Ray Lane: Kleiner is not moving away from greentech

Kleiner Perkins Partner Ray Lane will be driving the five miles home from work tonight in a brand-new, shiny, silver $100,000 electric Fisker Karma. Lane showed off the second production Karma (rumor has it No. 1 went to Leonardo DiCaprio) at an event outside Kleiner’s offices on Tuesday. But the Karma is not just a personal luxury item for Lane.

Fisker represents one of between six and eight greentech companies that Kleiner thinks will deliver big returns for the firm (out of its 70 or so greentech portfolio companies) and potentially make back a good portion of the hundreds of millions of dollars it’s invested into greentech over the past several years. Lane thinks that over the next two years, some of Kleiner’s half a dozen top bets will start to bear fruit via IPOs.

While there’s been a perception that Kleiner has been moving away from greentech investing, Lane told me in an interview after the Karma event that Kleiner is not pulling back. “We’ve committed a third of our 12th, 13th and 14th funds to greentech. We have 14 active greentech investors, and I just did two more deals this morning,” said Lane.

Here’s our lightly edited interview with Lane, who discussed, among other issues, why investing in greentech isn’t like investing in the Internet, what happened to Kleiner’s Think electric-car deal, and why he’s more excited about greentech than software.

Q. Have the returns been what you thought they were going to be for greentech? Did you think when you started that it would take a long time?

A. I didn’t expect them to be any different, other than that there was a recession. When we first started investing in green heavily in the ’05 and ’06 time frame, we went to our limited partners, and we said greentech is going to have longer returns than digital. Every limited partner signs on to a 10-year contract with us, and 10 years is about what they expect. They are not in a hurry, by the way.

In the VC industry, we’ve gotten used to investing in software companies, which is a lot easier development process. You get a couple of programmers, you get a product out in the first six months and for the Internet you get customers really fast. And in a year you have a company. Google was 4.5 years. So in digital, they are used to thinking 4 to 5 years.

But when we got into greentech, we said we think it will be longer than digital. It will be more capital-intensive than digital; there will be more government policy involved; and also the fact that we’re trying to replace an existing infrastructure like coal, gas and oil. And you have to scale it first. For the Internet, like Google, Facebook, Twitter, they start small and they just keep going. But you can’t do that with a gas plant or a car plant. The first car that comes out — my new car for example — can’t kill anybody. Facebook doesn’t risk killing anyone when it first comes out. You can’t build a car company in 3 to 4 years. It’s impossible.

Then you stick a recession in the middle of it. I don’t want to blame the recession, but it did slow everything down. Capital raising was tough. People just went to sleep and left the market. There is no question.

Our expectations were always in the 6 to 7 year time frame. That time frame would really feel good to us. We’re about to get there with some of the early companies, with the ’05 investments. We expect returns, IPOs and liquidity events over the next two years. And we’re seeing them.

Q. When you look at Zynga and they can make back the green fund in an IPO, how does that feel?

A. Sure. So can Fisker. Fisker has the potential to be the same value as Zynga.

Q. In theory you’d think it would be the car company that would be valued higher, right?

A. Not really. Software companies have been worth more than car companies for a long time. GM was worth $50 billion; now it’s at $25 billion. Google is at $200 billion and Oracle $160 billion. So it’s not unusual.

The reason is, the business model of the Internet and software is unique. There are no other industries like it. You can’t apply the rules of it to greentech. It’s a totally different world. Most software companies have 90 percent margins, and after you include development and services, maybe 50 percent to 60 percent margins. You’re never going to get that with a car company. I’d be thrilled with 20 prcent gross margins for a car company.

Q. Does that make you lean more towards green software, or green IT plays, like an Opower?

A. Not exactly lean, but yes, we want to do as many of those as we can. But there’s not enough of them. It doesn’t make a portfolio. We’ll continue to aggressively invest in the area, but there are just not enough software companies out there.

Q. What are areas that will continue to be attractive in the greentech space for Kleiner?

A. So, we started out with biofuels, solar, wind — those are some early ones. We did then a lot in conversion tech, coal to gas, and thermal electrics, heat to energy, waste heat to energy. Now we’re doing a lot of storage, electron storage batteries. Weve done a lot in water. Two years ago we hadn’t done anything in water, and now we’ve done 3 investments in clean water. We’re starting to do a bunch in agriculture. Everything from changing the productivity of seeds to making fuels and producing sugars.

