Avoid ‘Theranizing’ Cleantech VC

Theranos, Enron, Dr. Death, Fyre Festival. What did these scandals all have in common? Bold claims, investor backing, lies, victims and subsequent schadenfreude-inducing podcasts and documentaries about the leader’s fraudulent criminality. We seem to love a fall from grace deception based startup story. Billions wasted. Investors suing. Most of the scrutiny seems to come after the fall, but there were always people trying to raise issues along the way.

According to the Dropout Podcast, Elizabeth Holmes former leader of Theranos doesn’t have the deep voice that she projects; she would come in dead last in just about every track race, but she always thought she was going to be a winner. Which seems to sum things up well. She played to investor’s patriotism by continuously claiming her Theranos devices were being deployed in the field on military helicopters, they weren’t. She oversimplified the challenges of microfluidics and transforming a complex medical blood lab into a nearly autonomous box. She took investors money on the condition of secrecy for the tech. Theranos deceived investors and then customers by drawing their blood and rushing them off to actual blood labs (the labs they were trying to replace) and then making it seem like their own machines had attained the results. Their tests ultimately had many false positives telling people they were pregnant, or had HIV. Elizabeth was once one of the youngest self-made female billionaires but was recently found guilty of “massive fraud” and may spend decades in prison.

Overstating is somewhat expected in Silicon Valley’s ‘fake it ‘till you make it’ culture of selling yourself without a technology. Many founder’s pitches, even within cleantech, make big claims about their potential slice of the market or their pollution reduction potential. But this shouldn’t be equivocated with deceiving people about the functionality of your existing technology – or blatantly lying to supporters or consumers – which is in a different plane of morality and legality. It’s important to not conflate the two. The bigger concern is that some other cleantech companies have started to ‘Theranize’ themselves with similar dubious demo projects or marketing claims.

Nikola Motors was accused of pushing their electric trucks downhill for a demo video to investors, and last year finally admitted those accusations were entirely accurate. "Nikola never stated its truck was driving under its own propulsion in the?video." They did manage to show off that the ancient innovation of the wheel is still going strong, alongside continued support for Newton’s law of universal gravitation.

The accusation led into a three-count criminal fraud and two-count securities fraud indictment against the Nikola founder Trevor Milton in July 2021. He’s currently free on $100 million bail. GM, BP and others backed out of partnerships. Nikola is trying to move beyond the disgraced founder and has delivered their first electric truck.

We need roughly 3-5 trillion more dollars going into cleantech each year to help save the planet, but scandals like this don't help. If the tech doesn’t work both for the benefit of investors, consumers, and reducing pollution, then we will set the field back by allowing too many companies to fail up. If cleantech becomes a risky speculative investment theme it could possibly stunt growing investment from institutional investors to reach that 3-5 trillion each year. And we just don’t have time for delay. The good news is in fact, the returns from cleantech investing have been remarkable, so expect continued growth.

“Brook Porter of G2 Ventures, points out that while in Silicon Valley there is a narrative of failure of cleantech investments in the early 2000’s, $25 billion in investments actually resulted in $500 billion in public stock in companies ranging from Nest, Beyond Meat, Nphase and many more.”

Individuals have come to defend venture during the Theranos debacle, stating that many at traditional healthcare VCs passed on Theranos, and others should have better recognized the lack of top VC backing within the healthcare field before deploying hundreds of millions. They state that in venture having a company like Theranos fail is actually business as usual, as long as a minority of winners are going to 10X their return.

“Only a fraction of 1 percent of firms in the United States receive venture-capital backing, but this tiny minority accounts for 47 percent of the non-financial companies that do well enough to go public, not to mention 89 percent of research and development spending by those that make it onto the stock exchange.”

Venture is an important part of the innovation pipeline that is helping solve climate change within mobility, energy, agriculture, packaging, with a growing interest in emerging fields of aquaculture, ecosystem restoration, and carbon sequestration. We need to redesign our whole economy to become more sustainable and it will take hundreds to thousands of well-funded new companies to do so. This also involves a lot of risk taking and investment. And venture can help in this, in particular as a gating function where experts vet a companies’ technology before getting bigger rounds of fundraising, or going public through an IPO – via SPAC or otherwise.

Anything is possible in a presentation deck. And venture has an important role to play in spending the time to sift through the ‘audacious yet achievable’ goals of an early-stage company, often before a technology exists. It’s important that the Theranos ripple effect doesn’t slow down investment or credibility of VC or cleantech investing (and there are absolutely no indications of either slowing down), or to dissuade new investors from entering the fold just as this new wave is just getting started in cleantech. The early stage (pre-Seed-Series B) is where we need much more investor support. But it’s also a good time for investors to require milestones, do good diligence, diversify leadership, and grow the best cleantech companies and teams.

These ideas below may allow for more scrutiny, better companies getting funded, and growing environmental impact - so that the larger checks and public money can flow into truly functioning climate-busting tech.

Let’s all work fastidiously to avoid Theranizing the cleantech field.

Note: Some individuals and investors are already taking up these measures, and this is geared mainly to newbies entering the field. Very open to ideas on what you are doing to improve your diligence and incentivizing for environmental impact. Drop a note!

1.????Invest in a Fund – If you are newer to the cleantech space, or investing in general, strong recommend in becoming an LP and supporting a fund, you can get to know the ecosystem, investors, and technologies and work with VCs who have been neck-deep in this field full time for years. This may be a good idea before deploying your own direct investments or launching a fund.

2.????Peer Review – Asking other investors what they thought of a deal is the first and foremost way to go. A community of expert investors with knowledge of cleantech will snuff out the fluff and avoid FOMO-hype and ‘hero worshipping’ of founders better than most angels throwing darts into their first cleantech investments. This is our thesis at EnVest: that the environmental investor community can co-invest and support each other with referred deal flow.

3.????Hire Scientists – Many VC teams hire traditional finance backgrounds, sometimes there is an engineer or former founder, but very few funds have scientists on staff for the fields they invest in. Bring some interdisciplinary science background with your next hire, or create a paid third party scientific advisory board. Scientists are really good at one thing in particular – asking questions. Luckily, this practice does seem to be growing.

4.????Technology Milestones – Demonstration milestones should happen, preferably before or around a Series A to B investment. Hundreds of millions probably shouldn’t be poured into companies without at least a working prototype. By the time a Series A comes around groups may have raised millions in pre-Seed and Seed rounds and possibly gathered philanthropic or government grants for years, or preferably they may already have revenue from customers or sales.

5.????Climate Carry – While not ubiquitous, impact reporting metrics is becoming a trend with cleantech funds. Some are going above and beyond this and creating policies that attach part of the carry incentives for VCs into the degree of positive climate or environmental impact via metrics like CO2 emissions avoided, gallons of water saved, pounds of clothing recycled, or food waste reduced. A novel approach that seems like a win-win.

Matt Mulrennan is the CEO of EnVest – an environmental investing membership organization.

Further Reading and Listening:

The Dropout Podcast. Rebecca Jarvis. 2019-2022.

The Theranos Trial Shows Why We Should Be Suspicious of Nuclear Fusion. Slate. Charles Seife. Dec. 8. 2021.

What Elizabeth Holmes and Theranos Reveal About Venture Capitalism. NYT Guest Opinion. Jan 24. 2022.

With VC Deals Up 210% Is It Time For Climate Tech To Shine? Forbes. Felicia Jackson. Dec. 16. 2021.