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Predictions For Cleantech in 2014

Continuing a tradition since 2007, once again we bring you some end-of-year thoughts about where we think the cleantech investment theme is going.

Our cleantech-specific analysis and advisory firm Kachan & Co. focuses on this space. We publish research reports. We get briefings from companies introducing new technology. We publish a cleantech analysis service. We’re quoted in the press. We pore over what’s going on in the world in clean/green tech markets and have made some informed calls over the years, like China’s cleantech dominance, the rise of efficiency technologies and the downturn in cleantech venture capital funding.

This year, we’re of the opinion that industry-watchers should take heart. Especially if you’ve been on the page that cleantech is past its prime or otherwise unworthy of your attention of late. Why? Because we’re more optimistic about the year ahead in cleantech than in our last two years of predictions (read 2012 and 2013), which were uncharacteristically negative for a firm that’s often been something of a cheerleader for the cleantech space.

What’s different this year? As you’ll read below, we believe the world turned an important corner in cleantech in 2013.

Gradual recovery in 2014
If you’ve not been looking carefully into the tea leaves this past year, you may have missed the quiet recovery already underway in cleantech, a process we expect will gain even more momentum through 2014.

We had the chance to take a close look at the fundamentals of cleantech this fall in co-authoring a new (and free!) 38-page research report. Titled Cleantech Redefined: Why the next wave of cleantech infrastructure, technology and services will thrive in the twenty first century, the paper analyzes the most recent investment research available across a number of industries and major impact areas.

One section of the report compares the cleantech wave to other technology booms of the last 50 years, like the dot com boom, the networking craze, biotech, the PC and the microprocessor. We found a number of parallels and a number of reasons for optimism comparing the cycles. After 20 years in technology, personally, the more I looked at the data, the more it felt I’d seen this movie before. After an initial frothiness and correction, there’s always a resetting of expectations and execution and a gradual “climb out” of the trough. Gartner calls it a hype cycle. And climbing out of the trough is where we are today in cleantech.

The recent downturn in venture capital investing in cleantech doesn’t mean the sky is falling. The dip becomes less threatening when viewed in the historical context of how venture capital always spikes early in emerging categories, later to be augmented with other sources of capital, such as often-unreported corporate and family office investment, as industries develop. It happened in the dot com, networking, biotech and PC eras, and this transition is now well underway in cleantech, as shown below. We offer a lot more detail, with additional figures and graphs, in our report.

Venture capital playing a lesser role

While venture capital was the dominant source of clean technology financing in California in 2008, it played a lesser role in 2012. Source: CB Insights, Collaborative Economics. Excludes project finance and unattributed investments.

Another takeaway from the above: Pay less attention these days to venture capital investment as an indicator of the health of the cleantech space. You risk not seeing the real picture.

In addition to an analysis of patterns in venture funding in previous bubbles vs. what’s occurring today in cleantech, our 38-page analysis on the state of cleantech today also looks at overall investment levels into clean and green innovation and projects. It contemplates what’s to be learned from models like the technology adoption life cycle (of “chasm” fame.) It factors in the recent recovery in publicly traded cleantech funds and other metrics.

In all, based on what we learned writing this report, we forecast a continued recovery in cleantech. Not an exuberant one—we’re betting those days are over—but look for a clear upward trend in many things cleantech in 2014, i.e. corporate, private equity and family office investment, venture debt, project finance, M&A, interesting new innovation, new product announcements, etc. But don’t hold your breath for classic venture investment to increase appreciably.

Term cleantech to stay alive and well
There’s been speculation about whether the term ‘cleantech’ that my previous firm is credited with coining will, or should, persist. My colleagues sometimes suggested the phrase should quietly go away—that our job was to ensure that clean and green propositions are eventually added to all products, that all forms of energy become clean, that all synthetic chemistry and toxins be replaced with natural, biological solutions because these are ultimately the less expensive and potentially only real ways to accommodate more people on the planet.

My current cleantech research & consulting firm Kachan & Co. worried further about the future of the term cleantech this summer. I, myself, had something of a crisis of confidence after a set of cleantech power players I interviewed in Silicon Valley shared the extent to which they’ve been distancing themselves from the phrase. It seemed this summer that many of the investors, lawyers and global multinationals I’d worked shoulder-to-shoulder with for years had started considering cleantech a dirty word.

But today, at the end of 2013, we now predict the term cleantech to persist through 2014 and beyond. We have come to appreciate how our datapoints from the summer were very regional, and how the rest of the world is still enthusiastically embracing the term as shorthand for environmental and efficiency-related technology innovation.

We also now suspect that investors and service providers who recently distanced themselves from the phrase may have been too quick to do so, and anticipate a restoration of the cleantech-related teams at many of these firms. Why? Call it what we will in the future, the fundamental drivers of resource scarcity, energy independence and climate change aren’t going away. The largest companies in the world are demanding more and better clean and green products and services than ever before. And that’s driving a recovery.

Cleantech term search history

The peak in global search traffic for the term cleantech and its subsequent decrease and stabilization mirrors the Gartner hype cycle. Is a gradual climb up again in the cards, as the hype cycle suggests? We predict yes. Source: Google Trends.

Realistically, cleantech teams at private equity investors, law and consulting firms may rebuild in 2014 under the auspices of “energy,” “advanced materials,” or other related monikers drawn from the taxonomy of cleantech. But massive funds earmarked for this space are being raised again (e.g. just this week: Tata/IFC: $400 millionIndustry Ventures: $625 millionthe UN’s Green Climate Fund: $TBD, expected to be massive) and these sort of numbers are representative of opportunity. And we think it’ll still mostly be called cleantech.

Crowdfunding emerges as viable in unexpected ways
Forget what you know about Kickstarter and Indiegogo. Donation-based crowdfunding only has limited usefulness for companies seeking seed or other early stage funding in cleantech.

