Andrew Hargadon

Investing in clean tech, the wrong way

The WSJ today covered the funding of a new car venture, Fiskers, to the tune of $528M in loans (Venture Capitol).  Sounds like a lot of money until it's seen in the context of the DOE hoping to lend or give away more than $40B to clean tech businesses.  Or then again, maybe it is a lot of money.

Fiskers is ramping up to build a new gasoline-electric hybrid vehicle.  They are a Finnish company, but with this new funding will be opening a factory in war-torn Detroit. What's the deal?

The DOE hopes to lend or give out more than $40 billion to businesses working on "clean technology," everything from electric cars and novel batteries to wind turbines and solar panels. In the first nine months of 2009, the DOE doled out $13 billion in loans and grants to such firms. By contrast, venture-capital firms -- which have long been the chief funders of fledgling tech firms, taking equity stakes in the start-ups that will pay off if they go public -- poured just $2.68 billion into the sector in that time, according to data tracker Cleantech Group.

There are a number of reasons competing for why this may be the worst way to support clean technology and innovation.  I note a few.

1. The government is not equipped to invest in new ventures. 

In short, the DOE has only been in the clean tech investment business for a short time and, even then, only to sponsor basic research programs.

In the last year, the DOE's budget has gone from $25B to over $71B. In the past year. Anyone who has managed in growth mode knows they have barely staffed up to spend this money, let alone developed the control systems (or experience) to spend it wisely.

I've met a number of the folks there and they are very sharp. But nobody can spend an extra $47B (or so) in a single year and do so wisely.

2. The Heisenberg Principle is alive and well in venture investing.

The Heisenberg Principle, or the observer effect, refers to the changes that the act of observing will make on the phenomenon being observed.  In this case, federal investments in clean tech are changing the phenomenon being observed (and invested in). But this is too weak a statement. Federal investments in clean tech are completely changing the way clean technologies are being developed and brought to market.

Some young companies are tailoring their business plans to win DOE cash. Private investors, meanwhile, are often pulling back, waiting to see which projects the government blesses. Success in winning federal funds can attract a flood of private capital, companies say, while conversely, bad luck in Washington can sour their chances with private investors. The result is an intertwining of public and private-sector interests in an arena where politics is never far from the surface.

Injecting grants and loans in excess of 5 to 10 times the amount of venture capital entering the clean technology industry is rewriting the rules entirely.  

"The existence of an 800-pound gorilla putting massive capital behind select start-ups is sucking the air away from the rest of the venture-capital ecosystem," said Darryl Siry, former head of marketing at Tesla Motors Inc., a San Carlos, Calif., company that got a $365 million DOE loan in June to build high-end electric cars. "Being anointed by DOE has become everything for companies looking to move ahead."

This means that, by getting involved and investing in particular companies, the DOE is not only attempting to pick winners, they are also, by default, picking losers since nobody wants to back companies that aren't getting their own federal teat.

3. Investing in new ventures is not as easy as it looks in the business press.

In the shadows of all those stories of rags-to-riches entrepreneurs like Jobs and Wozniak or Sergey and Larry, and the venture capitalists who backed them, are the countless other companies who don't make it. Venture capital differs from other investment strategies primarily because their investments can go to zero overnight.  That means, essentially, VC's must pursue a portfolio approach in which one in twenty of the investments they make must succeed wildly enough to make up all the losses from the others, and then some. Nobody talks about the losers.  Or even the funds which failed to find that single home run.  And right now, the entire VC industry is in a decade-long slump. 

The DOE is co-investing in Fiskers with a set of well-known venture capitalists—among them the valley's pre-eminent VC firm, Kleiner Perkins Caufield & Byers. Together with smaller investors, they put up nearly $160 million to get Fiskers up and running.  This investment is part of KPCB's recent swing towards clean-tech investing (in addition to bringing Al Gore in as a partner). 

Having the DOE co-invest—or take advice from—venture capitalists who do this for a living seems like a good idea.  But even the VCs are learning hard lessons about investing in clean tech. One of KPCB's earlier "co-investments" with the DOE, Altarock, promised a new technology for drilling deeper wells for reaching geothermal energy.  The DOE put just $6M into Altarock, along with $30M or so from Google, Khosla Ventures and Kleiner Perkins Caufield & Byers.  The NYT covered their misadventures just yesterday (Running Aground).

on Friday, the Energy Department said that AltaRock had given notice this week that “it will not be continuing work at the Geysers” as part of the agency’s geothermal development program.

