Friday, April 18, 2014

Required reading for all Venture Capital investors

Warning: Do NOT invest in a VC fund without reading this first!
The inventor of everything | The Verge http://www.theverge.com/2014/4/14/5561250/cool-planet
This article teaches or reinforces a number of important investment lessons but one of the most important is the following:
Nobody knows anything.  To expand on that, never assume that Google or some talking head on TV or the Yale Investment Office knows anything or has done any due diligence on any particular investment  you may be looking at.  As an investor, always assume you are on your own.
Excerpts:
A cheap liquid fuel that “reverses global warming,” as Cheiky puts it, seems like a fantasy. But the venture capitalists he works with are eager to open their checkbooks for ideas that everyone but the entrepreneur deems impossible. “People always say it sounds too good to be true,” says Wesley Chan, who led Google Ventures’ initial investment in Cool Planet. “That is exactly the kind of company I get excited about as a venture capitalist. We’re in the business of making big bets.”
Cheiky’s former employees have a more troubling take. “He is either the world’s most unheralded genius, or he’s criminally insane,” says a former Transonic engineer. “One thing is for sure. He is undeniably very good at parting investors from their money.”
But Cheiky’s entrepreneurial track record, and his science, aren’t quite what they seem. "The guy is brilliant, there is no question. His IQ is probably in the 150s," says a former employee who worked closely with Cheiky at Transonic. "The problem is he is using all the intelligence for evil."
I later run his comments by three experts, including professors in quantum chemistry and zeolite catalysts. They tell me Cheiky’s got his science a bit mixed up and is making exaggerated claims. But it’s not until I call the University of Wisconsin that I really find the smoking gun. I reach William Banholzer, PhD, a chemical engineer who previously spent eight years as the chief technology officer at Dow Chemical. "I actually use Cool Planet as a teaching example of outrageous claims that defy common sense," Banholzer says.
He means that quite literally: Banholzer has created a PowerPoint presentation using Cheiky’s claims from his Google Solve for X talk, along with early Cool Planet presentations and charts. He doesn’t need to know exactly how Cheiky’s patented process works to conclude that it’s wrong: there simply isn’t enough energy in most plants to get the quantity and quality of fuel Cheiky claims he can produce. "And if you’re going to make biochar," says Banholzer, "everything I just said about the amount of plant material you’d need gets even worse."
Banholzer is uniquely qualified to assess whether someone is selling snake oil or pitching solid science. In addition to working as Dow Chemical’s CTO, he spent years helping to manage its venture capital arm. He saw hundreds of companies claim to have amazing new technology and learned to separate fact from fiction. His lesson on Cool Planet is meant to help business students do the same.
"Students get sucked in, because they want to believe," says Banholzer. "They see GE and these other big people put their money in. Because these companies put their money in, the students immediately jump to the idea, ‘Oh well they must know what they’re doing, it means there is something pretty good there.’ So I use Cool Planet as an example of ‘Don’t forget your engineering.’"

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