Peter DaSilva for The New York Times
Anup Jacob, left, Toby Coppel and Evan Lovell, partners of Virgin Green Fund, at GreenRoad, one of the fund’s investments.
Virgin is practicing a new kind of private equity investing to solve a particular problem of green tech start-ups, far past the early years when most tech companies attract venture capital. It wants to finance companies during the awkward later phase, when they need hand-holding, time and money.
“This is clean tech grown up — operating businesses with operating issues,” said Anup Jacob, a partner at Virgin Green Fund.
During brighter days, on their way to becoming independent adult companies, clean tech start-ups could raise money through project finance loans or tax equity, when banks or corporations invest in green energy projects in order to reap the tax credits that green companies receive.
But as those late-stage financing options have dried up, some clean technology companies have survived by giving up on the idea of building big, expensive factories to produce alternative energy and instead selling their technology to bigger companies. Meanwhile, some investors have recoiled from investing in new green start-ups and have begun investing more of their money in mature start-ups.
From 2007 to 2009, the total venture capital invested in clean technology companies dropped 15 percent, according to the National Venture Capital Association. But a parsing of those numbers shows that investment in late-stage companies actually increased 19 percent, to $821 million, while early-stage companies took the biggest hit, with dollars decreasing 41 percent, to $550 million.
Clean tech companies require more money over a longer period than the average Web start-up, so a lot of companies fall into this later-stage category. Virgin Green Fund, the brainchild of Mr. Branson, founder of the Virgin Group, has looked at 3,700 companies and invested in 10. Mr. Branson put about $100 million into the $220 million fund.
The founders and early investors of these clean-tech companies have already weathered the riskiest period — figuring out if the technology works — and are bringing in several millions of dollars in revenue. Now, the companies need capital to become $100 million companies, and experienced advisers to refine their business model or marketing strategy.
Many of Virgin Green Fund’s investments are far from Silicon Valley and were started more than a decade ago, before green tech became a fad. “It’s the not-sexy stuff of clean tech,” Mr. Jacob said.
Quench, which sells drinking water to businesses, is the product of the merger of several small companies. Based in King of Prussia, Pa., it rents filtration systems that clean water from the tap, eliminating the need for those five-gallon plastic jugs delivered to office break rooms.
Quench water systems are better for the environment because they do not require trucks to crisscross cities and deliver jugs, and they alleviate health concerns about drinking water that has been exposed to plastic for long periods, said Dan Kuzmak, its chief executive.
“We think water is the next oil, that it is the most underpriced asset on the face of the planet,” said Shai Weiss, a Virgin partner. Virgin Green Fund led a $13 million investment in the company.
Quench already had the technology, connecting its filtration system to the office’s water source and using ultraviolet light to kill bacteria. But revenue was just over $10 million a year, and Quench spent a lot of money sending sales representatives door to door.
The Virgin partners are turning it into an e-commerce business. “Easily, half their business could come from e-commerce,” said Toby Coppel, Virgin’s newest partner and a former chief strategy officer at Yahoo. “That’s transformational.”
This year, he spent a day reworking Quench’s Web site, doing things like increasing font sizes, including the phone number on each page and adding terms that would show up in search engines. The number of site visitors who made a purchase increased about 30 percent right away, and now Quench has cut its customer acquisition costs in half, Mr. Coppel said.
Virgin’s partners also wanted to invest in transportation, but not in a capital-intensive company like those that make electric cars, Mr. Weiss said. Instead, they were interested in the intersection between energy and information technology.
They found GreenRoad, which was started in 2003 in Israel and moved its headquarters to Redwood City, Calif. GreenRoad makes a device that sits in vehicles and provides real-time safety feedback and driver coaching. That prevents accidents but also saves fuel, because safer drivers accelerate and slam on the brakes less often.
GreenRoad has been selling the technology to trucking companies. Since the Virgin investment, it is planning to expand to consumers — teenagers and their parents. It is building online games for Facebook and other sites to teach safer driving and is working with insurance companies to offer lower rates for teenage drivers using GreenRoad.
Virgin is the largest investor in GreenRoad. Benchmark Capital and Generation, Al Gore’s investment firm, also invested. Because Virgin takes little technology risk, its investments will produce lower returns than home run venture investments, which could produce fiftyfold returns in a public offering. Virgin hopes for returns of three times the investment, typically from selling the start-ups to bigger companies.
In the long run, that may be a more profitable strategy. The riskiest green tech bets have yet to pan out. The three-year annualized return for the Standard & Poor’s Global Alternative Energy Index, which includes venture-backed companies like First Solar, is negative 15 percent.
The most successful green tech start-ups will probably be acquired by bigger companies for smaller amounts of money than that raised in a successful public offering, said Michael Kanellos, editor in chief at Greentech Media, a research and publishing firm.
“Silicon Valley, in the green world, is mostly going to act as a farm team,” he said. “They’re going to find great ideas in the lab, but the really successful thing will be selling it to General Electric. There’s not going to be many independent companies becoming the next Google.”
By CLAIRE CAIN MILLER/NYT