Working with the Pew Center on Global Climate Change, I’ve just completed an study of companies that have already successfully developed and launched new low-carbon strategic initiatives. The resulting report, “The Business of Innovating: Bringing Low-Carbon Solutions to Market,” was released today. The study documents the challenges and best practices to inform other businesses developing their own low-carbon innovation strategies. Innovation is challenging regardless of company or industry but, as the study found, low-carbon innovation has distinct challenges—and requires particular capabilities—that reflect the distinct nature of the technologies, opportunities, and environments involved.
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October 18, 2011
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April 07, 2010
Into the Valley of Death
Everybody is talking about how new breakthroughs—in energy and elsewhere—requires helping startups through the Valley of Death. This is a well-intentioned but dangerous policy.
The valley of death refers to financial risks that start-ups face as they struggle to grow from small teams to going ventures. The dip of the valley refers to the debt—the negative balance sheets—that companies experience as they invest money now in hopes of making it back upon success (the accompanying figure provides a general description).
Nowhere is this valley of death more evident than in clean technology, where startups face a difficult combination of challenges. On the one hand, the challenge of teams seeking $50k to $5M or more in funding to begin translating their advanced science into industrial processes (moving thin-film solar or fuels from algae out of the lab and into commercial production) and, on the other hand, the challenge of funded startups trying to raise investments for the industrial-sized plants and equipment needed to utilize those emerging processes. If we want to bring these emerging ventures to market quickly and at a scale that impacts energy security and climate change, policy wonks and private investors alike are arguing, we must provide the financial support these entrepreneurs need to make it through the valley of death.
Saying that most startups perish in the valley of death is like saying that most patients die of cardiac or respiratory failure—the moment when the heart stops pumping or the lungs stops breathing. Indeed, doctors now take great care in noting not just the immediate cause of death but also the antecedent causes: patient died of [blank] due [antecedent cause] due to [antecedent cause]. Without looking past the obvious, few lessons can be learned.
Innovation policy must similarly take great care not to confuse the ultimate with the antecedent causes of failure. Running out of money is the ultimate cause of death for most all ventures. Without considering the antecedent causes, it's also a dangerous basis for policy decisions.In addition to financial capital, there are three other forms that at different times can be significantly more valuable: physical capital (the physical resources someone has already acquired and organized), intellectual capital (the knowledge and skills someone has acquired and organized), and social capital (someone's social network, or access to the capital "stocks" of others).
While a startup's balance sheet might clearly show where they stand with respect to their financial and physical capital, it does little to reveal their intellectual and social capital. And yet for companies to avoid their own untimely demise, they depend as much or more on knowledge, experience, and ability to manage their company's fortunes—and on their social networks to discover, guide, and acquire the critical resources they will need to succeed.Supporting the success of small companies advancing clean technologies requires more than financial or physical capital—it requires ensuring these companies have access to the best knowledge and experience, and the right social networks, as they get started.
The energy sector is extremely large, bureaucratic, and entrenched. The competitive landscape in which new companies hope to thrive is a product of regulatory policies and industrial coordination that takes place in places and ways that are difficult for entrepreneurs to see let alone access. Yet this is a large portion of the knowledge and networks that new companies must acquire if they are to survive and make a difference.Institutions are emerging to provide new startups in clean technology with these resources. At UC Davis, for example, the Green Technology Entrepreneurship Academy, in coordination with the Graduate School of Management and with support from the Kauffman Foundation, brings scientists and engineers from across the country to explore the commercial potential of their research with instruction and mentorship from leading entrepreneurs, investors, and corporations. The emphasis is on combining entrepreneurial knowledge and networks—the critical intellectual and social capital that new ventures need before the financial capital can be put to best use.
Similarly, the Energy Efficiency Center supports promising new ventures advancing energy efficiency by providing access to their established network of university researchers, manufacturers, venture and corporate investors, electric utilities, energy service companies, and major energy customers such as the state of California and Walmart.
As the Department of Energy begins funding it's new Energy Hubs with an eye toward commercializing new research breakthroughs, it should seriously consider how it will provide these emerging ventures with the right capital to succeed.Indeed, the valley of death may be an apt description for other, less valiant reasons. The term came from Lord Alfred Tennyson's famous poem, "The Charge of the Light Brigade," describing the tragic british cavalry charge over open terrain in the Battle of Balaclava, in the Crimean War, in which 278 of 607 were killed or wounded within moments.
To those who witnessed it, the charge of the light brigade demonstrated both the courage of the British soldier and the incompetence of their command. The soldiers died because they rode directly into withering crossfire from three sides. Wrote the war correspondent William Russell:"At 11:00 our Light Cavalry Brigade rushed to the front... The Russians opened on them with guns from the redoubts on the right, with volleys of musketry and rifles.Poor intelligence, miscommunication, and unthinking obedience on the part of their commanders were the antecedent causes of the Light Brigade's valley of death. Companies run out of money for all sorts of reasons—including perfectly good ones: the market wasn't ready, the technology couldn't scale, or the economy tanked. But some of those reasons might have been avoided.
They swept proudly past, glittering in the morning sun in all the pride and splendor of war. We could hardly believe the evidence of our senses. Surely that handful of men were not going to charge an army in position? Alas! It was but too true -- their desperate valor knew no bounds, and far indeed was it removed from its so-called better part -- discretion. They advanced in two lines, quickening the pace as they closed towards the enemy. A more fearful spectacle was never witnessed than by those who, without the power to aid, beheld their heroic countrymen rushing to the arms of sudden death."
