Susan Preston, General Partner for the CalCEF Clean Energy Angel Fund, talks with the Opportunist’s Managing Editor Leslie Stone about why she believes angel investors are a critically important part of the country’s future and why this is a good time to invest in clean energy.
Nearly 8 million jobs were lost during the Great Recession—many never to return. Experts say small businesses may hold the key to turning the economy around through job creation. The White House concurs and in recent months has begun hosting economic forums around the country designed to help entrepreneurs. And yet startup companies are not getting the capital they need to move forward. “We are seeing less and less investing in the early and seed stage,” says Susan Preston, who has written several books on the subject of angel investing. “If we lose out on that opportunity, we are going to lose thousands of companies. We need vehicles by which to drive capital into early stage companies.”
Opportunist: Let’s start with your background Susan. Please tell us a little about that.
Preston: Originally I studied sciences and received my Bachelor of Science degree in Microbiology and Public Health from Washington State University. Then I decided to get a law degree and, after graduating from the Seattle University of Law, I worked as patent and environmental counsel for Weyerhaeuser. I also held senior management positions in the biotech area—doing everything from general counsel to CEO of public and private companies. I eventually returned to the private practice of law and helped open up a California based company in Seattle. When I finally made the transition to clean energy, I discovered I loved it. In the interim, I had worked with venture capitalists and angel investors.
Opportunist: You are credited with forming the first all-women angel group of investors. How did that come about?
Preston: I started Seraph Capital Forum in 1999, the year of the dot-com bubble. The forum came out of the frustration I saw with women not getting into deals as investors. Even though they were very experienced professionals capable of making intelligent investment decisions, women were being excluded from the club. So we decided to start our own club. The forum is still around today.
Opportunist: We understand you were also instrumental in creating the Access to Capital for Entrepreneurs Act.
Preston: Yes, it’s based on my idea for tax credits for early stage investing. I spent nearly a year and a half commuting to Washington, D.C., where I worked with the House and Senate to draft the bill’s language and structure.
Opportunist: What is the principle of the bill?
Preston: That 25 percent tax credit shall be given to investors who invest in early stage companies. It became a bipartisan federal income tax credit bill for private equity investing that was introduced in the House and Senate in 2006 and 2007. The following year it fell victim to other important issues, but it was picked back up and reintroduced verbatim in 2011 and I believe it has a chance this time.
Opportunist: What is the angel investor’s role as you see it?
Preston: They are becoming more critically important every day. Venture capitalist money is decreasing for seed stage companies and going to later stage companies.
Opportunist: Why is that?
Preston: There are a couple of different factors driving that. One, limited partners are not particularly happy with performance of early stage companies. It’s all about risk versus reward. They prefer to invest when a company is already commercialized, with revenues in a growth industry. Second, we are looking at massive funds and a lot of money to be put into play. Venture capitalists cannot invest small amounts of money. That simply isn’t in the realm of what they will consider. They won’t place $2 million here and $5 million there, which is exactly what seed stage investing is. They typically invest $20 million to $40 million at a time.
Also, if you come in at the early stage you’ll wait longer –seven or eight years, typically—for your exit and return on investment. That becomes a problem in itself and, therefore, we see fewer venture capitalists going there. The only other source of funding is through seed funds with an angel investor. Grants are hard to get and take forever to process. Angels are the absolute lifeblood of these young entrepreneurs.
Opportunist: Who is a typical angel investor?
Preston: Most are successful entrepreneurs who have grown companies themselves. They were successful at it and really enjoyed it and don’t want to put in 70-hour weeks again but love the excitement of growing a company. They can provide advice, direction and guidance that is invaluable for these young companies. They get a lot of different benefits from angel investors—like their Rolodex, for example. Angels will typically invest in an area where they have prior experience and usually have great connections, such as potential customers and experts and team members and so forth, so it is more than just their money they are investing. It’s like having a partner in the business. So, absolutely, angels are invaluable. We need to be doing more to support angel investors.
The government and others are just starting to wake up to this. When I was trying to get the [Access to Capital for Entrepreneurs Act] through Congress, most of the committee members had not heard the term angel investor.
Opportunist: What advice would you give potential angel investors?
Preston: A great way to start is to identify and become part of a local angel group in your region. There are courses and programs for training angel investors, but connecting with others and surrounding yourself with people of like interests is an excellent way to learn. Most angel investors are still lone wolves, but angel groups have better returns than individual angel investors.
Opportunist: Tell us about the CalCEF Clean Energy Angel Fund.
Preston: It is a traditional limited partnership with a 10-year lifespan that runs out in February 2018. We invest in clean energy companies that are in the very early seed stage.
Opportunist: As a proponent of clean energy, do you believe this is a good time to invest in that sector?
Preston: Clean energy compared to the others, from a public market standpoint, has received undue attention and had a magnifying glass unfairly placed upon it because of Solyndra and the large grants, but this is an amazing opportunity at this time. We must be counterintuitive in our investing and think differently about it and look at the specifics and realize that when everybody else takes their eye off the ball, this is the best time to invest.
Preston: The battery market—specifically electric cars and our interest in creating longer operating batteries. The military is interested in smaller batteries with longer life that can be easily recharged so troops in the field can go longer periods of time without the weight of extra batteries. Some estimates say a very high percentage of weight in a soldier’s backpack is from extra batteries.
