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How to Win at Cleantech Investing: Milk Stimulus, Raid Labs, Befriend David Gelbaum

Out of a staff of about a dozen, the investing team at cleantech-focused firm 21Ventures has three people writing grants full time to grab pieces of the stimulus package for the 40 or so startups in the firm’s portfolio. It couldn’t be any other way, says David Anthony, founding partner of 21Ventures, as “there’s more money allocated to cleantech in the stimulus package, than there’s probably going to be invested by venture capitalists in North American cleantech startups over the next three years combined.” The only thing that surprises Anthony is that more investors aren’t focusing more aggressively on grant writing.

It’s all part of the alternative strategy that 21Ventures and Anthony have built since the firm’s founding in 2003. Unlike a traditional venture fund, which pools together hundreds of millions of dollars from limited partners and then divvies it up among dozens of startups, 21Ventures has a group of high-net-worth individuals that can invest in specific startups through 21Ventures’ deals. On one hand the risk is higher because investors aren’t diversifying their investments across companies. But on the other hand, 21Ventures investors can make better returns if they happen to pick the startup with the big exit. The members of this group consider themselves pretty tech savvy, and 21Ventures’ model lets them use that expertise to hand-pick investments.

In that respect 21Ventures is kind of like an angel fund, where investors are making individual bets on entrepreneurs. But, as Anthony puts it, angels do all of their own leg work on their investments, whereas at 21Ventures the firm’s partners do most of the homework. At the end of the day, that means those investing in 21Ventures need to have a lot of trust in the firm’s ability to find the diamonds in the rough.

The rough is sometimes where 21Ventures finds itself. “We tend to look at the high risk end of the equation, like universities,” Anthony says rattling off a list of schools that aren’t necessarily known for stellar science programs. “We go where the Kleiners and Sequoias aren’t,” says Anthony. That’s not to say that deals are that hard to find — Anthony says the cleantech industry has had a buyer’s market for the past three years.

Looking at under-invested areas is one of the keys to 21Ventures’ strategy, says Anthony. Advanced farming techniques is one such area and Anthony said the firm just invested in Aero Farm Systems, a startup which builds “aeroponic farming,” or farms in urban environments that use technology like LEDs to grow crops. Another underinvested area is water, both desalination and wastewater treatment. The last thing Anthony says he wants to see is another thin film solar manufacturing deal.

The strategy seems to have promise. 21Ventures has invested $300 million in 25 companies, and plans to invest another $25 million this year and $40 million next year. One of the biggest validations of 21Ventures’ techniques is the alignment with David Gelbaum’s fund Quercus Trust, which often coinvests in early stage startups alongside 21Ventures, such as for Graphene Energy and Advanced Telemetry. Gelbaum, a famous former trader turned secretive cleantech investor and philanthropist, is a friend with whom Anthony says he feels very lucky to do deals.

Like many investors that have been around awhile, Anthony isn’t bemoaning the recession either: “It’s a good time to invest when there’s blood in the streets.”