Andrew Hargadon

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.

The Low tech, high stakes world of innovation

A few recent and distantly related events have strong implications for our thinking about fostering revolutions in energy.  In particular, the challenge of pushing old and large industries to adopt new technologies in hopes of making widespread change.

The first incident was PayPal's recent global service outage.  It lasted only about an hour:

"About an hour ago, PayPal started experiencing site issues that affected the ability to send and receive money. We have all hands on deck to get this fixed," said PayPal spokesman Anuj Nayar in a blog post about noon PDT. "We're really sorry for the inconvenience."(CNET)

According to PayPal executives, the company processes $2,000 in transactions every second, so an hour outage cost vendors who rely on PayPal about $7.2 million. PayPal's Total Payment Volume in 2008, according to the company, was $60 billion—"nearly 9 percent of global e-commerce and 15 percent of US e-commerce."

The second incident came in a distinctly different field.  This May, Lennar Homes, acknowledged its use of a new and defective Chinese-made drywall.

Lennar Corp. has identified 400 homes in Florida that have confirmed problems with defective Chinese drywall, and it has set aside $39.8 million to repair the homes, the Miami-based home builder said in a securities filing Friday. (WSJ, 5/31/09)

The drywall problem has affected more than just Lennar Homes, estimates of 100,000 houses built in 2006 and 2007 with the suspected Chinese drywall.  According to the Wall St Journal (WSJ, 8/06/09):

Experts estimate it costs about $100,000 to pull out bad drywall and replace corroded electrical wiring and appliances in an average-sized home, and the problem is shaping up as a costly disaster for homeowners and the battered housing industry. Many homeowners are hoping the federal government will step in with some sort of aid similar to that provided for victims of hurricanes and tornados, as well as a moratorium on mortgage payments.

If proven a health hazard, the total cost to the construction industry for removing the tainted drywall adds up to approximately $10 billion in repairs.

For the small business owners relying on PayPal, an hour of lost revenue is costly.  But to the small contractors and drywall subs who may have to replace existing drywall, this kind of problem can put many of them out of business altogether.

Really sorry for the inconvenience

The two incidents together highlight a particular problem when thinking about the stakes of innovation.  High technology generally has an aura of high risk, of bold visions and big leaps.  And yet the real risks—the stakes—may have less to do with the innovation and more to do with where it's going.

As central as PayPal and other recent computing and internet innovations have become in our lives (think iPhones, Blackberries, Apples, Google, and Amazon), they're no match for the ubiquity and taken-for-grantedness of so many technologies that have become invisible and embedded in our lives. Think drywall, and then insulation, lighting, electricity, gasoline, internal combustion engines, tires, and on and on.

The risks of adopting a new product or technology are very different when it's a new behavior and relatively distinct from so many other aspects of life. While it seems as though they have become central to our lives, we're actually quite resilient when our computers crash, our internet access goes down, our cellphones drop calls.  We can manage. And anyway, why worry?  A few years down the road and we'll have moved on. Our biggest concern is whether we can keep our email address of cell number.

So a small business adopting Paypal is very different, in other words, from a small business adopting a new brand of drywall, putting it up, and then putting over that drywall the household electrical outlets and light fixtures, the trim, the paint, the finished flooring, the furniture, and a real live family. The low-tech product requires a larger commitment because the contractor (and home-owner) have to live with it for decades and, should it fail, has considerably more costs than simply replacing it. 

And that's just drywall.

Consider today's headlines around the energy revolution. Utility-scale solar and wind sound like technological breakthroughs, as does the smart grid.  But the utilities adopting them take the same risks as the contractor: they have to live with their choices for decades, indeed they are liable for those choices. 

At 34 years old, Microsoft is long past a start-up. It's operating systems are running approximately 90% of all personal computers, and yet the public has been relatively tolerant of the bugs, incompatibilities, and poor performance of its latest version, Vista (which to date has over 360 million users).  Imagine waking to find that your utility has installed an upgraded version of your power meter, and half of your appliances are no longer compatible. Or worse, imagine that your new Microsoft CE power meter has a virus (questions about the security of the smart grid are finally starting to surface).

