Beyond the Stimulus: Untapped Resources for Startups, VCs

kefkasdinIt’s rare that a venture-backed startup in cleantech these days doesn’t have an eye on government funding opportunities via the stimulus package. As Battelle Ventures’ General Partner Kef Kasdin told us in an interview, “Why rob a bank? There’s money there Because that’s where the money is.”

But startups, for the most part, haven’t been big winners in stimulus awards so far. A123Systems, a later-stage battery startup based in Massachusetts (which went public on Thursday) snagged one of the largest grants in the first round of funds allocated under the Department of Energy’s highly competitive battery manufacturing program, but many more smaller companies didn’t make the cut, at least in that round. Kasdin thinks startups can do better.

“Raising money from the government is not the same as raising your Series B from venture guys,” said Kasdin. It requires more planning, she said. Given that the battery program, and the stimulus package in general, has been designed to create jobs quickly — which in some ways favors large corporations that already have commercial-scale manufacturing capacity — I asked Kasdin whether startups can really compete on the economic arguments. “Startups could also talk about job creation,” she said, albeit with more risk. For startups, she said, it’s a matter of understanding the criteria for these programs, and then “positioning themselves appropriately.”

Kasdin stressed that she’s not assigning blame: The government was right to make it a quick process for the battery program, she said, since “that’s what we all wanted as taxpayers,” but it meant some startups didn’t have time to make the strongest case possible. “At the first pass, bigger companies tended to do better. They had the wherewithal to put proposals together. It’s an education process.”

According to Kasdin, however, another government resource remains relatively untapped by cleantech investors and entrepreneurs: the National Laboratories, which Battelle’s nonprofit arm sole limited partner manages the technology transfer offices along with the Department of Energy.

Technology coming out of the National Labs is very early stage, and so investments are high risk, said Kasdin. Battelle’s strategy is often to set up a “virtual company” to invest a small amount of money up front in order to fund development of a prototype for a commercial application, and then reassess. This way, she said, “You don’t have $10 million or $20 million in and then be behind the curve. You can get quite far on very little money.”

By contrast, a significant portion of investment goes to more fully formed, and thus more capital intensive ventures. Kasdin described it as “chasing deals that already have a lot of money behind them and a team. That’s a different risk-reward equation.”

With tech coming out of the National Labs and venture-backed “virtual companies” being used, overhead costs for space and equipment are low. And if lab researchers can’t carry the whole project, then part-time consultants can be hired at relatively low cost. For some projects, outside team members are also brought in, said Kasdin, to bring a “sense of urgency” that can be lacking in the government system.

When a prototype is finally ready to spin out as a private enterprise, researchers can take “entrepreneurial leave” (not an official term) to help the startup team progress toward commercialization. That’s what Battelle-backed battery startup Planar Energy Devices did — the startup’s DOE researcher just went back to the National Renewable Energy Laboratory recently after two years with the company, said Kasdin. There he’ll continue to serve as an adviser to the company — and lend some insight to the lab, “taking the experience of working at a startup company — the real world — and bring that back to other researchers.”