In 2014, look for equity and debt-based crowdfunding platforms to catch their stride and serve as legitimate ways for cleantech vendors and project developers seeking to raise relatively modest amounts of capital. (Which isn’t to say we expect the U.S. SEC to sort out all regulations in 2014 around Title III raises under the country’s Jobs Act. We expect that equity and debt-based crowdfunding plays in cleantech will leverage Reg D in the U.S. and other similar regional constructs worldwide in the short term to help companies raise money.)

In 2014, expect selected efficiency, “cleanweb”-style big data, collaborative consumption and other capital efficient plays to be able to raise hundreds of thousands of dollars for themselves in equity or debt via horizontal crowdfunding platforms like AngelList or FundersClub, or industry-specific debt and equity portals like MosaicSunFunder or a host of other emerging platforms. Under current regulations, such crowdfunded raises may ultimately be feasible up to $1 million per company per year in the U.S.

Which will likely make crowdfunding less attractive in 2014 for big, capital-intensive cleantech plays.

Underperformance in EV sales, and risks to growth rates
Betting that the future of transportation will be all-electric, and that 2014 will be THE year of the electric car, finally? Think again.

Enthusiastic bloggers breathlessly paint the picture that electric vehicles (EVs) are flying out of the showrooms (as in here and here), but they’re selling slower than expected by analysts, with only 150,000 expected sold worldwide in 2013.

Most industry watchers believe EV adoption will be spurred by governmental support in the form of subsidies, infrastructure funding and concessions such as free parking, access to high-occupancy vehicle (HOV) lanes and congestion-zone toll exemptions, along with broader adoption of wireless charging and smart-grid innovations. But, in our analysis, there are other forces causing risk to the growth rates of electric vehicles.

As we forecast last year (read “The internal combustion engine strikes back”), there have been innovations taking place in internal combustion engines (ICE) that could forestall the timing of an all-electric vehicle future. Even more surprising to us have been the substance and volume of fuel cell vehicle announcements this year from the world’s leading automakers—which are likely at least partially responsible for the quiet doubling of certain fuel cell companies’ share prices in 2013. Yes, you read that right: Automotive fuel cell companies’ shares are UP!

In 2010, my line to journalists that “the jury was in, and the future of transportation was to be all-electric.” In 2012, my talking point was that the near-term future of transportation was to be all-electric. In 2013, I started talking about fuel cells possibly succeeding all-electric in the far future of transportation, once costs come down. In 2014, fuel cell approaches may get even more ink and undermine the aggressive uptake expected for electric vehicles.

And that’s not necessarily a bad thing, for if their fuel (hydrogen, methanol, or in some cases formic acid or others) can be created in low-cost, sustainable ways, fuel cell vehicles could ultimately have less of an impact on the planet, given that the power required to drive EVs often comes from dirty sources.

Rare earth profits to be made in unexpected places
Fortunes will not be made in 2014 in rare earth element mining companies. Reconsider buying into rare earth element mining companies or associated funds. If holding rare earth mining investments hoping they’ll return to stratospheric levels of yore, consider getting out of them.

Why? In the short term, we think recycling will be one of the few rare earth plays with upward motion. Much of the industry has been focused on new mines to meet growing demand for rare earths. But recycling of rare earths is gaining momentum quietly, and stands to accelerate in 2014 given the increasing costs of mining and cost and schedule overruns at high profile sites like Molycorp’s Mountain Pass California mine.

  • Brussels-based company Umicore is at the forefront of recycling technologies for critical metals. At its site in Hoboken, Belgium, the company recycles about 350,000 tons of e-waste every year, including photovoltaic cells and computer circuit boards, to recover metals like tellurium. In 2011, it started a venture to recycle rare earths from rechargeable metal hydride batteries (there’s about a gram of rare earths in a AAA battery) at its Antwerp site, in partnership with the French company Solvay.
  • Japanese car company Honda announced this March that it has developed its own in-house recycling program for metal hydride batteries, which the company plans to test using cars damaged by Japan’s 2011 quake and tsunami.
  • The Critical Materials Institute of the U.S. Department of Energy is developing a method that involves melting old magnets in liquid magnesium to tease rare earths out.

Watch for more and more companies to be introducing rare earth recycling plays. And watch for a near future trend encouraging electronics manufacturers to design their products to be easier to break apart for rare earth element recovery in the first place.

Getting rare earth metals out of modern technology is hard, since they’re incorporated in tiny amounts into increasingly complex devices. A circa-2000 cell phone used about two dozen elements; a modern smart phone uses more than 60. Despite the relatively high concentrations of rare earths in technology, it’s traditionally been easier to chemically separate them from the surrounding material in simple rocks than in complicated phones.

Recycling is perhaps the best route forward for elements where demand is expected to level off in the long run. Expect demand for terbium and europium, for example, to fade as fluorescent bulbs are eventually replaced with much smaller LEDs. But for other elements, like neodymium, new supply is needed. Currently only tiny amounts of neodymium are required for ear-buds of smartphones—but high-performance wind turbines need about two tons each. But it’s only these sort of large quantity applications that are expected to drive the need for new mines.

Other potentially appealing rare earth plays in 2014 include new processes at existing mines to improve processing yields, and the development of alternative materials to obviate the need for rare earth elements.

More on the subject in a brief on rare earths to our analysis service subscribers.

And so concludes our predictions for cleantech in 2014. What do you agree with? What do you disagree with? Leave a comment on the original version of this post on Kachan’s website.

This post is reproduced by permission and was originally published here.

 

A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. The company publishes research on clean technology companies and future trends, offers cleantech data and analysis via its Cleantech Watch™ service and offers consulting services to large corporations, governments, service providers and cleantech vendors. Kachan staff have been covering, publishing about and helping propel clean technology since 2006. Details at www.kachan.com.

15 Tips For Clean/Green Tech Accelerator Success

I’ve been helping behind the scenes on a new cleantech incubator recently launched in Vancouver, Canada called the Foresight Cleantech Accelerator. And in the process, I’ve been getting the opportunity to learn what other accelerators and incubators are doing well, and not so well, around the world.