The project’s apparent collapse comes a day after Swiss government officials permanently shut down a similar project in Basel, because of the damaging earthquakes it produced in 2006 and 2007. Taken together, the two setbacks could change the direction of the Obama administration’s geothermal program, which had raised hopes that the earth’s bedrock could be quickly tapped as a clean and almost limitless energy source.

As one geothermal scientist explained,

Some of these startup companies got out in front and convinced some venture capitalists that they were very close to commercial deployment,” said Daniel P. Schrag, a professor of geology and director of the Center for the Environment at Harvard University.

If it's too easy to convince the VCs that energy technologies, like internet start-ups, are weeks or months from having a product on the market, then how will staffers at the DOE do better at picking the winners?

4. Finally, what's the return to the government (and us) in investing in early stage ventures? 

The DOE seems to be acting under the belief that either (1) they are able to pick winners or (2) their investments in individual ventures will advance an entire sector. I've already argued they, along with professional investors, are having trouble picking winner. And I've already argued that by swinging their $47B checkbook around, they're picking losers as well as winners.

So will the DOE's individual investments advance the development of entire fields, like hybrid cars, geothermal, or solar?  Here their experience in investing in basic research is not simply irrelevant but downright dangerous. Since the federal government got into the basic research game 50 years ago, a dominant justification for the relatively poor connection between particular research projects and desired outcomes has been that each project contributes to the pool of general knowledge from which future research project benefits. Knowledge spills over freely and everyone benefits.

Investing in early stage ventures is very different.  Knowledge doesn't spill over in this arena. The lessons learned in one company are neither published nor, for that matter, advertised. Especially not the tough lessons (ie failures).  Quite the opposite—in many cases there are strong disincentives to sharing either good knowledge (potentially valuable intellectual property) or bad news (dissuading future investors, employees, and customers from joining in).  Consider how Altarock has shared news of its misadventures.   

But the company, whose project at the Geysers was located on land leased from the federal government by the Northern California Power Agency, has held information about its project tightly. Not even the power agency has been informed of AltaRock’s ultimate intentions at the site, said Murray Grande, who is in charge of geothermal facilities for the agency.

“They just probably gave up, but we don’t know,” Mr. Grande said. “We have nothing official from them at all.”

Investments in early stage companies will either win big—for the company and their investors—or it will fade away and the lessons will be lost with the money. Government funding does best when it creates a broad and strong platform of knowledge and technology which others can access, learn from, and continue to add to. 

Investing to advance clean technology is a complicated game. Energy is an old and established sector, with expectations for technical performance and reliability to make the internet look like child's play. Picking winners and losers in the early stage ventures just coming into the clean tech markets is dangerous. There are better ways to waste money than this.

 

Career skills in the new (networked) world

Thomas Friedman's piece in the NYT this morning, The Do-It-Yourself Economy talks, in so many words, about the decomposition of production that has been taking place over the last four decades.  This decomposition has financial and strategic origins as much as technological, with such milestones as IBM deciding to outsource to Intel for its PC microprocessor, and to Microsoft for its operating system. 

This buy-versus-build (or "asset-lite") strategy was pushed, by McKinsey among others, because it offered greater financial returns and strategic flexibility.  And as outsourcing increased, so did supplier sophistication and market acceptance. Here we are, 30 years later, and nobody blinks when, for example, Amazon releases a consumer electronic product relying on cellular connectivity. After all, anybody can now find the suppliers and service providers to put that together.

The technophile in Friedman sees the half-full cup of Americans now able to do, in small offices and with contract employees, what used to take entire companies (and full-time employment—which of course is the cup-half-empty view of the same trend). Everyone loves innovation.  In this column, he credits the internet and personal computing with enabling people, like marketer Ken Greer, to produce films for a fraction of what it used to take.  And his conclusion is right:

By being able to access all these cheap tools, Greer got to focus on his value-add: imagination. The customer got a better product for less money. But he didn’t create many new jobs. For that, he needs the economy to pick up. “If we could only borrow a buck and invest,” said Greer, “we’d all be rolling again.”

The irony of not hiring employees to do your work, but needing employment (needing others to hire employees), is noted but not the point of this post. 

The actual point is about being needed—about getting hired and doing well in this "new era." In other words, employment is changing.

Q: What's the ideal worker of the future? 