Q. What big returns are you banking on?

A. I’m not going to comment on who files and who goes public. But I think you’ll see 6 to 8 IPOs out of our cleantech portfolio. In terms of big opportunities for companies, though not forecasting IPOs, I think there are big opportunities with Bloom Energy, Miasole, Silver Spring Networks, Enphase Energy, Macoma, Fisker and GreatPoint Energy. These companies I think will be huge. They’ll probably all IPO. I’m not forecasting when, but these companies will be huge.

I think I’d be close if out of the 70 greentech companies we’ve invested in, 20 of them will make no difference – as in we tried and it was fun, but it didn’t work and its not going to be a big company. Maybe 15 to 20. Then I think there’s another 15 or 20 that are IPOs, big outcomes, return-the-fund kind of thing. Then everything else is kind of like, we don’t know — they’re too early, or we’re still removing technical risk. That’s the profile of venture capitalists. We take so much risk so early that we never expect all of our companies to make it. The Kleiner model is that 1 or 2 will return the fund.

Q. So it’s going as you expected?

A. So far, it’s as expected. But again with a big headache around the recession. I would have expected some early, not on time, but early IPOs. I think without a recession, we could have seen a few of these companies IPO last year.

Q. Do you feel like the greentech investing space as a whole has learned lessons? A lot of the generalist VCs that moved into greentech investing and haven’t been as aggressive as Kleiner have moved out.

A. We had all of the challenges for greentech on the first piece of paper for our limited partners — government policy, capital intensive, regulation — that it’s tough to invent a new business. The only one we didn’t put down was a recession. Actually, a recession would have been fine, this was a depression. Kleiner went out and raised extra funds just as an insurance policy, but we never used a dime of that.

GreatPoint Energy is a good example. They were on a capital intensive plan to build plants in the U.S. The combo of a recession and shale gas finds in the U.S. meant that GreatPoint was looking at a very tough time building their plant in the U.S. So we sent them to China to start developing partnerships there. So that is where they are going to build their plant: in China. Where they pay three times what we pay for natural gas.

If you and I sit down two years from now and we don’t have a single IPO from this group, I’d say now we are behind. But we do expect IPOs out of a bunch of companies.

There have been other funds that followed us and Khosla, and the recession took them out of it. I also think they are feeling the overall crunch of venture capital. We have always said that the VC industry is too large. It’s got too much capacity. There are 900 VC firms in U.S.; there needs to be 300. You’re seeing this macro trend of LP passing on new funds.

Q. So for Kleiner, maybe there are more opportunities now that there are less general investors in cleantech.

A. That’s exactly it. I like it. We don’t like to have VCs that copy ideas or be “me too.” Valuations go up. There’s more competition. You have to have a thesis when you are investing in greentech. When I did Fisker and another car company, my partners thought I was out of my mind. But I had a thesis. We can invest in a car company and either have a way to get the valuation high enough so you don’t get crushed on dilution or get low-cost loans that are high leverage for equity investors. Or buy cheap assets, which I did not know going in. I did not know we could go to GM Disposal corp and buy a plant for $20 million; that is a big deal for us and Tesla at the NUMMI plant.

Q. What happened with Think?

A. I should probably explain this to the market. I think it did not turn out well. I did not invest in Think and I passed on it several times. And I got a call from Rockport, and they had come up with an idea to invest a little bit of money, $5 million — $2.5 million each — to buy the North American rights to Think if they ever come here. So right from the beginning I did not see it as an American car. I saw it as a European city car, and to this day, I think Europeans will pay $35,000 for a little car to be able to park it in small spaces and scoot around the cities in it. They sold 3,000 of those: No one has sold that many EVs.

So I thought our investment was pretty cool, and we owned some of the rights for $2.5 million if they brought it here to the U.S. Then when they were starting to restructure Think Inc, they wanted to buy the American rights back, and I said OK, for $2.5 million. But we ended up getting 1.5 percent of Think for selling that back. So I thought that was a pretty smart investment.

Q. Anything else I should know about Kleiner’s greentech future?

A. I was one of the first ones to say this [greentech] is what I want to do. I just did two digital investments because I knew KP wouldn’t do them without me getting involved. But I’m not out there looking for digital investments. I don’t want to do them. I have no interest. I don’t go to the meetings, and I don’t follow all of that social stuff. I volunteered to lead this greentech practice. This is my day job, and I like doing it.