Andrew Hargadon

The Business of Low-Carbon Innovation

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.

Misguided Policy: Following venture capital into clean technology

The Solyndra debacle raises significant questions about how to best pursue a clean tech revolution. As I argued before, most of these questions will go ignored in the scramble for political advantage but several others are raising the same questions (E.G., Real Solyndra Scandal).  A good post by Bruce Krasting actually brings testimony from an engineer with Solyndra that makes the company look very much like any other venture-capital backed business—consuming cash as fast as possible to grow as quickly as possible to meet a rapidly closing window of opportunity. 

In particular, the Department of Energy’s recent loan guarantee program, through which Solyndra received its loan guarantees. has backstopped roughly $2 billion to venture-capital backed clean tech startups with the honorable motive of fostering a clean tech revolution. In a search for means to foster a clean tech revolution, the Obama Administration made venture capital a cornerstone of its energy policy. Yet, despite venture capital’s leading role in clean technology this past decade, we don’t really know when it works well and, as importantly, when it doesn’t. 

Last spring, my colleague Martin Kenney and I completed a research paper that looked at the boundary conditions underlying venture capital’s success and its appropriateness in pursuing a clean tech revolution: "Misguided Policy: Following Venture Capital into Clean Technology."  The paper looked directly at the funding of Solyndra, Tesla, and other new ventures. It is forthcoming in California Management Review but, given the circumstance, wanted to introduce it here.

Download Hargadon Kenney 2011 CMR Misguided Policy Following Venture Capital 110726

Garage multinationals: DripTech in the news

A good mention of DripTech, a Green Tech Entrepreneurship Academy alum from 2008, in the Wall Street Journal today (For Small Businesses, Big World Beckons). 

What's the problem with LEDs?

LED lighting is clearly a path forward.  The challenge, as with all "promising but currently too expensive" new clean energy technologies is how to get from here (low volume, high costs) to there (high volume, low costs).  The bulk of cost reductions typically come from economies of scale, which moves industries down the learning curve. So what brings us the larger volumes?  Is it more government subsidies for research?  Is it regulations or rebates that drive market demand?  In a recent Technology Review article (LEDs Are Getting Ready for the Spotlight), Josie Garthwaite describes another option, which follows on my earlier post about finding new problems for old solutions.

Investing in greentech innovation: patience, piles of cash, tons, and years

Two particular articles in today's NYT provide a nice comparison between investing for innovation in greentech versus internet startups.  

More news on VC investments in Greentech

Some recent (bad) news from VC investments in greentech raise more questions about whether this is the best model for pursuing innovation.  Despite its glory days in the halls of the Obama administration in general and the DOE in particular, venture capital is not the cure for all ills.  In particular, the factors that make venture capital successful are not always those that make new ventures successful. Understanding the difference is critical for national policy makers, venture capitalists, and scientist-entrepreneurs alike.

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.

Now might be a good time to reconsider.

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.
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."

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.

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.

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.