Earlier this afternoon, I had the chance to chat with Faysal Sohail, a managing director of CMEA Capital in San Francisco, which invests in technology, life sciences and energy and materials companies. We talked about CMEA’s decision not to keep funding Alien Technology (roughly $300 million raised), why the industry is about to see more “pre-baked” deals (portfolio companies selling at prearranged prices to strategic investors), and whether it’s too late to make nice with the government if you’re still hoping for some of those stimulus dollars. An edited transcript of that conversation follows:
You’ve said that in the next few years, you think that the 550 venture capital firms actively investing will drop to 300 or so. That could be pretty drastic. Do you see a downside to the shakeout?
I don’t. There’ve been too many companies in the same exact areas getting funding in recent years. I think the shakeout will force entrepreneurs to come up with bigger ideas — sectors that haven’t been tapped. If an idea has been funded, they’ll find something else. Innovation won’t slow down.
Obviously those VC firms that make it will have exits to point to, but where do you see the exits coming from?
I think the corporate connections that can help the portfolio companies of venture firms will become even more critical. We recently did a massive deal with Shell, for example, where Shell is becoming an R&D partner in Codexis, a biofuels company that we helped start [and that dropped plans for an IPO last September, after filing with the SEC six months earlier]. It’s also an investor now and owns about as much of the company as we do.
So Shell might buy Codexis?
Shell is working with Codexis to quickly and cheaply turn starches into sugars [and, ultimately, ethanol], but pre-baked deals, where strategic investors are coming in [in exchange] for an ability to buy the company at a pre-negotiated price is something I think you’ll see more of. They come in and say, ‘We like where this company is going, we want a piece of it and to be on the board, and as soon as the company hits certain milestones, we want to go ahead and acquire the company.’
You’ll be hearing about one such deal from us soon. But speaking generally, prebaked deals give us the comfort of knowing we have an exit and a partner who can participate in a financing, and it gives the strategic investor the knowledge that they have access to a next-generation product line and that they won’t have to compete with anyone on price.
And if milestones aren’t hit, everything is up for renegotiation?
You’re also an investor in the solar startup Solyndra, which received a $535 million loan guarantee in March — the first to be approved by the Department of Energy in four years.
Yes, money that will let them build a massive new plant to build solar panels, whereas traditionally, you’d have to go public to raise that kind of money. We’re still finalizing the final documents, but it’s essentially a normal, seven-year loan that gets paid back over time.
The money was part of the stimulus package. How long ago did you apply for a governmental loan?
We worked on it for two years. We’ve shifted from having breakfast at the Four Seasons in New York to having navy bean soup at the Senate dining hall. The government is becoming a very critical part of expansion capital, though if you’re just starting now and haven’t thought through projects and don’t have the right partners, it’s very difficult. It’s very hard to hire good lawyers and lobbyists at this stage; they’re already working on so many projects.
I noticed that when 15-year-old Alien Technology [which sells UHF Radio Frequency Identification, or RFID, products] raised its newest, $40 million, round last summer, CMEA didn’t return to the table. Why not?
We were quite involved in Alien. We helped start the company and were seed investors and still have some ownership. But [our stake] was from a very old fund.
I know Alien is vying for a multibillion-dollar market but I understand from analysts that competition is heating up at the same time that the prices for RFID tags is falling. Why has Alien raised so much money?
Good question. I was the vice chairman and I helped recruit the CEO and actually got some products shipped out. But that was many, many years ago. I’m not close enough to the actual inside numbers today to know much, but Alien [which yanked a plan IPO offering in 2007] would have to scale up to really large numbers in order to go public at this point. It’s not just them; you need to have $100 million in revenue and be profitable to even think of an IPO today. And I don’t think they’re at that stage.