Cleantech entrepreneurs thinking big

Cross-posted from Cleantech Business

As an MIT alum interested in clean energy, I subscribe to the free semiannual magazine Energy Futures.

The purpose of the magazine is to tout MIT advances in energy technology, but since MIT (with the MIT Energy Initiative) is one of the world's cutting-edge energy research labs, I find that it is often a provocative look into a possible future that may or may not* come to fruition. (*The technology may not work, it may not scale, it may not be cost effective, something better may come out, etc. — such are the risks of technology entrepreneurship).

In the spring issue, one article describes the work of Prof. Vladimir Bulović, recent PhD grad Miles Barr and ex-postdoc Richard Lunt to create transparent solar cells. The cells absorb energy in the UV and near-infrared, but only about 30% of the visible light. This would allow the PV cells to become just another layer on a building’s windows, and could also use the window class to protect the (currently fragile) layers from the elements.



Right now, the efficiency is only 2%, but are hoping to get the efficiency up to 10-12%.

As with any BIPV (Building Integrated Photovoltaic), integrating the PV into windows would eliminate most of the installation cost; it would also mean that the PV is not an obstacle in use of the existing roof, interfere with drainage, need to cope with snow accumulation, etc.

The big win seems to be for large commercial buildings. The article claims that a 5% efficient PV cell could generate 25% of a building’s electricity. Absorbing near IR would reduce cooling in the summer (but increase heating in the window). With such a cost-benefit, the builder of a new commercial building would invest in such efficiencies (even ignoring the LEED bragging rights) while a consumer might worry about increasing the price of a house $20-50k (and would also tend to have more shading problems). If every new skyscraper had such BIPV, it would both generate a lot of energy and also be a big market.

To exploit the opportunity, the three men formed a company called Ubiquitous Energy, where Barr is president and CTO, and the other two are on the scientific advisory board. They have a $1m in seed funding and $375k in SBIR funding so far.

Like any tech startup, it’s a gamble — but this seems one with a big payout if they can solve all the challenges.

Chasing what is not yet known not to work

Today was one of the best events of the year for Bay Area cleantech entrepreneurs, with a panel discussion by three CEOs and one chairman of local biofuels companies (Amyris, Cobalt, Solazyme and LS9, respectively). I organized the event on behalf of the MIT Club of Northern California.

It was a great evening of very sharp leaders talking about how to make a successful business in a high-tech, high-risk industry based on biotech and chemical engineering. We had a standing room only sellout crowd, based in part on favorable publicity from the Merc and Biofuels Digest.

While we learned a lot from all the panelists, a unique perspective was offered by Noubar Afeyan, a Boston VC (and MIT alum) who appears to be a serial (perhaps chronic) entrepreneur. His Flagship Ventures web page says he’s “co-founded and helped build 24 successful life science and technology startups,” including roles building Applera and Celera in the biotech segment.

Afeyan is the chairman of three biofuels companies: LS9, Joule and Midori. The Bay Area’s LS9 was his firm’s 9th life science startup. As he said, “we number our companies the way that MIT numbers buildings.” (Inside joke for us MIT alumni: buildings, courses, majors are all given by numbers rather than names.)

In his opening slide, he showed an oft-quoted cartoon about the optimism of two archaeologists looking at a tiny pyramid in the desert, with the caption “This could be the discovery of the century. Depending, of course, on how far down it goes.”

This set up one of his best laugh lines of the evening, in which he said all the entrepreneurs in the industry were chasing “what is not yet known not to work.”

That seems to capture what makes high-tech entrepreneurship different: we don’t know what technologies will work and won’t work, so we invest in pursuing things that might work (or at least are not yet known to fail) in hopes of finding the one that does work. That seems almost the definition of entrepreneurial optimism: if it isn’t known to fail, it’s worth trying.

Cleantech entrepreneurs: life without VC?

Cross-posted to Cleantech Business.

Statistics released Friday by the Cleantech Group say that “cleantech” VC investments in 2010 hit a record $7.8 billion, up 28% from the $6.1 billion in 2009 for North America, Europe and Chindia. The N.A. data was even more impressive, up 45% to $5.28 billion. Worldwide, solar continued to account for the largest share of the investments, up 52% from 2009 to $1.83 billion.

Although this sounds encouraging, Iris Kuo of VentureBeat had a different take. First, cleantech VC investment has been declining for the past two quarters. Instead, the capital-intensive have been going to government sources, including BrightSource, Solyndra and Tesla.

However, analysts are just beginning to realize that cleantech businesses may be fundamentally unsuitable for VC investment. A series of clues have emerged in the past 6 months.

Exhibit A was the whole debate started by VC Fred Wilson and his “two venture capital industries” thesis:

The first VC industry is investing in software based businesses. The software VC business has been fundamentally altered by the massive decrease in the cost of building and launching a software based business.…

The second VC industry is investing in cleantech, biotech and other capital intensive tech businesses that have economic models that have not been fundamentally altered. This VC industry operates largely the same way it has operated for the past twenty or thirty years.

The statistics were supported by TechCrunch data from the first 8 months of 2010: an average of $5m for web/ecommerce vs. $31m for cleantech.

Exhibit B was the decision of Kleiner Perkins to pull back from cleantech investing and go back to its roots in IT. Of all the major Silicon Valley VCs, KPCB had made the most aggressive bet on cleantech — particularly green energy. This is the firm that in 2007 made a partner out of a former presidential candidate and Nobel Prize winner.

Exhibit C are the observations of one of the most respected IT industry executives, analysts, inventor and entrepreneurs: Bob Metcalfe (MIT ’69), inventor of Ethernet and founder of 3Com. Having finished a decade as a venture general partner, last month Metcalfe said that the VC model (so far) does not fit cleantech:

Q: What did you learn from your investing in clean-tech, or as you call it, enertech?