The first incubator launched in the U.S. in 1959, but since then the terms accelerator and incubator have become somewhat synonymous. Both are generally used interchangeably to describe organizations, typically with multitenant facilities, which exist to help foster new innovation—though some characterize accelerators as higher velocity and sometimes contributing cash, as in Y Combinator. Like Foresight in Vancouver, many provide educational programming (in Foresight’s case, a structured curriculum called the Venture Acceleration Program), as well as office space, mentoring, expert clinics and networking with strategic customers and investors. Some even offer capital directly. Still others offer pooled support services such as marketing and accounting.

Incubators are a global phenomenon. In efforts to foster job creation and local economies, they’ve blossomed around the planet. There are some 7,000 such programs around the world, according to a 2011 study by the University of Michigan. And—no surprise—some perform better than others.

Why?

Best incubator practices
What are some of the secrets of success of the best incubators? University of Michigan researchers collected and analyzed data to determine relationships between how an incubation program operates and how its client companies perform, as measured by a number of outcomes. (It even came up with a web-based tool to help incubation professionals measure their efforts against best practices—facility managers take note!)

Highest performing incubators were found to exhibit the following characteristics:

1) No one practice, policy, or service is guaranteed to produce incubation program success. Instead, it’s the synergy among multiple practices, policies, and services that produces optimal outcomes. There is no single “magic bullet” service an incubator could or should offer.

2) Top-performing incubation programs often share common management practices. High-achieving programs have a written mission statement, select clients based on cultural fit, select clients based on potential for success, review client needs at entry, showcase clients to the community and potential funders, and have a robust payment plan for rents and service fees. Incubation programs with lax or no exit policies typically had less-than-optimal performance.

3) Advisory board composition matters. Having an incubator graduate firm and a technology transfer specialist on an incubator’s advisory board correlates with many measures of success. Additionally, accounting, intellectual property (patent assistance), and general legal expertise on the incubator board often result in better-performing programs. Government and economic development agency representatives also play key roles in enhancing client firm performance, as their presence ensures that the incubator is embedded in the community, which is necessary for its success. Local government and economic development officials also help educate critical funding sources about the incubation program. Incubation advisory boards should include diverse expertise.

4) Neither the size of an incubator facility nor the age of a program is a strong predictor of client firm success. Many incubator funders and practitioners perceive that the size and age of an incubator are key success factors. But it is the incubator’s programming and management that matter most. For example, staff-to-client ratios are strongly correlated to client firm performance.

5) High-achieving incubators collect client outcome data more often and for longer periods of time than their peers. Overall, two-thirds of top-performing incubators (66.7%) collect outcome data. More than half collect this information for two or more years, while slightly over 30% collect data for five or more years. Collected data include client and graduate firm revenues and employment, firm graduation and survival rates and information on the success of specific program activities and services.

6) Most high-achieving incubators are not-for-profits. Incubation programs focused on earning profits were not strongly correlated to client success. The most important goals of top-performing incubation programs are creating jobs and fostering the entrepreneurial climate in the community, followed by diversifying the local economy, building or accelerating new industries and businesses, and attracting or retaining businesses to the host region.

7) Public sector support matters. Only three of the top- performing incubation programs studied operated without public sector support from local government agencies, economic development groups, colleges or universities, or other incubator sponsors. On average, nearly 60% of top incubator’s budgets are accounted for by client rent and service fees.

8) Incubation programs with larger budgets (both revenues and expenditures) typically outperform incubators with budget constraints. Programs with more resources have more capacity to deliver client services and are more stable. However, the sources of incubation program revenues and the ways the incubator uses these resources also are important. Incubators receiving a larger portion of revenues from rent and service fees perform better than other programs.

9) The growth or size of a host region’s economy are poor predictors of incubation program outcomes. Incubator management practices are better predictors of incubator performance than the size or growth of the region’s employment or GDP.

10) A region’s capacity to support entrepreneurship has limited effect on incubation program outcomes. Compared with incubator quality variables, regional capacity variables have less predictive power. Among regional capacity measures studied, only urbanization, work force skills, availability of locally controlled capital and higher educational attainment have moderate influence on incubator client outcomes.

Cleantech incubator-specific advice
In support of the Foresight Cleantech Accelerator I’ve been working with, I’ve recently spoken with a handful of others around the world involved with cleantech clusters, incubators and accelerators. Below are some top challenges I heard, and potential ways to mitigate them.

11) Sanity-check the services you offer. Incubator management should review the array of services provided through the incubation program and assess the effectiveness of those services periodically.

Services found by the University of Michigan (in the study previously referenced above) to be statistically significantly related to client firm performance include:

  • Providing entrepreneurial training (from business basics to comprehensive training in managing a new enterprise)
  • Offering increased access to investment capital
  • Securing strong supportive relationships with local area higher education institution(s)
  • Providing production assistance (from R&D and prototyping through to engineering production systems)
  • Developing strong mentor programs (e.g., shadow boards, loaned executives, periodic engagement with incubator managers, participation in program activities)
  • Shared administrative services and office equipment, and assistance with client presentation and business etiquette skills

But in cleantech, not all of these services may be necessary. Incubators shouldn’t feel bound to traditional concepts of what has been appropriate at other tech accelerators—even successful ones like Y Combinator. The requirements of clean and green tech companies can be different. In fact, the pivot earlier this year of high profile San Francisco green tech accelerator Greenstart to simply focus on design was apparently in direct response to client needs.

12) Don’t assume business training is business training. Some graduates of a certain energy software accelerator in Texas complain about the value of its programs, characterizing them as oil and gas executives trying to teach energy and water entrepreneurs about energy efficiency. Ensure you have relevant, credible domain experts teaching your companies.

13) Cultivate bench strength in your domain experts. Clean/green incubators lament that it’s hard for them to keep top coaches and entrepreneurs-in-residence (EIRs). The good ones apparently keep leaving to join the most promising companies they’re working with, or investment funds. Accelerators need to be constantly recruiting and developing new coaches and EIRs, interviewees cautioned.