A: It's not going to be the imaginative ones.  Sure, they'll be involved.  But skip over the dour, hip, designerly types and look for those who can actually execute.

Why? Because behind Greer's process of making a film that's 20% the cost of traditional projects, there were roughly 5x the number of contracts with external suppliers, each of which required some form of project briefs, request for proposals, reviews and decisions, contract, work, evaluation of work, payment, and integration.  All are decisions that require initiative, independent thinking, integrity, and communications skills (to mention a few). Can you name more than 5 people in your organization that you would trust to do that at a strategic level and without adult supervision?

Contrary to popular jingoism, imagination is not America's most important skill and saving grace. Innovation is about recombining existing resources in new ways and always has been.  The challenge in this "new era" is not simply imagining how old pieces can come together, but being able to actually make it happen. That's execution (and not to be confused with the "executing-on-someone-else's-ideas" implementation).

For us, the most important skills we stress in our entrepreneurship classes are not having new ideas but rather honing the skills to pull together networks that never existed before. Employment in this "new era"  hinges on your ability to execute across organizational boundaries, creating new partnerships in ways that traditional corporate work never involved, let alone allowed.

Automist, another student-driven design innovation

One of the perks of my job is to serving on the Advisory Board of Design London, a joint venture between Imperial College and the Royal College of Arts.  There, as in similar programs that bring together engineering, design, and business students, I get to see the exciting ideas and ventures that emerge from the mix.

At Design London, MBA students from Imperial College Business School, engineers from Imperial College of Engineering, and Design students from the RCA come together to design, engineer, and grow new businesses.  In addition to teaching an interdisciplinary design program, it also advances the role of design-led innovation for London's many small and medium-sized enterprises, and houses a business incubator that helps launch new ventures.

The New York Times "Year in Ideas" issue just featured one such company (Kitchen Sink), which formed when two design students recognized how a solution in one corner of firefighting could be used in another:

Yusuf Muhammad and Paul Thomas, industrial-design students at London's Royal College of Art, learned this after a school assignment prompted a conversation with members of the Chelsea Fire Station. The firefighters mentioned water mist, a firefighting technology used on oil rigs and cruise ships because of its advantages in a confined space. After picking the brains of specialists at the conference of the International Water Mist Association, the duo began prototyping a low-cost means of taking water mist into the family kitchen.

Their patent-pending product, Automist, consists of a ceiling-mounted heat detector that triggers a pump under the sink that sends water to a special unit at the base of the kitchen faucet.

There, six high-pressure nozzles emit jets of mist that rapidly turn to steam, creating an inert atmosphere that starves the fire of oxygen and reduces the heat of the room. "It's almost like being in a wet sauna," Muhammad says.

The team had previously won the James Dyson Award, where you can read more about the idea and company.

2010 Food + Health Entrepreneurship Academy

UC Davis Center for Entrepreneurship Announces Inaugural
 Food + Health Entrepreneurship Academy

Unilever, PepsiCo, Innovation Center Denmark and Kraft Foods Named as Sponsors


Applications Now Available Online

DAVIS, Calif., – The University of California at Davis (UC Davis) Center for Entrepreneurship today announced the details of the second annual Food and Health Entrepreneurship Academy. Presented by the UC Davis Center for Entrepreneurship, the Academy will be held from February1 – 5, 2010 at the Buehler Alumni Center at UC Davis. The Academy is a one-week intensive designed for PhD students, postdocs, and research faculty working in fields related to foods, nutrition and human health who want to learn to analyze, enhance and communicate the broader potential impact of their research, explore business opportunities and design research programs that address practical applications.

Applications are due by January 1, 2010 and are available at http://entrepreneurship.ucdavis.edu/health. All accepted students will receive scholarships to cover the program’s tuition, materials, and lodging. 

The lead sponsor of the Academy is Unilever. Major sponsors are PepsiCo., Innovation Center Denmark (Silicon Valley) and Kraft Foods.  “Unilever is delighted to sponsor this event. A key component of our strong commitment to open innovation is the skills, culture and competencies that we need in our organisation to foster strong entrepreneurship and creative drive. Our vitality mission also makes the Food and Health initiative highly relevant for us,” said Phil Giesler, Innovation Director at Unilever Corporate Ventures.

