There are those out there who believe that all real entrepreneurial activity comes to us thanks to venture capitalists and their funds. But a story from Red Herring illustrates how limited their interests, and therefore their impact, are due to the investment criteria they use to evaluate deals.
Despite the promise of cleantech like biofuels and water purification technologies, some venture capitalists say it can be tricky to invest in the field because it doesn’t necessarily offer the fat and easy returns that make them drool.
The challenges aren’t obvious from the numbers. Cleantech investments in North America grew 35 percent to $1.63 billion in 2005, according to the Cleantech Venture Network, the industry monitor that held the Cleantech Venture Forum conference in San Francisco last week.
But some of the most promising clean technologies just don’t fit the classic VC model of a six-year exit with returns of 10 times the original investment, industry watchers said.
So while VCs do play an important role in our entrepreneurial economy, keep in mind that they only fund a fraction of a percent of new businesses formed each year, they are rather selective on the types of businesses they like, and as this story shows they can have a very near-sighted view of the world.
John makes a good point. That is exactly why it is extremely important to put together a great team before attracting investors in an effort to build investor confidence.