Gerry Langeler of OVP on Digital Energy and the Cyclical Nature of Venture Capital

Maybe it’s not such a bad time to be an investor after all. OVP Venture Partners, based in Kirkland, WA, held its sixth annual Technology Summit today at the Four Seasons Hotel in downtown Seattle, and the mood was decidedly upbeat. The crowd was a real who’s who of the technology and life sciences industries; some notables in attendance were Rogers Weed from Washington state’s Community, Trade & Economic Development department, Werner Vogels of Amazon, Dan Ling from Microsoft Research, Jeremy Jaech of Verdiem, Matt O’Donnell of the University of Washington, and Leroy Hood of the Institute for Systems Biology.

Luke and I will be posting our takeaways from the meeting in the next day or so. I thought it would be useful first to frame the whole discussion using a few remarks from the introductory talks given by OVP managing directors Rick LeFaivre and Gerry Langeler this morning. LeFaivre pointed out that the OVP summit has historically tackled the prevalent technology issues of the day—from “utility computing” and mobile in 2004 to open source, IT security, digital media, and cloud computing in subsequent years.

This year’s keynote topic was “digital energy”—the convergence of information technology with cleantech and renewable energy. (LeFaivre spoke with Xconomy on this topic in detail back in March.) Langeler, who’s based in Portland, OR, and helps lead OVP’s efforts in this arena, gave an overview of both the digital energy space and the venture capital industry more broadly.

Here are a few key points I took away from Langeler’s talk:

The venture capital market is like the 1980s all over again. “What we have is a cyclical industry,” Langeler said. “And [the cycle] is almost the opposite of the buyout industry. So roughly next year, when we all come out of this environment, there will be an incredible amount of pent-up energy for innovation.” (That sounds pretty optimistic to me. Others think the situation is less rosy. A couple months ago, Seattle-based investor Andy Sack called this recession the “World War II” of our lifetimes. It’ll be interesting to see who’s right.)

In the information technology space, VCs have to be picky. OVP has seen its percentage of investment deals that are in IT shrink from around 90 percent for its fifth fund to around 50 percent for its current (seventh) fund. The IT space “is maturing,” Langeler said. “You can’t just shoot a shotgun in there, you have to be selective.” (Part of the reason for the shrinking IT space for VCs is probably also that it costs a lot less to start software companies these days, so angel investors and entrepreneurs themselves are taking on more of the early-stage costs.)

Digital energy follows a proven model, but the exits are far from proven. OVP is looking to “uncover high-growth segments with low capital intensity” in cleantech, said Langeler, and is more or less following its biotech-meets-IT playbook. In the energy generation space, it is looking for startups that make tools that can be sold to more capital-intensive and price-sensitive industries like solar-panel makers, wind farms, and ethanol producers. In energy storage and distribution, OVP looks for startups that can sell materials and software to utilities and government organizations. (This strategy seems a tad conservative to me, but the road to cleantech exits has been littered with dead-end, high-capital investments in biofuels and solar, to name a couple, so it’s understandable. But still, who will finance the more expensive projects?)

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One response to “Gerry Langeler of OVP on Digital Energy and the Cyclical Nature of Venture Capital”

  1. Dave says:

    OVP’s cleantech investment strategy actually sounds sensible, unlike most, and I hope it works. Traditional VC’s are ill-suited to funding infrastructure type investment projects. The returns are generally lower than VC’s IRR targets, although only a few VC’s have made decent returns in the past decade. More importantly, VC’s simply do not have the $$’s. They are not buyout or infrastructure funds. VC’s funds are generally measured in hundreds of millions of dollars, not in multiple billions. Most VC’s also have very, very little experience investing in highly capital intensive businesses. VC’s invest in technology not in power plants…