14) Raise lots of money. An incubator needs financial support, and clients can’t be expected to contribute 100% of an organization’s requirements. Raise funds early and often. In terms of a best practice, the Research Triangle Region Cleantech Cluster (RTCC) has done a great job securing local commercial support, convincing 10 large companies with a significant local presence to each contribute $25k/year with a 3 year commitment (for a total of $75k each up front) for an advisory board seat. Supporting companies include ABB, Duke Energy, Field2Base, Power Analytics, PowerSecure International, RTI International, SAS, Schneider Electric, Sensus and Siemens.

15) Beware of incubator founders leaving, sometimes collapsing the operation. Founders of accelerators get lured away more often than one might think, one interviewee said, pointing to NREL’s CleanLaunch program. Launched with fanfare in 2011, its website is now down as of this writing after the founder left. Mitigate by ensuring the board has a succession plan for the organization’s leader, who, being human, isn’t beyond being lured to the next possible disruptive start-up him or herself.

This post was originally published here and is republished by permission.

My Cleantech Journey: From California to Texas and Beyond

I have been told that blogs somehow have more importance and greater connection when written in first person. I often tire of writing “analysis pieces” that seem cold, dry, and impersonal even though they are incredibly important. I somehow have been bottling up the need to write my personal perspective on where cleantech is today and why my opinions and actions in it are as well. It pretty much comes down to this…

I dedicated my entire career since business school to helping bring technologies to market and towards the birth and growth of the clean technology. I have been incredibly fortunate to have learned from the best at MIT in how to bring ideas from lab to market and got to work alongside some of the best technologies and companies while there in learning this trade. I then got to practice this in Silicon Valley with some of the best venture capitalists, best research universities and national labs, and was motivated by my experience being stuck in NYC on 9/11 to make my priority clean technology. I was fortunate to band together with like minds to form durable organizations, policy, and funding mechanisms that popularized and accelerated the growth of cleantech. I have led an enchanted life in being one of the early innovators and actors in this sector. But it was not enough.

I have long stated that technology innovation alone was not going to solve our shift to a clean energy infrastructure. My Silicon Valley compatriots, especially the ones that could risk their limited partner’s money into an arena they had no experience investing into, thought that if they built a cleantech company, it would be adopted as widely, quickly, and capital efficiently as their semi, software, and semi investments. Unfortunately this was a naïve assumption and I quickly harkened back to my Texas roots upon realizing this. The fact was that Texas is the energy expert and energy capital and that if the energy capabilities in Texas weren’t leveraged – project capital, project development, infrastructure deployment, industrial scalability, energy trading, and energy risk management – then we would not have sufficient expertise or capital to make this transition. So, I went back to Texas to see if I could bridge this divide. My tagline became “If Texas becomes a renewable energy state, then there’s hope for the planet.” So if we can show traditional energy companies and investors how to make money in new energy, they would move more of their money and expertise there.

I was well on my way to doing this when I took a side trip to Colorado with the invitation of Kleiner Perkins to be their Entrepreneur in Residence at the National Renewable Energy Laboratory. What I found at KPCB were the excesses of the Silicon Valley that I was trying to shift away from. It was a portfolio that had limited prospects for success and an attitude that “Texas doesn’t matter” – that (before the economic downturn) there would be so much follow-on capital that the masters of Silicon Valley alone could re-make the energy marketplace. At NREL on the other hand, there was tremendous resistance to want to commercialize technologies. I found there that indeed there were a tremendous set of incremental innovations that could lower the cost of renewables, but these should be broadly licensed to industry (an quickly and freely) in order to bring down their costs. There was a limited set of “disruptive” innovations that were potential game-changers in the energy marketplace, but needed 5-15 years each to mature to a point of being competitive. There were no venture capital firms at that time, including my employer at the time, that were organized and capitalized to invest into the long haul for these applications.

What to do? To fill the gap, I intended to set up a firm that crossed the divide between innovation and deployment, between California and Texas, leveraging maturation centers like NREL, Pecan Street Project, and others to accelerate demonstration and deployment. Unfortunately, we hit the market window at the worst time possible and I faced a divorce in the process. Therefore, this fund never came into existence. The beauty in this is self-reflection. For those of you who have been given the opportunity to completely re-evaluate everything in life through a traumatic life event, I found clarity, beauty, focus, and realization…

My realization was this: Technology investing alone was not going to turn the corner on averting climate catastrophe. What was needed were more large scale economic demonstrations that renewables are more cost effective today than coal, gas, or nuclear energy. I was fortunately invited by a friend and one of the architects of the Pickens Renewable Energy Plan to form a new renewable energy development firm called Brightman Energy. We quickly modeled and demonstrated that a fully-depreciated coal plant in Texas could be replaced at a lower cost (and with greater long term price stability) with a well-designed, geographically dispersed renewable energy portfolio. This also led me to realize that renewables should be the baseload energy of choice in almost any geography in the US with natural gas providing the balancing or storage mechanism (at least until DSM, efficiency, and other storage solutions became cost effective with natural gas). I also realized that Texas is the deregulated market of choice to demonstrate and scale these solutions – with the most advanced nodal market, transmission infrastructure, system wide preference for generation efficiency, efficient renewable energy trading market, and its own grid, Texas had already created the ideal market for renewables and had already become the largest renewable market in the US.

So where do I go from here? With Brightman, we are building the case and project portfolio for integrated renewable deployment at a scale that can replace coal or natural gas plants (or could take advantage of the latter in order to balance increasing levels of renewables). At the same time, I continue to look at other scalable business models, financial models, and deployment models that will accelerate renewable energy and clean technology deployment – things that will take huge slugs out of our carbon emissions and hopefully avert climate catastrophe. And, yes, I still love disruptive technology – I continue to watch the ones that I think will make the greatest difference on the planet, because they will and they will replace the first generation of massive renewable deployment at an even lower cost more pervasively.

Cleantech by any other name

How relevant is the term cleantech today? Has it had its day in the sun?

It’s a heretical question for someone who’s spent much of the last 10 years of his career furthering the cleantech meme globally. A former Managing Director of an organization that gets much of the credit for coining the phrase to begin with, I’ve been a big proponent of the term, to the intentional subordination of others.

But having just returned from a week of meetings with Silicon Valley investors, lawyers and others, I find myself facing the reality that intelligentsia in the sector are distancing themselves from the phrase.

