Wednesday, June 20, 2012

Winning A Golden Ticket Out Of The Cleantech Valley Of Death

Winning A Golden Ticket Out Of The Cleantech Valley Of Death: by Adam James “This is a country who hasn’t gotten the memo that things are impossible.” Those were the enthusiastic opening words to the Department of Energy’s Clean Energy Business Plan Competition from U.S. Chief Technology Officer Todd Park. Technology innovation broadly has accounted for three quarters of post-WWII growth in the U.S. And moving forward clean technology innovation will be a key driver for American economic growth. However, advancing clean technology will require the next generation of inventors and entrepreneurs to find the financing they need to scale. And that is the exact purpose of the Department of Energy’s Clean Energy Business Plan Competition, which, under the expert guidance of the Office of Energy Efficiency and Renewable Energy, has developed six innovation regions funneling the best and brightest ideas into a competition with a $100,000 grand prize. In addition to a kick-off address from Secretary of Energy Steven Chu and an awards ceremony introduced by Deputy Assistant to the President for Energy and Climate Change Heather Zichal, these bright entrepreneurs rubbed elbows with some of the nation’s sharpest (and wealthiest) clean tech venture capitalists — honing their sales skills in the hope of landing essential funding for getting their projects to scale. “I’ve got it! I’ve got the Golden Ticket!” Well, the winning team didn’t exactly say that — but they might as well have. In talking to the finalists and runners-up over the two day event, it was very clear that despite bringing brilliant world-changing ideas, these folks would be absolutely nowhere without the committed funding for their research and development. And beyond simple R&D, these technologies will never get to scale without serious financing from venture capital and private equity firms. That’s the goal of this competition. All the finalist and runner up technologies made it out of the regional competitions for a reason. From radiator efficiency to new battery technologies, these were some of the most creative and revolutionary ideas to come out of America’s innovation ecosystem. I will profile some of the particularly promising prospects in my Climate Progress column UpStarts over the next few weeks. “What got you here will not get you there” That was a warning from Ken Morse, Chairman of Entrepreneurship Ventures. Put another way, the skill set that turned these ideas into proof of concept will not get a technology to market. You need sales, marketing, communications, and most importantly, money. Lots and lots of money. The good news is that venture capital has been investing more and more in cleantech. The rationale is pretty simple. Low carbon and no-carbon technologies will be the linchpin of economic growth in years ahead, as climate mitigation and adaptation concerns inevitably drive business models. Smart investors know this and are diversifying their portfolios by seeking clean energy and efficiency projects as good places to park capital. This makes sense from an investment perspective, as putting money into climate-conscious technologies is a way to hedge bets against failing business models and to make money from technologies that will actually address the problem. When asked what the “bottleneck” was for clean tech — the factors preventing a fourfold increase in the amount of innovative clean technologies getting to market — Andrew Chung, a partner at Khosla Ventures, was very explicit. First, R&D funding, specifically ARPA-E, would probably need ten times as much funding (not, as some Republicans are calling for, budget elimination). Second, the funding gap that occurs at the commercialization phase requires new conceptualizations of risk and return by venture capitalists. Khosla has addressed this problem by dis-aggregating funding into two buckets; one for seed money (90% of companies fail, but that 10% who succeed draw massive returns) and one for commercialization (less risk, but still risky). From the public sector, this would require more support for bodies like a clean energy bank. This is crucial to, said Mr. Chung, to “invest in the future” and give fuel to America’s economic engine while addressing climate concerns. Of course, what got America here will not get us there. We cannot continue to reduce funding for R&D, eliminate commercialization financing, and expect to remain a global superpower. Period. “We have the choice of inventing these technologies and being exporters in the clean technology market, or sitting back and becoming importers. We can lead the market, or we can follow,” said Daniel Poneman, Deputy Secretary of Energy for the Department of Energy. We will either lead, or we will follow, and reducing our support for key R&D and commercialization programs means conceding our market share and resigning ourselves to buying these technologies from countries that are willing to support R&D and commercialization — like China. Walking around and talking to some of the finalists and runners-up in the competition, I was struck by how difficult it is to make it to the later stages of the financing game. The folks who were milling around had strong institutional support from their universities, which is not easily acquired. Even with that, they had to beat out countless competitors — many of whom likely had technologies and business ideas that may have been just as revolutionary and innovative. All this secured them a chance, a chance, to pitch their idea to a venture capitalist and get connected with government officials. This hard-earned break earned by a select few folks is crucially important to the survival of their idea. These young innovators are looking over a deep chasm called the technological Valley of Death. This Valley stretches from the research and development phase (lab-centric; a few successes; many failures), across the prototype phase (the pudding; where the proof is) to the beginning of the pilot phase (dipping a toe in the market). The widely accepted role of venture capital is to guide projects from the prototype phase to the pilot phase. Basically, if venture capitalists see the model and like the idea, they will put the money on the table to develop a prototype they can test in the market — and then possibly providing the funds to help that technology reach scale. In exchange, they gain a stake in the IP of a technology hoping it will go big at the commercial stage. Absent funding at the commercial stage, however, many ideas wither on the vine. What keeps these projects alive long enough to get a good chance in the market are regional programs, like universities and the DOE competition, and incubators like ARPA-E. That’s why cutting funding for these kinds of programs is absurd. In hosting this competition, the Department of Energy has made a big step toward helping some technologies cross the Valley by give them access to capital. In this sense, the real prize may not even be the $100,000 grant or the technical assistance from the DOE, but the chance to access the pool of capital to help drive projects forward. The fact that some of the best and brightest still need these kinds of competitions to connect good ideas with big money is a reminder of the necessity of policy mechanisms to guide clean technologies to market, and the danger of thinking that they can brave it on their own. In thinking about the importance of programs like this, Energy Secretary Steven Chu said it best. Our mantra should be: “Invented in America, made in America, sold around the world.” Adam James is a Special Assistant for Energy Policy at the Center for American Progress.

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