By guest authors Irina Patterson and Candice Arnold
Irina: You were talking about alternative energy. Do you have special expertise and connections in the space?
Michael: We have lots of connections in the space, in both industry and academia. But a lot of it is really because my other partners and I – this is when I’m wearing my Independence Equity hat – have spent so much time with all of these different companies in areas in which we know a lot or, at least, are able to get at the critical questions.
So, that’s why when we look at alternative energy, depending upon how you break it down, we’ll get there, and then if there are any specific, hardcore questions about either the IP or other technological questions, we’ll get additional scientific help or support for certain areas.
Irina: What about government regulations? Do you have expertise in that?
Michael: We know a lot of general regulations and, sort of, the trends as well as where the funding is going that is supporting those trends. I wouldn’t necessarily say we are experts in this, but we’re trying not to be so dependent upon subsidies or anything else, and we’re trying to look at where things are not subsidy dependent or dependent upon certain types of regulations.
First, we’re looking at the advantages a technology has from a value proposition viewpoint, and then we’ll drill down based on the regs and what can be done and not be done and how the partners are deploying it.
We’re not going to be building out a biofuel plant or a large solar farm or any of these large things that are project finance deals, where, typically, you’ll have to deal with these things more. We’re going to be putting a lot of the core components in these systems.
It’s still important to understand power purchase agreements and a lot of other things. But what we’re focused on is being able to have the value proposition to our immediate purchaser, who is going to be the one who’s going to drive a lot of the sales or have a deeper relationship with the regulations.
Irina: What is your preferred type of investment?
Michael: Typically, it’s preferred equity.
Irina: Do you do any convertible debt?
Michael: Yes, sometimes. Possibly if it’s early on and it’s sort of unclear or there’s difficulty in getting to what an appropriate valuation is. Especially if there’s a belief that in a short there may be a good uptick or inflection point from which to provide value, we may do that. There are circumstances where we would do convertible debt, but the vast majority of the focus is on preferred equity.
Irina: Do you invest in any deals that can generate dividends?
Michael: We looked at a bunch. Certain circumstances, especially like we were talking about before, about the maybe niche opportunities, we may look at some things that are dividends, especially if we think it’s not a big enough company, and they may not be able to have a good exit opportunity, or it’s not clear what the exit opportunity is. If the company can showcase that they have enough cash flow to give out dividends, then that’s something we’d consider.
It’s usually not the preferred way. If people are going to risk it, they want it to be a big enough opportunity, and they’re willing to wait for that to happen. But for a [small] number of opportunities, it’s a good approach, and I think it’s good as possibly an overall part of a portfolio and diversification to find a few of those, too.
Irina: What kind of capital requirement do you prefer?
Michael: Low. Everything that we want to do, whether it be across Cornerstone or VentureLab or Independence Equity, we’re all focused on capital efficient businesses. There are some discrete outliers, but the idea is that we don’t want a large need for capital.
We typically like for a company to need less than $25 million in total capital over its life. That’s the preferred amount, but, obviously, there are some circumstances like if you’re growing so fast or there’re new opportunities that come up and may be different. This is prior to getting to an IPO or something like that.
Another company that we got involved with for Cornerstone in which we were a later stage [investor] had raised a lot more than that. The target is for the company to get $25 million, at most, in capital before some type of exit. That’s one reason why we don’t do pharma, biotech, and biopharma. Too much capital is required.