In five days last week, I met face-to-face with two private equity investors, four venture capitalists, two lawyers, an entrepreneur and one of the heads of innovation for a global multinational—all with name-brand firms, all power players associated with some of the biggest deals cleantech has seen. I asked them each about the topic. And while all were quick to affirm their belief in strong future demand for what we think of as clean or green technologies, the term cleantech has undeniably fallen from favor, they said. Why?

  • Cleantech has become built into every sector, with clean/green propositions in many technology verticals, from industry to IT to water to energy to agriculture; “cleantech no longer means anything new anymore,” one said
  • Cleantech is simultaneously “too broad” (i.e. somatic shorthand for too many vertical industries) and “too narrow” (i.e. become too closely associated with renewable energy to those who don’t recognize the intended breadth as defined by Kachan & Co. and others) to be useful any longer, another said
  • But the biggest reason—that we’ve written about for some time herehere and here—is that venture funds’ Limited Partner investors have been underwhelmed (some used the term “burned”) by cleantech too much for too long, and the term is now poisonous for some venture partners; some are distancing themselves from it. Some have let go of their teams. So while there may still be relatively wide general industry momentum for the term cleantech, because lexicons don’t change overnight, those at the very center of the space that we’ve thought of as cleantech are quietly starting to use other phrases. Deloitte, for instance, rebranded its annual invitation-only Napa Valley cleantech event last week as Energy Tech. Is it just a matter of time until others start picking similar monikers?

Virtually all I met with agreed that what we’ve thought of as cleantech to date is still an investable thesis: There’s still resource scarcity. Governments are still seeking energy independence. Climate change is accelerating, not abating. Large corporations continue to have an appetite for clean technologies for cost savings, differentiation vs. competitors and as high margin product offerings. So the markets for clean and green technologies are expected to be sustaining and long-term. But will there continue to be a unified name for the sector? Will the term cleantech rebound in popularity? Cleantech, at the time of this writing, appears to be in what IT analyst company Gartner calls the “trough of disillusionment” in its widely-referenced “hype cycle” model:

Cleantech & the Gartner hype cycle

Cleantech is arguably suffering a correction from hyperbole that also characterized the early PC, Internet, networking and other technology sectors—all of which recovered in some form as expectations mapped more realistically to execution. Will cleantech as a term do the same? Source: Gartner.

So the question appears to be: Will cleantech as a meme emerge on the other side of this trough, regaining market momentum and credibility much like PCs, the Internet, networking and Internet applications did when they went through the trough themselves? As another datapoint, if cleantech is indeed in a trough, it’s been slipping into it for a while, now. A historical look at Google search data for the term cleantech, current up to the time of this writing:

Cleantech term Google search history

Google search history of term “cleantech” over time. Interest in the term peaked in late 2009 and has been declining since. What does this mean for companies positioning around the term? Will it recover or not? What would YOU bet? Source: Google.

Will cleantech re-emerge, regain in popularity and follow the Gartner curve back up? Or has its usefulness as a distinction ended? If the term is no longer fashionable, what should this space be called? What would you advise entrepreneurs in this sector to position around? We’re very interested in your thoughts here at Kachan & Co., where we work exclusively with cleantech companies… or what we used to call cleantech companies! Leave a comment on the original version of this article on our website.

This article is reprinted by permission and was originally published here.

Why is it So Hard to Make Money in New Battery Technology?

Energy storage is still the rage in cleantech.  But after the collapse of A123 and Beacon, and the spectacular failure on the Fisker Karma in its Consumer Reports tests, fire  in Hawaii with Xtreme Power’s lead acid grid storage system and with NGK’s sodium sulphur system, and now battery problems grounding the Boeing Dreamliners, investors in batteries are again divided into the jaded camp, and the koolaid drinker camp.   Not a perjorative, just reality.  New batteries and energy storage is still one of the juiciest promised lands in energy.  And still undeniably hard.  Basically, investors are relearning lessons we learned a decade ago.

Batteries are just hard.  Investing in them is hard.  Commercialization of batteries is hard. So why is it so difficult to make money in new battery technology?

Above and beyond the numbers, there are a number of commonalities related to the commercialization and venture financing life cycle of battery technologies that seem to differ to some degree from other venture investments in IT or even other energy technologies.  Having looked at probably 100+ deals over the years, and on the back of an deep study we did a couple of years ago on benchmarking valuations in energy storage, here’s our take on the why.

Timing – Battery technology commercializations have historically tended to be one of the slower commercialization cycles from lab stage to market.  Startups and investors in batteries have a long history of underestimating both the development cycle, capital required, and the commercialization cycle, as well as underestimating the competitiveness of the market.

Special chemistry risk – There is significant risk in launching a technology in newer battery chemistry.  There have been only a limited number of new chemistries succeed, and when they do, as in the case of NiMH and Energy Conversion Devices, they are typically either co-opted by larger competitors obviating a first mover advantage (that advantage is typically much weaker in this field than others) or requiring expensive patent suits.  Also as in the case of NiMH, there is no guarantee the chemistry will have legs (just when it is hitting its stride, NiMH is already becoming eclipsed by Li-On.  This risk has proven to be especially high for new chemistries (like Zn type) that are not as widely researched, as the supply chain development does not keep pace.  In addition, the battery field is highly crowded, and research is old enough that and despite new chemistry in most cases truly defensible patent positions are extremely hard to come by, or provide only discrete advantages (ability to supply a range of quality product cheaply in high volumes (or with value add to the product) seems to be the primary competitive advantage).  Few battery technologies of any chemistry end up their commercialization cycle with anywhere near as sustained an advantage as their inventors expected.

High capital costs – In any case, almost all battery startups will require extremely large amounts of capital (on the order of US$50 to 100 mm+) to achieve commercialization (much higher for real manufacturing scale), and the end product margins tend not to be particularly high.  Even with stage gate, a very large portion of this investment (US$10-50 mm+), is generally required to be spent while the risk of technical and economic failure is still high.  In addition, during the manufacturing scale up phase post R&D, capital investment required per $1 of revenue growth tends to be linear, making these technologies capital intensive to grow.

