Startup metrics for capital-intensive industries will create more Teslas

Lotsa folk, including myself and this dude in this post, bemoan the lack of funding for startups trying to change the world. We have tons of laundry delivery startups, and not a lot of Teslas. Granted, companies like Tesla require hundreds of millions of dollars to get started, while laundry apps require a few hundred thousand. But if the upside potential of a Tesla is 1000x bigger than a laundry app, shouldn’t VCs be funding cooler shit?

I’ve dealt with this issue fundraising for Edenworks. In my opinion, it all comes down to one reason: the lack of accepted milestone metrics for capital-intensive startups.

Here’s what I mean by lack of metrics- software startups have a handful of widely understood traction metrics that enable investors to figure out who’s doing well and who’s full of shit. If your mobile app has gotten 2,000 active users in a short period of time, angel investors will take interest. If your SaaS startup has a customer lifetime value 3x your cost of customer acquisition, VCs will take interest. But if you’re an energy startup that has figured out a way to produce a Million BTU for $5 (aka you can produce energy for less $$$ than natural gas), capital providers don’t know what to do with you.

Here’s how all your available funding sources react:

• Banks: Nope, sorry, you’ve got no track history. The most I can make off giving you a loan is 5% in interest, so it makes no sense to do that if there’s even a 10% chance you’ll go under.
• Private equity firms: If you could guarantee that this power plant will work by having all your contractors sign performance guarantees, I’ll invest in the power plant. But I’m not gonna invest in the company, since I want to be able to sell my stake in the power plant as soon as I want to. I’m not waiting around for you guys to IPO or get acquired.
• Venture capital firms: This is so cool! But I want to spend $2 million to figure out if this is going to work, not $50 million.

So what you have are banks that will invest in the second and third power plants, but not the first. PE firms that will invest in the plants, but not the company (and thus not R&D). And VC firms who will invest in the company, but since they don’t understand the industry they’re not willing to plunk down more than a few million. As a result, the energy entrepreneur cannot get off the ground, since she needs someone to invest in the company’s R&D before she’s ready to have folks invest in the physical power plant.

If you were a startup in biotech with a new drug, this wouldn’t be as much an issue, since the process for what constitutes a good investment in a new-drug startup is well understood. Axovant IPO’d in June this year and closed its first day of trading with a $3b market cap. It’s only got one product and $0 in sales. However, since investors understand the FDA’s drug approval process and how drugs enter the market, they’re able to make these bets based on early stage, pre-revenue metrics.

But biotech is the exception when it comes to metrics de-risking a capital-intensive industry. Ironically, the federal government is responsible for this — they put into place milestones for drug development based on public safety that investors now use as proxies for startup metrics. But there simply aren’t startup-appropriate metrics for most industries.

So how do we get startup-appropriate metrics?

I think Corporate VCs have a big role to play here. I envision them doing three things better:

• Touting what “success” means in a given industry, and being specific. For example, in the hydroponics industry, crop cycles are generally 18–28 days for leafy greens. If I were a corporate VC interested in hydroponics, I’d put it out there that anybody who can beat that by a significant margin is worth talking to.
• Blogging. Before I go into that, let me add that I think we’ve reached peak VC-blog, and that the startup ecosystem is way biased toward VC-driven advice as opposed to founder-driven advice. That said, I’d love for corporate VCs to demystify their industries more. Shops like Siemens Ventures have more access to more hardware knowledge than anyone else in the world. Yet they have websites that look like this. What major issues would their departments love solved? I’m sure the information is out there, but they don’t seem to publicize it in a big way.
• Learning from failed startups in their target industry in order to figure out what the impediments to growth are. If I’m General Electric (which has a venture arm), I’m probably looking into better car battery technologies given electric cars are going to be a big deal. Even Tesla uses lithium-ion technology that’s been around for decades. Tons of promising research is being done on the space — why aren’t there more startups muscling their way into car batteries? Given GE’s future relies on acquiring a startup with this tech, I wish their corporate VC arm and others like it were more proactive in identifying barriers to entry within the industries they want to own in order to develop a startup ecosystem in that space.