Lighting manufacturer Soraa is on the verge of shipping the first of its potentially revolutionary line of LED MR16 lamps. Based on a technology that grows an LED's photon-producing gallium nitride crystal on gallium nitride itself, allowing the LED to run on more current and generate 10 times more light, the lamps will be the first to offer quality performance equivalent to that of a 50W halogen MR16, according to the company. And without $100 million in venture capital funding, it's unlikely that the company, or its ability to pursue this line of research, ever would have existed.
Founded when Silicon Valley–based venture capital investor Vinod Khosla approached the technology's inventors, professor Shuji Nakamura and two of his colleagues at the University of California, Santa Barbara, and provided them with seed money to start the company, Soraa is just one example of how venture capital is changing the lighting industry. With disruptive LED and high-tech control technologies set to reinvent lighting in the years ahead, investors are flocking to lighting entrepreneurs and startups, hoping to claim a slice of a market with a huge potential for growth. And while the stream of cash is likely to fuel innovation and help subsidize capital-intensive research and development, the return-driven investment mind-set could change the way the industry operates.
Global venture capital investments in lighting have been steadily increasing over the past four years, according to Brian Carey, U.S. cleantech advisory leader for PricewaterhouseCoopers (PwC). PwC, which conducted an analysis for architectural lighting of venture capital investment data from the January 2012 "MoneyTree Report" (by PwC and the National Venture Capital Association based on data from Thomson Reuters), found that U.S. venture capital investments in LED lighting grew 83 percent from 2010 to 2011, rising to $304.4 million across 24 deals last year (go.hw.net/ALMoneyTree).
"Especially in this cleantech area, you get investors who come in and don't understand a market yet," Black Coral Capital's Rob Day says. Some of their efforts bear fruit, "but some of them fall flat on their face[s]."
"The global lighting market is very large," he says—approximately $75 billion to $100 billion or more in annual revenues—"so breakthrough technologies such as LED lighting have a huge potential for growth if they are cost-competitive."
LED lighting and lighting-control businesses are also riding a wave of investor interest in clean technology, or cleantech for short, says Rob Day, a partner with Boston-based Black Coral Capital and a cleantech private equity investor since 2004. Basing their investment strategy on long-term natural resource trends and rising energy costs, cleantech investors seek out new technologies in fields like alternative energy or conservation. Because of its potential energy savings in commercial building lighting, a major source of energy use, LEDs are naturally gaining attention, says Day, whose company provided venture capital to Digital Lumens, which manufactures LED lighting systems for industrial applications.
Although the LED industry receives government subsidies in many countries, such as the United States, Japan, and China, it is less reliant on government incentives than other global cleantech sectors such as solar energy, Carey notes. And with many venture capital investors coming from high-tech sectors, the technology risk for LED lighting is relatively low, he says. "It's similar to semiconductors, and VCs are familiar with these technologies."
Venture capitalists often specialize in startups at certain stages of development. Soraa, for instance, went through multiple rounds of financing. Khosla provided the startup seed money in 2008 to hire the company's core technical leaders and set up a research-oriented laboratory near Santa Barbara. By 2010, the company had developed the technology enough to begin product development, so they raised another round of financing from venture capital investor NEA. That funding allowed the company to move to Silicon Valley and build two fabrication plants, one for engineering and one for production. Today, with a third investor, NGEN, on board, the company has raised a total of over $100 million in venture capital.
"VCs are ideally suited for early-stage technology investment and bringing the company to the marketplace," says Eric Kim, Soraa's CEO. "VCs tend to bet with very high risk and very early, but if the risk pans out, they win very, very big. The upside multiple is huge."
In a sense, venture capital has filled the void left by cutbacks in research and development at large companies, says Barry Weinbaum, who has managed several venture capital–funded startups and is now president and CEO of Lumenergi, a Newark, Calif.–based developer of lighting control and energy management technology that is backed by venture capital funding. "Venture capitalists have given inventors, entrepreneurs, and academics the ability to incubate and grow businesses that would have had very little chance to grow otherwise," he says.
Venture capital investors can also bring diverse skill sets and business relationships to balance the expertise of lighting experts, Weinbaum says. "Venture capitalists, being as well-connected as they are, are very important for opening doors for bigger kinds of relationships."
Venture capital is also vital in a fast-moving industry like LED lighting, says Keith Ward, president and CEO of Luminus Devices, an LED manufacturer focusing on "big chip" technology that has received $127 million in seed money and venture capital since its founding in 2002. "VC money has funded aggressive R&D and operational expenses at Luminus, above what the revenue and margin that the company creates would typically cover in our early years," he says. "When you're small, and in a transformative environment like LED or lighting, you need funding fast so that you can invest very aggressively. Small companies can't typically afford to do that on their own." Unlike banks, venture capitalists will take the risk with a pre-profitable startup to provide the up-front capital that fuels innovation and accelerates sales development.
The role of venture capital in transforming lighting into a growth industry is one reason why many welcome the influx of capital, Ward says. In addition to allowing small businesses to grow faster and owners to take some equity from their startup, the trend provides an opportunity for larger companies as well. "They latch onto some of these smaller businesses that have had heavy doses of VC participation, and they buy at a reasonable value for their business, and then they take that technology and they spread it across an infinitely greater business profile," Ward says. Interest from consumer electronics manufacturers, such as Samsung, LG, and Toshiba, could bring new sales channels and products to the traditional lighting industry and speed up the pace of change, he adds—a development that could benefit both sides.