A: I’m still in the process of learning – this is complicated stuff. But I learned that the innovation environment in the energy space is not there yet. The problems we see are a mismatch between the asset class called venture capital and the innovation opportunities in energy – it takes too much capital and it takes too much time. But I claim that’s only because the innovation environment in energy hasn’t developed, say, the way it has in pharma. Drugs take a lot of money and a long time, but there’s a lot of venture capital activity in drug discovery. That’s because the drug-discovery business has grown into being able to exploit the venture capital model. The partnerships that big pharma has with drug companies in stage one, stage two, stage three [clinical trials] allow venture capitalists to do what they do and get the returns that they need. The energy space has not quite developed, but it will.

This entire debate was anticipated by Prof. Martin Kenney of UC Davis, the editor of Understanding Silicon Valley — perhaps the leading academic expert on Silicon Valley and a longtime expert on hightech VC.

In July 2009, Kenney wrote a book chapter entitled “Venture Capital Investment in the Greentech Industries: A Provocative Essay” that will be published in the Handbook of Research on Energy Entrepreneurship. He notes a number of warning signs:

1. investors have been pouring money into green energy without being able to get it back from IPOs;
2. market growth may be slow, since “clean” technologies are competing with established (and cheaper or better) incumbents;
3. the cleantech bubble investing bubble parallels the Internet bubble;
4. thus far, the most successful cleantech businesses have been self-funded: either bootstrapped (e.g. Danish wind turbines) or internal green ventures from existing multinationals like Siemens and Sanyo.

Kenney tries to offer a positive scenario, suggesting that VCs could learn and adapt like they have in biotech. However, in the past 18 months have been signs that biotech VC may be facing similar problems (if the returns to pharma R&D are becoming less certain).

While the scale of investment in energy is enormous, the VCs have various reasons to actually favor larger deals (and often pension funds throwing money at them to invest). While VC worked great during the 1990s with relatively small investments followed by quick exits via IPO or acquisition, but both are much harder in renewable energy.

The first problem is the time scale. If (as Zider’s 1998 classic HBR article suggests) VCs seek a 10x liquidity event after 5 years (to cover their losers), then doubling the delay to 10 years cuts the IRR by more than half (and the NPV even more than that). For a 10 year exit — and ignoring the increased risk of failure — the same IRR would require a 100x return.

The other problem is that the size of the investment reduces (if not eliminates) the opportunity to exit via acquisition. A 10x return via acquisition was common for $50m dot-com investments, but such exits are going to be much rarer with $500m invested; a 100x return is going to be out of the question.

If VC can’t find a way to make money off cleantech investments, then cleantech entrepreneurs are going to have a hard time bringing their businesses to scale. Without VC, new businesses will have a hard time competing with self-funded multinational incumbents — or government-funded enterprises in large centrally-planned economies.

VCs and green entrepreneurs

At the Academy of Management (#AOM2010) conference this week in Montréal, one of the more lively sessions was a “caucus” on Monday entitled “ Venture Capital Investments in Cleantech: An Act of Passion or Another Bubble In-The-Making?”

As the title suggested, the audience of about 30 academics argued about the rationality of VC investments, how they might be studied by academics, and of course the underlying industry dynamics.

It was an interesting albeit disjointed discussion. Imagine 15 smart (but perhaps undisciplined) people having a series of a stream of consciousness monologues (while the other 15 sat and watched). Still, this was probably the most concentrated grouping of management academics interested in cleantech entrepreneurship anywhere at the conference. Since most of the VC (at least by $) has gone to solar, this was also a RE/EE discussion.

Not all of the discussion was about VC. (Since I don’t personally study VCs, I only think about them in the context of the availability of funds for startups.) Some of the discussion was about more basic questions of studying cleantech startups.

My own question was about how SIC/NAICS doesn’t capture cleantech industries — the so-called “cleantech sector” — nor will it until the next revision of NAICS. (Cleantech seems no more a sector than nanotech.) The answer seemed to be that various “experts” have made databases by hand that they claim capture the entire industry. (Desiree Pacheco of Portland State seemed to be the most knowledgeable here, and had clearly been down this road before.)

The session was organized by Eva Yao (Colorado), Antoaneta Petkova (SF State), Sanjay Jain (Santa Clara) and Anu Wadhwa (EPFL). They have an (in progress) study that shows that high status VCs invested first in cleantech, and the room offered a bunch of possible explanations (such as the bigger VCs have more scale, more status and more slack).

In addition to Toni and Sanjay, the Bay Area was also represented by Geoff Desa of SFSU, Gregory Theyel of GreenVisions and CSU East Bay and of course yours truly. Colorado is a hopping place for renewable energy entrepreneurship, but my hunch is that overall California has the rest of the country beat.

Cleantech Venture Challenge

Cross posted to Cleantech Business

The University of Colorado at Boulder is preparing to host its 4th annual Cleantech Venture Challenge, an international business plan competition for new ventures that somehow address a “sustainability” need. The business plan competition is sponsored by the Deming Center for Entrepreneurship at the Colorado’s Leeds School of Business.

The competition uses a three-stage process. An intent to compete must be filed by Nov. 21, followed by a complete business plan on January 30, 2009. The eight semifinalists will come to Denver March 17-19 for the final rounds and the ultimate selection. The National Renewable Energy Lab (in nearby Golden, CO) will also invite the top renewable energy project to present at NREL.

The top prize is $25,000. The finals will also coincide with a sustainable business summit to be held at the Denver convention center, part of the state’s efforts to position itself in the cleantech business.