Degradation of initial technical advantage – In many technology areas one can expect the performance of the final manufactured product to improve over the performance in initial lab results, In part because of the low cost target, high reliability, high volume requirements of this product type however, promising battery technologies, are often forced to make compromises in the scale up, manufacturing, and commercialization stages that mean the performance of actual product might be expected to fall from levels or rates seen in lab scale experiments (though cost may go the other way).    At the same time, battery performance of standard technologies, while mature, is a moving target, and during the time frame for commercialization, will often improve enough to obviate the need for the remaining technical advantages.

Size matters – Most battery products (whether batteries or components like anode or cathode materials or electrolyte), are sold to large customers with very large volume requirements, and highly competitive quality and performance requirements.  As a result, breaking into new markets generally is extremely hard to do in niche markets, and means a battery startup must prove itself and its technology farther and for a longer period of time than other technology areas (see capital costs, timing and down rounds).  Many battery components technology developers as a result will be relegated for early adopters to emerging customers with high risks in their own commercialization path.

Lack of superior economics from licensing – As a result of these size, capital cost, timing, and commercialization risk issues most battery technologies will command much lower and more short-lived economics than anticipated from licensing (or require expensive patent lawsuits to achieve), and will require almost as late a stage of development (ie manufacturing operating at scale with proof of volume customers) and commensurate capital requirements, as taking the product to market directly.

Propensity for down rounds – In addition, battery technology companies tend to have down rounds in much larger numbers in the post A rounds (Series B through D+) than other venture investment areas, as these challenges catch-up to investors and management teams who overestimated the scope of work, capital and timing required in the seed, A and B rounds.  In particular, battery investors have tended to invest in seed, A and B stage battery technologies (pre-scaled up manufacturing process or even lab and prototype scale) with expectations of typical venture style timing and economics.  Quite often instead, it is the B, C, or D investor group that post cram-down rounds achieve the Series A economics (even when the technology IS successful), and the seed, A and B investors suffer losses or subpar IRRs.

Is the Avis / ZipCar Acquisition Green?

I am selling my little Honda in California, since I moved to Texas two years ago, I left a car in San Francisco to drive when I’m here.

So I’d been looking into getting car share.  Absolutely loving the concept, been trying to figure out if it is a better deal for me than renting when I come out.

So when Avis dropped half a billion dollars on ZipCar, I was pretty intrigued.  Which raised the question, does this count as a cleantech or green exit?

I mean, I’ve rejected the “IT services instead of flying argument” making web conferencing services a product green, something I used to get emails on from marketers all the time.

Zipcar’s a little like that.  Are fewer miles actually driven?  Less gas used?

How about fewer cars bought?  Is Zipcar actually replacing cars?  Or adding cars and increasing miles driven by bringing new drivers into the fleet, or making some time drivers into more of the time drivers and reducing public transit use?  I’m not sure that car rentals like Avis don’t increase the number of vehicles and maybe even miles per person in the US.

When does efficiency and better shared services instead of capital expenditures become green, and not just a good deal?

Cap and Trade for Traffic

Great article today on a study suggesting that traffic congestion is created by the marginal driver, and more interesting, from the marginal driver from specific and predictable locations.  Maybe 1% of commuters leaving from specific neighborhoods have a big increase on traffic congestion and commute time for everyone. The link to the study is here.

We dealt with this in the demand response market for energy.  With regulators 10-15 years ago creating free markets enabling companies to sell a reduction of energy demand to the power companies instead of increase generation.

We dealt with this in the carbon, Renewable Energy Credit, and Acid rain sphere by creating cap and trade style mechanisms enabling the rest of the market to pay some marginal actors just enough for them to drop out first.

There are bars that change the price of beer based on demand.

The stock market handles real time demand pricing every day.

Why not for traffic?  Hammer congestion and air pollution.  Create localized markets where the transit or roads authority, like Caltrans, TexDOT, or the local air district, instead of spending my tax dollars only on new roads, infrastructure, or regulations, used cellphone apps to pay a few dollars to commuters who would drop out of the critical commute paths at the right times.  Perhaps credits on your toll road account?  The more who apply, the less each make? Compliance tracked against your cellphone GPS?  A thousand ways to address the myriad technical issues with payments, tracking, compliance, verification, and additionality.

Small investment, massive social, environmental and economic benefits.

The Economics of Cleantech Investing

I drafted this memo in early 2003 for a venture capitalist friend of mine, well before the bubble in cleantech.  In light of the back and forth on the recent Solar City IPO, I thought it was worth revisiting.  Some of the points were pretty prescient, calling out many of the challenges cleantech investors and exits have faced,  nearly a decade before they faced them.

 

Risk Economics in Energy Technology Investing


We believe there is substantial economics to be made from venture capital investment in energy technology, especially focused on clean energy and high efficiency or environmentally friendly applications.

However, investors unfamiliar with the sector tend to under-price risk and overestimate stage in technology development and commercialization in energy technology.

Much of this miscalculation can be boiled down to the fact that adoption rates of new technology in the energy sector generally tend to be slower than more traditional venture capital industry sectors.  This tends to be true for a couple of reasons, and has a number of implications for venture capital investment in the sector.  We have tried to lay out a few thoughts for potential investors in the space, which though they by no means constitute an all-encompassing investment model, should be helpful in decision-making.

Integration / Customer Hurdle Issues – This is a sector that tends to be very risk averse in new product and technology acceptance, and does not tend to pay for technology before the product stage, with an attitude of “we as the customer are already taking a huge risk by simply changing our operating procedures or letting you have access to our mission critical, extremely expensive infrastructure, why would we pay you, too?”  This situation is often characterized by very entrenched channels and customers, with multiple levels capable of “saying no”, and a long process to “yes”.  As result the level of product testing is substantially longer than other sectors as well. One implication (also see “Cheap” Technology below) is that technology businesses that have access to customers or are in integration areas tend to be under-priced by investors relative to technology developers.  This under-pricing can be especially true if the business has a vision to acquire technology or IPRs from developers as a price of admission to a customer base.  This set of issues also raises a second set of implications in the engine industry, where the major engine manufacturers, while they are often under pressure for change, are not exactly adept at handling new technology adoption, in part since they sell almost entirely through low-tech dealer networks, and only partially touch the end customer themselves.  Another risk issue here is that investors in technology development have tended to underestimate the power of entrenchment in both customers and channels, and as discussed below, run a risk of being caught in a bind as a one-product wonder without the depth or breadth of solution to protect market share.