The five-day academy will cover the basics of entrepreneurship, with sessions focusing on networking, intellectual property, market and business validation, elevator pitches, development strategies, developing a business pitch, and the logistics of building a team and establishing an organization. Participants also work with mentors from the venture and business community to develop their group presentations and a keynote networking dinner is scheduled for Wednesday, February 3, 2010 for participants, industry executives, guest faculty and mentors.

"To successfully bring ideas out of the laboratory and into the marketplace, emerging research technologies must co-evolve with existing market- and business-based opportunities. With this focus in mind, PepsiCo is working with the FHEA to identify and develop synergies between the fields of foods, nutrition and human health,” said Karin Rotem, Director of Innovation, PepsiCo.

Further details about the Academy can be found at http://entrepreneurship.ucdavis.edu or email Nicole Starsinic, busdev@gsm.ucdavis.edu. For sponsorship opportunities, please contact Wil Agatsein, executive director, at wagatstein@ucdavis.

Brilliantly, tragically funny side of networked innovations

When you create a product and business model that shape-shifts the entire cellular industry—your fate is tied to partners who may not share the same vision, values, or aspirations (no need for sympathy—the only thing worse, of course, is to watch it all happen from the sidelines).  A not-so-brief chat with Randall Stephenson of AT&T in the "Secret Diary of Steve Jobs" captured the experience perfectly.

The problem, according to AT&T, is that hardcore iPhone users—the customers AT&T shares with Apple—are using the "smart" in smartphones too much:

The carrier has had trouble keeping up with wireless data usage, leading to dropped connections and long waits for users trying to run programs on their devices. AT&T is upgrading its network to cope, but its head of consumer services, Ralph de la Vega, told investors at a UBS conference in New York that it will also give high-bandwidth users incentives to "reduce or modify their usage." (see story).

As fake Steve Jobs explains to AT&T's CEO:

And now here we are. Right here in your own backyard, an American company creates a brilliant phone, and that company hands it to you, and gives you an exclusive deal to carry it — and all you guys can do is complain about how much people want to use it.

Score another one for Recombinant Innovation

Two researchers at UC San Diego modeled the H1N1 virus, looking for ways to fight it (and other pandemics) (MIT Tech Review).

Biochemist Andrew McCammon and undergraduate lab member Daniel Dadon used a sophisticated computer program to simulate all possible conformations--27 in all--of the H1N1 virus's flexible neuraminidase protein.

Using "massive" computing power, they simulated how the virus and, in particular, a suface protein could take shape.  Witih a set of 27 possible structures, they then looked at a library of FDA-approved drugs and searched for which of these drugs would bind to the protein in one of its possible permutations.

This is a great story of the value of recombinant innovation.  By taking another look at the problem (27 other looks, to be exact) they could then go in search of existing solutions that solved one or more of those problems. And in pharma, existing solutions avoid the enormous costs of developing novel solutions.

In this way, the next big thing in Pharma could be the beginning of the end.  At least of of the money machine for big Pharma—the development of wholly new drugs (and their patent-protected profits) to treat diseases.  

The current model has a catch-22: patents are necessary to support the enormous risk of developing drugs that fail to have the effects, or have worse side-effects, than promised.  But because only patent-protected profits can recoup the enormous R&D expenses, only new (read patentable) drugs are developed. This despite the fact that many old drugs have valuable uses "off-label."

The value of a recombinant innovation process comes from the ability to exploit sunk costs, to leverage the value of ideas that have already been well developed and tested.  This computer simulation hopefully points to a new and cost-effective way to see how old drugs can be used in new ways.  Old drugs that we already know perform and perform safely.

"If you start with compounds that are FDA-approved, it may be a faster way to find good drug leads," says Rommie Amaro, who specializes in pharmaceutical and computer sciences at the University of California at Irvine. "There's a long process to get a drug reviewed, and the molecules have to be metabolically okay for people to ingest. So instead of starting with random leads from a chemical library, if you start with compounds that are FDA-approved, you could already have the more harmful compounds weeded out."

The new medium is the old medium

A few months back, I wrote a post about the power of video as a prototyping tool.  More such videos are coming out and it's exciting to watch this tool become so powerful even as it moves into more and more hands.  Again, distributed production. 

As I said before,

Perhaps not surprisingly, effective technology development teams embrace prototyping to design products and services.  Yet those same engineers and scientists turn around and try to describe and sell their ideas without designing the communication process.

The short video, done well, not only communicates more information in 3 minutes than a powerpoint presentation can get across in 15 minutes, but allows for prototyping.  Express, test, cycle.