Now imagine you're the utility. Would you bet your company on someone's high tech product when mistakes in low tech choices carry high stakes?  The moonshot and Manhattan project were high-tech, but these projects never faced the challenge of adoption by a reluctant market.  Investing in the next energy revolution requires accounting for the market: those who would commit their businesses to adopting, installing, and standing behind the new technology for decades. 

Are we designing solutions low-tech enough for them?

Modeling the costs of greenhouse gas reduction

Taking measures to reduce greenhouse gas emissions over the next decades raises fears among some that  our economy would be adversely impacted.  Of course, not taking measures, as the UK's Stern Report argues, could be worse. 

Nonetheless, some nice researchers at Yale conducted a meta-analysis of the current models for estimating the economic impacts of GGH reduction measures, identified the seven major assumptions that control 80% of the differences in estimates, and created a tool to allow anyone to plug in their own version of these assumptions.

You, too, can play economic advisor: http://www.climate.yale.edu/seeforyourself

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.   

In defense of ethanol

While I had to turn comments off (another victim of spam), I received this post from Brian Glassman via email and feel compelled to post it:

Dr. Hargadon illustrates an important point which has been downplayed in promotions for Ethanol, E10, and E85 fuels, that they are not equivalent in their mile per gallon to gasoline. The Ethanol industry in general has been pushing away from this fact, by promoting ethanol’s greener side and hoping that while they publicize its’ eco-friendliness, researchers and producers will drive the manufacturing costs down to the point were it can compete on a cost bases with gasoline. Fortunately, the recent research push has done just this. Researchers like Michael Raab, and others are coming up with new innovative ways to reduce ethanol manufacturing cost. I was recently part of a group who were among the few to attack the low fuel mileage aspects of E85 and E10, by creating a bio-based fuel additive to boost mpg, with the goal of making it comparable in mpg to gasoline (first link below). However, this doesn’t escape the final point that Dr. Hargadon makes and that I agree with: “the less glamorous solutions like energy efficiency through improved mileage, better public transportation, smarter commuting” are just practical and definitely attainable and should not be ignored.
Thank you
Brian Glassman

http://www.pratt.duke.edu/pratt_press/web.php?sid=333&iid=38
http://www.technologyreview.com/read_article.aspx?id=16408&ch=biztech
http://www.technologyreview.com/TR35/Profile.aspx?Cand=T&TRID=436
http://www.agrivida.com/news.html

Not one to squelch debate, me. Though I remain skeptical that we can successfully coincide the development of low-cost cellulosic ethanols (made from stalks and other ag by-products) with their boosting, their distribution and their broad adoption and resulting engine optimization. All of this in the face of new eco-diesels from Mercedes and Honda that show both reduced emissions and tremendous efficiencies.

Many technologies make their greatest performance improvements only when competing technologies arrive on the scene--witness the Welsbach mantle increasing the performance of gas lamps by 6-fold when the light bulb first reached the market, and the steam engine doubling in efficiency in the years after the internal combustion engine. What is in store for the ICE when alternatives truly become a threat?

All of which is to say--innovation means progress. Whether the alternative fuels win or traditional gas and diesel wins, we will be better off than if these challengers weren't around.

Greenwashing, or racing the organic train, part II

Good article in the NYT (A Milk War...) today about the entrance of Walmart's private label organic milk, Great Value. Walmart gets this milk from Aurora Farms:

Activist groups, as well as some organic food retailers and dairies, contend that the company where Wal-Mart and the other big retailers get their milk operates large factory farms that are diluting the principles of organic agriculture and delivering customers a substandard product. They argue that Aurora’s cows do not spend any significant time roaming pastures and eating fresh grass; instead they live on a diet high in grains.

I wrote about this briefly when I found a box of Kellog's Organic Rice Krispies in our cupboard (Racing the organic train). As promised, Walmart has indeed brought out low-cost organics. The race is between organic going mainstream and organic getting so watered-down as to become nothing but a marketing term.

As Melanie Warner writes,

The controversy turns on how closely Aurora adheres to the principles behind the organic food movement. Many organic farmers say grass feeding is essential for organic dairy production because it is part of a cow’s natural behavior. Milk from grass-fed cows, they say, is also higher in beneficial fatty acids than milk from cows fed grain, making it more nutritious.