R&D vs. Product /Market Development Investments – Because of the slowness of adoption rates, the relative risk of R&D investment bets to product /market development investment bets tends to be substantially higher than in many other sectors.  The implication is that early stage investment (pre- purchase orders) should be done at lower valuations than the same stage in other sectors, while later stage (post purchase order) investment can potentially be done at higher valuations, while achieving the same risk adjusted IRR.  Another implication is that investors often should expect some level of public funding support for technology development as a prerequisite for investment, not as a driver of additional valuation.

“Eternal Pilots” – This industry tends to be under significant environmental and PR pressures and as a result companies in the space tend to make limited investment of resources and capital in numerous pilot programs and “evaluations” that do not have significant likelihood of moving forward in a major way, but may run for years.  This has been especially true of regulated utilities that could often in effect price through some of the cost, or were expecting to bear the cost anyway as part of a PR or ongoing market vision program, as well as major energy companies, who have huge margins, and tend to have massive and far-flung R&D programs.  This tends to obscure the vision of VC investors looking to bet on strategic relationship “traction” as a way to proxy potential product adoption.  In other words, one can easily overestimate “traction”, and investors often tend to overestimate the life cycle stage of a new technology.  The newer the technology, the higher the over-estimation risk would tend to be.

Political Process – This industry tends to be very politically sensitive.  And the entrenched leaders tend to be much better than the startups at managing this process.  One thing this means is that significant public/government backed or public/private capital is available to fund R&D in the area, and that government/military business can often be viewed as core customer base.  It also means that technology development requiring regulatory or legislative drivers can be much riskier than in other sectors.

“Cheap” Technology – Given the above, existing technology tends to be “cheap” on the venture capital scale, and contracted or visible business tends to be the driver of value. Part of this is because the technology is often developed with “cheap” public dollars. The other way to think about it is that if you have the market and access to customers, attractive, proven technology at the product development stage can often be acquired for essentially pure upside.  While this may not call into question a particular technology development investment program, it again does have implications for the value of that technology as opposed to the value of a going concern.

Make One Bet, Not Two – To follow on that point, one implication is that an effective investment strategy may be to accept either technology development risk, or market risk, but not both.  In that, an investment in technology development not be made unless there was a near certainty of obtaining public funding to offset substantial portions of the cost or customer purchase orders once product development is completed, or that investment in customer ramp or market development not be made unless the technology is proven and has extremely limited risk of failure.  Betting on early stage companies that neither have a “locked-in” customer or completed technology may tend to be an extremely risky bet, and should perhaps be done only at quite low valuations relative to other industries.

Gross Margin Ramp – Another area of typical miscalculation is in profitability of new technology.  The sector tends to be a bit more “custom” in its product demands than some industries, and one major bet that has caught investors is cost structure/timing of volume orders.  This is an area where it has proven extremely difficult for many companies to develop enough business to move gross margin positive, let alone operating profit.  A common mistake is to over build manufacturing capacity in an often desperate race to get a marginally cost effective technology to an acceptable cost point to achieve venture like growth projections, when a more effective strategy often might have been to build low volume, higher cost point premium solutions for a smaller market in order to maintain the business during the often long process of technology adoption.  Such a strategy, which tends to be ignored by venture backed startups until too late, can be a key element in reducing the timing risk in this sector.  Part of the issue also stems from technology companies misunderstanding the price point potential and impact on their net price to manufacturer from channel and integration costs, a particularly sore point now to many companies betting on distributed generation technology, as is the point below.

One Product Wonders – Unlike other sectors where large companies are quite adept at acquiring in new products and technology lines, this is a sector where major competitors tend to be more likely to make a build vs. buy decision.  This tends to be more true for high margin components of an overall solution, exactly where technology investors tend to play.  Often investors have found that their supposed channel is in fact their most successful competitor, even despite the fact that the channel may not very good at the solution.  The result is that investors often overestimate how far a single product company can go, and overestimate how badly a potential strategic partner or exit will view that they need a particular technology solution.

While none of these points are meant to invalidate particular investment strategies, they are meant to be points to consider when risk adjusting and developing pricing / valuation strategies for energy technology investments.  At the end of the day, we tend to feel that technology companies in this sector, when compared to many other venture capital investment sectors, should be priced much more closely on visible cashflows than value of technology or market potential, or by “stage”, where the risked economics may not be as easy for an investor to define.

Cleantech to “Backtrack” in 2013?

Our firm, Kachan & Co., has just published its latest annual set of predictions for the cleantech sector for the year ahead.

To our analysis, 2013 is shaping up to be something of a year of backtracking for the cleantech industry, a year that calls into question some of its traditional leading indicators of health, and one that surfaces long term risk to such cleantech stalwarts as solar, wind and electric vehicles.

Do we think cleantech is finished? Not at all. But much like young Skywalker learned in Episode V, cleantech is about to find out that the Empire sometimes gets its revenge.

In brief, (click here for long version) our predictions include:

Cleantech venture investment to decline –  Expect worldwide cleantech venture capital investment in 2013 to decline even further than it did in 2012, never to return to the previous highs it achieved before the financial crisis of 2007-2008, we believe. Among the factors: the departure of many venture investors from the sector because of disappointing returns, poor policy support worldwide and a lag time in the pullback of equity and debt investment.

But this doesn’t mean the sky is falling in cleantech. Family offices, sovereign wealth and corporate capital are now having more significant roles, filling gaps where traditional VC has played in recent years. It’s a sign the sector has matured, we believe. Fewer VC cooks in the kitchen may indeed impede innovation, but deep pocketed corporate capital should help clean technologies that are already de-risked reach more meaningful levels of scale.