Who wouldn't rather watch a compelling 3 minute video than read through 5 online pages, or download and read a brochure?  And as broadband gets broader, and publishing tools get easier, this will push production capabilities out to the margins in ways we can't imagine yet. 

Here are some of the more interesting recent examples I've seen. Sure, these are done by professionals, but increasingly for smaller customers and means.

XPlane has made the move from graphic design to video communications tools—and using Apple's Keynote software to do it.  This video, Did You Know 4.0 (an update to earlier versions), is wonderful:

As is this compelling video by Jake Harriman, founder of Nuru International, and a Marine Corps veteran (and Stanford MBA student), describing his new social venture.  The quality of the video (and their website) demands the viewer to take the organization seriously.  

The End (Jake's Story) from Nuru International on Vimeo.

Every entrepreneur should figure out how to tell their story in this medium.

Driptech and the opportunities in distributed production

BusinessWeek recently highlighted Driptech among their "Most Intriguing Businesses." I first met Peter Frykman when he participated in our 2008 Green Technology Entrepreneurship Academy, passionate about the commercial opportunities he could envision for his new technology.

There are countless social entrepreneurs starting businesses in the developed world for customers in the developing world.  Most exceed the intentions-to-understanding ratio. Peter and Driptech had the advantage of going through Jim Patell's Design for Extreme Affordability class at Stanford, and its focus on the user and use context, and seemed to have broken through to actual usefulness. 

As BusinessWeek says

Frykman's breakthrough was the realization that such systems didn't have to be made in large manufacturing facilities and then exported abroad. Instead, they could be made with cheap plastic tubing and compact precision lasers, even in facilities in target markets.

Driptech's innovation includes a better drip irrigation system—cheap enough and simple enough for small-scale farmers—along with a better manufacturing process. And it's the production process, as much as the product, that enables broad diffusion.  Manufacturing is localized and draws on low cost and globally available materials (polyethylene tubing). In BusSpeak, that means value creation is pushed to the margins of the network, to the benefit of the local and critical partners in distribution, sales, and service. 

Distributed production may be the coming industrial revolution--the tools that enable small and local producers to acquire precision manufacturing capabilities.  First to produce someone else's designs but soon enough to be able to adapt and reconfigure for their own.  Given its product and mission, Driptech could be one of the more rewarding of the early examples. 

 

IDEO on TED, Tim Brown on thinking big in design

For anyone not already in IDEO's PR reach, Tim Brown's presentation at TED in July has been posted.  Tim does a great job talking about how design become a narrow profession—"a priesthood of folks in black turtlenecks and designer glasses working on small things." And in talking about how design can become something more.  

In many ways, Tim's remarks on design challenge us in the same way that Drucker challenged managers: "It's not enough to do the thing right; you need to do the right thing."

Design thinking, in this way, is becoming a powerful frame for thinking about innovation, one that focuses on the process (innovating) and not the outcome (innovation).  It's one thing to say people should "innovate" but, because innovation-as-process is so closely associated with innovation-as-outcome (eg., a revolutionary market success), such behaviors are hard to pursue. 

I once asked a class full of senior executives whether they wanted innovation. They all said yes. When I then asked whether they wanted their direct reports to spend time developing and experimenting with new ways of doing their work, they all said no.  They wanted innovation-as-outcome but not not the process.

Design thinking describes what you should do when you're innovating, but in a way that sounds more manageable and more useful.

More on cash for clunkers

A recent study by Consumer Energy Report on the Cash-for-Clunkers program offers some additional alternatives for how the cash might have been spent. After counting how many low-mileage SUVs and trucks were purchased through the program, Lisa Margonelli offers some other alternatives.

“For that much money, we could have gotten a lot more,” says Lisa Margonelli, who directs the New America Foundation’s Energy Productivity Initiative. “Consider this: Cash for Clunkers only required a fuel economy increase of 2 mpg over the original car, so the total mandated gas savings was about 38 million gallons of gas. The auto companies can raise the fuel economy of cars on the assembly line by that much at a cost of $500 per vehicle. So, we could have given our $2.87 billion to the auto companies to upgrade 5.5 million cars by 2 mpg or more, and bought ourselves a yearly fuel savings of 303 million gallons of gas.”

That's an 8-fold increase in annual fuel savings. Maybe not as bold as my earlier "modest proposal", but still a useful perspective on how to spend money effectively if the objective was to reduce our dependence on gasoline.