At Aurora’s Platteville operation, about 40 miles north of downtown Denver, 4,000 cows are put on grass only when not being milked or when they are nearing the end of a lactation cycle. That totals about two to three months a year. The rest of the time they stay in dirt-lined outdoor pens where they eat from an ample trough filled with a mixture of hay, silage, corn and soybeans.

It's still early in the race, but right now "greenwashing" is in the lead.

McDonalds with a purpose.

Govindappa Venkataswamy, an opthalmologist, passed away July 7th. He's not an American icon, but could (and should) be for his entrepreneurial ways. The WSJ just began a weekly column honoring the passing of prominent business figures, and Dr. V's passing is an especially nice way to inaugurate the column.

Dr. V Started the Aravind Eye Care System with an 11-bed clinic in 1976, and has since grew it into a five-hospital system. The Aravind system provides affordable surgery for the masses--quite literally--and now impoverished cataract patients can have their eyesight restored for about $40--and if that's too much, for free. It also proved that there was a way to make money at the bottom of the pyramid; the free are paid out of the profits of paying patients.

What makes the Aravind system interesting to innovation is the origin of its success:

He was inspired, Aravind says, by the assembly-line model of McDonald's founder Roy Kroc -- learned during a visit to Hamburger University in Oak Brook, Ill. ... "Can't we do what McDonald's and Burger King have done in the United States?"

Sound familiar? In 1910, when Ford's engineers came back from studying the assembly lines of the Chicago meatpacking plants (first publicized in Upton Sinclair's 1906 book, The Jungle), one of his chief engineers said "If they can kill pigs that way, we can build cars that way." From food to cars to food to the operating rooms of Tamil Nadu:

The assembly-line approach is most evident in the operating room, where each surgeon works two tables, one for the patient having surgery, the other for a patient being prepped. In the OR, doctors use state-of-the-art equipment such as operating microscopes that can swivel between tables. Surgeons typically work 12-hour days, and the fastest can perform up to 100 surgeries in a day. The average is 2,000 surgeries annually per surgeon -- nearly 10 times the Indian national average. Despite the crowding and speed, complication rates are vanishingly low, the system says.

What if the best ideas of modern economies were, with care, put to better use? As Dr V said, " Intelligence and capability are not enough. There must be the joy of doing something beautiful."

A great cause, a great speaker

The TED conference has been making its speakers available for viewing by the masses (e.g., me), and this talk by Majorca Carter about greening the South Bronx is worth forwarding on. Guy Kawasaki posts about her first, so apologies to anyone who reads Guy before me (and a questioning look for anyone who doesn't...).

Majorca's talk is riveting for her passion, commitment, and perfect mix of polish and promise. This is must-see TV for anyone with a cause. Study it, mimic it, channel its spirit into your own projects.

Guy's comments on her speaking style were also informative--about both her and Guy. Great speakers like Guy are clearly great students of speeches, but it's not easy to see them in action. Now TED's collection offers a great set of training tapes for the rest of us.

The ethanol mousetrap (and moonshot)

As Ethanol, the solution du jour for our energy needs, comes into the spotlight, it reveals itself to be as realistic a near-term solution (and long-term panacea) as its predecessor, hydrogen. Ethanol will not now, nor may it ever, provide the energy independence people seek. As Julia Olmstead writes in Counterpunch:

Improving fuel efficiency in cars by just 1 mile per gallon -- a gain possible with proper tire inflation -- would cut fuel consumption equal to the total amount of ethanol federally mandated for production in 2012.

Many others have made this same point before. What's interesting, to this innovation-obsessed blogger, is the underlying impact that the concept of ethanol and other innovations has on the innovation process itself--especially when that process requires public effort and political will. What does the thought of a simple, clean solution just around the corner do to our ability to act with the solutions we hold in our hands (like raising mileage standards by 1 mpg)?

If a bird in hand is worth two in the bush, why is a technological solution in hand worth less than one around the corner? Is it the promise that this next one will take less effort and will to implement than the ones we have available today?

That promise of the better mousetrap that sells itself undermines more than just green technologies. It undermines innovation in organizations big and small. The possibility that tomorrow's idea will be easier to implement than todays keeps us tolerating the status quo. It's just like Annie sings: "The sun will come out, tomorrow. You can bet your bottom dollar." Or was she pushing solar?