Public financing of new ventures can prolong a company's life, but it won't fix poor planning, miscommunication, or blind faith. Money hides more bad decisions than it cures. To ensure companies make the transition from small venture to a sustaining business, financial capital may be the last form of capital startups need.
Public finance is an attractive tool for federal policy makers—it is easily wielded and often well-publicized. But it alone will not save clean tech entrepreneurs from riding bravely into their own valleys of death. Investing in the infrastructures that invest intellectual and social capital in these emerging ventures may be a more valuable and more critical intervention.March 30, 2010
While we were waiting for the google of electric cars...
While the DOE was out investing in startups like electric car manufacturers Tesla ($465M) and Fisker ($528M)—or rather guaranteeing loans, the equivalent of investing minus the equity—the regular old car companies were not sitting on their hands. In fact, while Tesla has ramped up production of its $109,000 Roadster to roughly 100 units per month, Nissan has announced its new $25,000 electric car, which will go on sale in the U.S. in December.
According to the AP (Nissan),
The Leaf, a four-door hatchback, will have a base price of $32,780, but it's eligible for a $7,500 federal tax credit for electric vehicles. That will make it cheaper to buy than electric vehicles coming from rivals and may force competitors to cut prices. But the Leaf's limited range of just 100 miles per charge for its lithium-ion battery could be a dealbreaker for some motorists.
Customers can start reserving a Leaf in the U.S. on April 20 and Nissan is aiming for 25,000 orders by December. It hopes to build and sell 50,000 of the cars around the world during the first model year. Production is starting at an existing factory in Oppama, Japan, south of Tokyo, and will expand to Nissan's factory in Smyrna, Tenn., in 2012.
It begs the question—do we really need a silicon valley startup to produce electric cars? In many ways, Microsoft, Apple, and Google were revolutionary. These companies were uniquely configured to design, build, and sell products and services in ways that were fundamentally different from then current market leaders. And so they led revolutions in the personal computer, software, and internet markets.
Is a wholly new business model required for leading a revolution in electric cars? Yes, the drive train is different, but does building electric cars, marketing electric cars, selling electric cars, and servicing electric cars require fundamentally new organizational structures, skill sets, or business models.
If Nissan can introduce an all-electric car with the capability of producing 50,000/year (or 4,116/month), where is Tesla's advantage? As Tesla attempts to introduce a $50,000 sedan, where will Nissan be—let alone Honda, Toyota, and who knows how many other car companies who already have the supply chains, production lines, and distribution and sales to move their own models.
The clean tech revolution will not be fought and won where the incumbents's business models can remain intact. If we're waiting for the google of electric cars, it's going to be a while.
August 07, 2009
March 30, 2008
November 28, 2007
Racing down the hydrogen highway...
Today's WSJ charts the recent decline of ethanol's prospects and suggests the business press, and mass media, has removed from the bio-fuel its most-favored-panacea status (Ethanol Craze Cools
As Doubts Multiply).
Gone are the in-depth articles charting the return of the family farm and the fall of the house of Saud. The nay-sayers (who have been saying nay all along) now get the attention:
A recent study by the Organization for Economic Cooperation and Development concluded that biofuels "offer a cure [for oil dependence] that is worse than the disease." A National Academy of Sciences study said corn-based ethanol could strain water supplies. The American Lung Association expressed concern about a form of air pollution from burning ethanol in gasoline. Political cartoonists have taken to skewering the fuel for raising the price of food to the world's poor.
From over here on the science side of the debate, there has been little doubt that corn-based ethanol was not ready for prime-time: it's energy balance (the energy needed to produce ethanol relative to energy gained from its production) was within debating distance of zero. The only advantages of corn-based ethanol were a $0.51 tax credit for every gallon of used and a $0.54 tariff on every gallon imported.
The hope for scientists, though, was that enough investments in corn-based solutions would spill over and advance the (more promising but still immature) cellulosic ethanol. While this has been true recently, it comes at a potentially serious cost in the long run.
Should corn-based ethanol lose its status as the technological cure for our energy and climate change woes, it could fall pretty hard. Heard much from hydrogen lately? In 2003, Bush proposed spending $1.2 billion to fund research in Hydrogen. In 2004, California's Governor Schwarzenegger announced:
I am going to encourage the building of a hydrogen highway to take us to the environmental future... I intend to show the world that economic growth and the environment can coexist. And if you want to see it, then come to California....
And senate bill 1505, signed in early 2007, turned this vision into a statute. Hydrogen has since lost much of its luster, along with much of its research funding...perhaps when politicians realized that ethanol promised to cure the same woes while also appealing to the Iowa primary voters. But that's another story.
What interests me is the question of what happens when good technologies go bad--when promising technologies are brought to market prematurely, with too many promises made and too few kept. It happens in countless start-ups, when emerging technologies turn out to need twice (or more) the development time than their business plans promised and in large organizations, when the demands of Wall Street made it too tempting to accelerate the next generation technology.
When the inevitable disappointment comes, the technology becomes a pariah--outcast and shunned. Unfortunately, the scientists and engineers who worked their tails off trying to deliver on the unrealistic promises, usually get hit the hardest: "There goes ol' Burt--he worked on the Newton project. Hasn't been the same since." And another promising technology is set back decades (and the generation who pioneered it is lost) for no other reason that that very promise.
Perhaps the biggest tragedies happen on the national stage--when new technologies move from the spotlight to the scrap heap because they failed to live up to the unrealistic promises of a few scientists, investors, or politicians. Worse when so many others, urging caution, were ignored.
