A conventional wisdom these days is that fewer venture capital firms want to invest in early-stage cleantech startups. But Flagship Ventures has found that, in fact, interest in early-stage cleantech, and other types of deals like healthcare, remain strong, and the firm says it was able to close a $270 million fund recently (and turned away around an additional $30 million), says Noubar Afeyan, managing partner and CEO of Flagship.
The Massachusetts-based VC firm announced on Wednesday that it’s closed the fund, the fourth since its inception in 2000, and plans to put the money into startups in fields that it’s been investing in for years, including healthcare and sustainability, which Afeyan says refers mostly to biofuels, green chemicals, water and nutrition.
The nutrition category is relatively new for Flagship, which began investing in it two years ago and is interested in technology that increases production or effectiveness of nutrient delivery and availability. Flagship’s portfolio companies in this space include Essentient, which was born from the internal Flagship VentureLabs and hasn’t disclosed what it’s doing exactly.
“We are addressing the scarcity issue with food supply,” Afeyan said. “This is where sustainability and healthcare and wellness threads converge.”
Some of Flagship’s existing companies are familiar to the cleantech crowd: cellulosic ethanol maker Mascoma, which has filed to do an initial public offering, and LS9, which engineers bacteria for producing fuels and chemicals.
Flagship raised money at a time when VCs were putting more money into late-stage cleantech rounds. In many instances, VCs had to pump more money into cleantech startups they invested in previously because those companies needed money to enter mass production or deploy its first commercial-scale project but couldn’t raise enough capital from other sources. Also, investors haven’t been selective enough in picking their portfolio companies, and part of that has resulted in a lack of stellar exist.
Perhaps the VC community is undergoing its own self-selection process of weeding out those who aren’t very good, much like the process that emerging sectors experience when they attract too many players and money.
“Closing this fund is significant because there has been a lot of disappointment of late at the number of players in the space. The capital availability for breakthrough ideas isn’t there. In the face of that, we’ve been offered the opportunity to deploy more capital,” Afeyan said
Although Flagship intends to spend most of the new fund on early-stage deals, it plans to portion “less than a quarter” of the amount for late-stage rounds, Afeyan said. The VC firm has seen some good deals involving companies that have good technology but just can’t raise the money to achieve its next goal. The late-stage rounds will likely be smaller than early-stage ones, but Flagship can count on a good return on the investments much sooner. Early-stage deals generally range from a couple hundreds of thousands of dollars to $4-5 million, and Flagship sometimes end up investing between $10-20 million during the lifetime of each company, Afeyan said.
Photo courtesy of Argonne National Laboratory
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