0.2x. Then the next generation there was something like 0.5-0.7x and so if you’ve actually done 1x, at least you return the money back to the LPs, that’s already a great thing.”

Even software investments, which are popular across venture for their quick scalability and relatively low capex, are harder to make work in cleantech, he says, requiring larger teams to develop and sell.

“ We’ve seen a lot of software businesses in the energy space where you could get to a few million in revenue, but actually making the jump from $2-3m in revenue to $20m in revenue is very, very difficult.”

Big tickets needed for good exits

Zavorotniy’s view is that the new fund should construct the vast majority of its portfolio, some 70-80%, with startups that can hold their own and reach profitability, with a smaller pot of capital set aside for riskier ventures.

“If 80% of your portfolio will at least be sustainable businesses where you know their profits are not going bust, you should be able to do quite well. It’ll not be 10x return for LPs, but you should focus on 2-3x return with a reasonable risk profile,” he says.

When billion-dollar exits are hard to imagine, it makes more sense to take larger stakes in companies so as to not be diluted out by the time of exit.

“In the last 10 years, there’ve been a few [large] exits, but these are mostly kind of couple hundred million, a hundred million, or less exits.”

US market is still attractive

While the state of support for cleantech startups in the US is up in the air under the new administration, the US remains a market that they will want to break into. It may not be the “holy grail” to the same extent as it has been in the past, but it’s still somewhere that will allow a startup to scale quickly.

Currently, one of the unit’s portfolio companies, Roofit Solar, is making moves in the US market, where Zavorotniy says investors should not rely on government support schemes.

“If you look at it four or five years ago, everything was sort of relying on a supportive regulatory environment. We’re looking at business of which are going to make it irrespective of regulatory environment, irrespective of cyclicality,” says Zavorotniy.

“ US market is not easy to enter, but once you enter it, you can actually scale it quicker for a lot of energy or cleantech businesses.”