What do Chevron, General Motors and Proctor & Gamble have in common, besides being global brands and Fortune 100 companies? All have active and substantial relationships with venture-backed energy and clean-tech companies.
Why would lean-and-mean start-ups want to work with these large organisations? We at CMEA Capital have learned that to be successful, they often must.
We are not talking about standard transactional customer interactions in which the start-up is simply a supplier or customer. We are not talking about financial support from government organisations, as those relationships have different motivations and goals. We are talking about deep partnerships in which well-established corporations put skin in the game via research dollars, joint development agreements, channel partnerships for customer acquisition or even equity investments.
Unlike some other sectors, energy and materials companies compete in markets that are global, mature and capital intensive. Whether the end product is electrons, consumer goods or cars, the incumbent leaders have spent billions over many years building infrastructure such as transmission lines, gas stations, pipelines and more, along with the global sourcing and global manufacturing networks to deliver these products.
Serving these huge industries requires meeting needs of scale, cost, safety and reliability that are daunting for any young company. Partnerships can offer funding and credibility, and channel advantages and supply chain simplifications that dramatically reduce the cost and risk of bringing new innovations to market.
We are not the only ones to figure out that strategic partnerships are essential in clean-tech. Take the numerous partnerships of algae-based chemicals and fuels producer Solazyme. Chevron has invested money and provided non-dilutive research funding. In addition to offering Solazyme increased market credibility, the partnership has reduced the financial burden on venture investors.
Another one of Solazyme’s strategic partners is already a customer – Unilever signed a research development agreement in 2009 and became an equity investor last year.
Today, Unilever is using Solazyme’s products for its algae-based soaps in an attempt to phase out the use of palm oil. Solazyme has equity investors representing other markets,.such as food (Bunge, San-Ei Gen) and airline fuel (Virgin’s Richard Branson).
An example from the CMEA Capital portfolio is the strategic partnership between Contour Energy Systems and oil-and-gas giant Schlumberger. Contour is developing advanced batteries based on carbon-fluoride chemistry.
Schlumberger has a hard time finding suitable batteries for the challenging underground environment and Contour’s technology provides the solution. Thus, the start-up and the large corporation are working together to adapt Contour’s promising new technology for Schlumberger’s long-standing problem.
When it is perfected, Schlumberger will become a customer, driving sales. In the short term, Contour benefits from the contribution towards engineering costs, materials provided by Schlumberger’s research and development (R&D) group, plus an equity investment. In the long term, Contour can leverage the technology advancements to enter other markets with the backing of a Schlumberger endorsement.
Most relationships last because they are mutually beneficial, so it is important to mention that large corporations have much to gain from these partnerships. Years of declining energy R&D budgets in both public and private the pace of innovation at established companies. This trend is so pronounced that private R&D funding in energy technology in 2005 was less than half that of 20 years earlier.
Many large corporations have found partnering a young company focused on a promising new technology is a more cost-effective way to reap the benefits of a new technology while capping the downside risk.
We have a hard time finding a venture-backed energy or clean-tech company that has successfully gone it alone.
Some try but rarely does it go well. When a young company wants to break into established, largely commodity industries, securing a strategic partner is usually a wise approach. Exactly when and in what form that strategic partner should be engaged is a matter for a management team and board depending on the needs of the company and its market.