Energy storage technology is another area. If we really want to advance renewable energy like wind and solar, we have to find a way of storing the energy that is produced because, unfortunately, wind doesn’t always blow at peak power utilization. The sun has a little bit of correlation to that. Battery and storage devices—from personal size like to electric cars to large grid scale that can store energy being generated by renewable sources—are a big issue and there is a lot of opportunity for driving down what has been a very expensive proposition. On a broader scale, batteries could even help us with renewable energy adoption and reduction of petroleum fuel.
Opportunist: Our current administration has been stressing the importance of movingaway from foreign oil. Do you believe that is possible in our lifetime?
Preston: From a homeland security standpoint and management of our own economy, it certainly makes sense. We buy oil from a number of countries that aren’t exactly what we call stable. Our economy is heavily impacted by the cost of transportation of fuel. Long haul truckers have to pay more for shipping fuel. These ramifications and collateral damage are caused by the increasing fuel cost because there is no internal domestic way to control the cost of energy and our domestic need for keeping the lights on and running industry and all those things.
We are hearing a lot about electricity and natural gas. With all the new fracking in North Dakota and other parts of the country, we are seeing the price of natural gas go way down. That has the opportunity of creating much lower costs from a manufacturing and operational standpoint, but the concern for folks like myself is that people will become complacent and say “Well, we’ve got cheap natural gas; we don’t need to do much else.” It is certainly better than petroleum based fossil fuel but it is still polluting the environment because a lot of methane gas comes off the harvesting and that is extremely bad and hard on the environment and the ozone. We have to be very careful about how much emphasis is placed on natural gas and we must keep our eye on the ball with renewable resources.
Another area that I would sincerely like to see people spending more time and attention investing in is energy management and inexpensive methods of monitoring and managing a building. I think we are starting to see more of that and I think that would help in optimizing building operations and power consumption surge. Buildings themselves consume about 40 percent of all the electricity produced in the United States.
We need to look for ways in which we can be more energy efficient. We can look for methods to somehow monitor the air conditioning and refrigeration units in large buildings and have a system that can tell us if it’s running poorly and needs maintenance—everything from whether it needs an air filter replaced to a tune-up. If a building is operating at 70 percent efficiency, for example, we need to figure out how we can pop it up to 90 percent very simply with straightforward things that can be done. With monitoring and reporting systems we are looking at relatively inexpensive devices added onto machinery that automatically have it run at a more optimum level.
For example, air conditioning units are typically monitored to run at maximum levels and have all power available at any time. But a good percentage of that time a building doesn’t need the compressor running at that level. We can save thousands by more efficiently operating the equipment to actual needs rather than specifically to the way machinery was designed to give maximum performance even when it’s not needed.
This country, for the most part, is still operating like the ‘70s and ‘80s when machinery and buildings were built to maximize performance without regard to consumption of power. Everything was made to maximize comfort and performance without appreciating what we were doing to the environment. The result is a legacy of equipment and buildings that are very inefficient. It’s relatively cheap to turn an inefficient building into a highly effective one using energy at a fraction of the cost. Replacing lights and putting in double-paned windows, for example, can increase efficiency and decrease consumption.
Opportunist: California certainly seems to be ahead of the curve.
Preston: Yes, California is an example of the effectiveness of these requirements. After the energy crisis in the ‘70s, the State of California enacted a number of laws relating to energy efficiency. When you compare the per capita energy consumption of California since the early ‘70s with the rest of the United States, the line has stayed flat. It has not increased in 30-plus years. The rest of the United States has quadrupled. And yet no one would say that California has compromised its style. [Laughs] Through recognition of energy efficiency and specifically the Energy Star system at Berkeley Lab, we have seen a great graph of prices coming down exponentially and energy efficiency going up—driven by consumer demand for cheaper and more efficient appliances.
Opportunist: Can you share some of your fund’s success stories?
Preston: Alphabet Energy, based in Silicon Valley, is commercializing a breakthrough thermoelectric waste heat recovery technology that essentially turns waste heat into electricity. The company has received a lot of publicity and coverage and was even featured in National Geographic. Alphabet’s goal is to become the leader in the potential $100 billion global market for products that convert medium- to high-grade waste heat into electricity.
Another startup company, Colorado-based Boulder Ionics, produces ionic liquids and ionic liquid based electrolytes for application in a wide range of products. They are looking at replacing the electrolytes found in lithium ion batteries, which has lots of advantages. For example, whenever you hear news of electric cars catching fire it’s typically due to overheating of the electrolytes. Ionic liquids have no vapor and, therefore, no flammability issue within reasonable use. They also have great voltage potential and cost less money to operate. Ionic liquids haven’t been adopted yet but Boulder has developed a cutting edge affordable technology and the company is getting attention from the scientific media.
Allopartis Biotechnologies, in San Francisco’s Mission Bay Innovation Corridor, works with enzymes. Enzymes are very important in the production of biofuels, manufacturing renewable chemicals and getting us away from petroleum. The company’s first pre-commercial product is targeted at the renewable chemical and biofuel production market, which is a potential $75 billion market. This area is a little bit more technical and harder for people to grasp sometimes but when you look at it as an opportunity for us to get away from petroleum products it’s quite exciting.
Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in the Orlando area.