Long term risk emerges for solar and wind – The solar and wind markets suffer today from margin erosion, allegations of corruption, international trade impropriety and other challenges. In 2013, we think poor progress in grid-scale power storage technology will also start to put downward pressure on solar and wind growth figures. Prices per kilowatt hour are falling, yes, but the cost of flow batteries, molten salt, compressed air, pumped hydro, moving mass or other storage technology needs to be factored in to make intermittent clean energies reliable and available 24/7. When also considering continued progress in cleaner baseload power from new, emerging nuclear technologies, natural gas and cleaner coal power, the growth rates for solar and wind appear increasingly at risk.

Clean coal technologies gain respect – We predict 2013 will be the year a new set of technologies will emerge aimed at capturing particulate and CO2 emissions from coal fired power plants and help clean coal technologies begin to overcome their negative positioning. The barrier to capturing coal emissions has been cost and power plant output penalties. Our research has identified encouraging new technologies without such drawbacks, and we think the world will begin to see them in 2013. China is expected to target domination of the clean coal equipment market, like it does already in many other cleantech equipment categories.

The internal combustion engine strikes back, putting EVs at risk – Important innovations quietly taking place in internal combustion engines (ICE) could further delay the timing of an all-electric vehicle future, we think. In 2013, unheard-of fuel economy innovations in ICEs will enter the market, including novel new natural gas conversion and heat exchange retrofits of existing engines aimed at dramatically lessening fuel needs. Some of these technologies, when combined, claim to be able to reduce fuel costs by 90%. That could push out the timing of EV adoption.

Cleantech adoption in mining – Notoriously conservative mining companies and their shareholders are starting to realize that the capital expenses of new clean technologies can be offset by reduced operating costs and the potential for new revenues. In 2013, we predict more adoption of cleantech innovation in mining, in areas such as tailings remediation, membrane-based water purification, sensors and telematics, route optimization software intended to lower fuel and equipment maintenance costs, and low water and power hydrometallurgical and other novel processes for mineral separation.

Big ag steps up and cleans up – We estimate that 2013 will be the year the world’s leading agricultural companies embrace new innovation in significant ways. Expect accelerated corporate investment, strategic partnership and agricultural M&A in 2013, as agricultural leaders race to meet consumer demand for cleaner, greener ways of producing food, having weathered intense consumer GMO-related and other backlash.

Want more rationale & data? Read our predictions for cleantech/greentech in 2013 in their entirety.

Agree? Disagree? Weigh in on our original article here.

Betting on Black Swans

The phrase “Black Swan” was coined in the book of the same name by author Nassim Taleb to describe an event that is hugely important and influential that was not anticipated but yet in retrospect could have been.

September 11, 2001 is a classic example of a Black Swan.  It was only a failure of imagination by most Americans (including myself) to never have contemplated beforehand the possibility of such a dreadful day.  But, the terror attacks of that fateful day were pulled off with pitiful ease, without requiring any enabling technical or social developments.  Upon reflection, we should have seen it coming.  And, because it came, most countries around the world undertook a host of incredibly expensive actions.  Everything changed on 9/11.  The trajectory of human events was irrevocably and dramatically altered.

Of course, there have been many other Black Swans in recent history:  the Pearl Harbor attacks, the unveiling of the atomic bomb, the launch of Sputnik, JFK’s assassination, and so on.  Each was shocking, and changed the course of history.

These are all geopolitical examples, but there have been commercial examples as well.  In the past 50 years, the way we live has been wholly altered by such inventions as the transistor, graphic user interfaces (GUIs), touchscreens, and the Internet.  The way medicine is practiced has been overturned with the advent of medical imaging and non-invasive surgery, and the Genome project promises radical breakthroughs that we generally can’t foresee yet.

In energy, probably the most significant Black Swans in our lifetimes so far relate to advanced methods for discovering or extracting oil and gas from resources that were previously believed to have little economic opportunity.  This most notably includes hydraulic fracturing (a.k.a. “fracking”) to tap natural gas and oil from shale formations, but also embraces deepwater offshore exploration/production and steam-assisted gravity drainage (SAGD) recovery of the Athabasca oil sands in Alberta — all of which were pipe dreams (at best) a decade or two ago.

These hydrocarbon breakthroughs were largely made possible by the emergence of massive computational power to enable 3-D seismic imaging of deep geology and precision control of drilling and subsurface operations, assisted by dramatic improvements (in many cases, evolutionary over decades) in materials and mechanical technologies.  Some wags have said that the best rocket science occurring today is not aimed towards the heavens but instead is aimed underground.

Needless to say, these Black Swans in energy have transformed the oil/gas sector — one of the largest economic enterprises on the planet — which in turn has shifted the economic and financial fortunes of many players in the industry by untold billions of dollars.

So, the question becomes, are there Black Swans lurking ahead in the cleantech space?

Vinod Khosla certainly thinks so.  One of the most visible of the cleantech venture capitalists, Khosla penned last year a wide-ranging and ambitious thought-piece entitled “Black Swans Thesis of Energy Transformation”.

Khosla thinks that many other venture capitalists — including, presumably, me — are too cautious in pursuing “what could be” in energy.  By focusing mostly on the potential for attractive returns, venture capitalists have become captive to the pursuit of incremental improvement, and are thus overlooking “game-changers” that admittedly have higher risks.  A large part of his argument is built on the notion that forecasts are largely bogus, and too much weight in investing and managing is placed on the projections of the future by even the most expert of observers.

Khosla acknowledges that failure is a strong possibility with his bolder philosophy, but that is the price to be paid for aiming high and achieving great things.  Quoting Robert F. Kennedy, “only those who dare to fail greatly can ever achieve greatly.”  Now, maybe having a billion dollars of your own wealth, stemming mainly from his role in founding Sun Microsystems, helps to give Khosla the confidence to accept a high likelihood of failure.  However, through his fund vehicle Khosla Ventures, he is investing other people’s money too, so he can’t afford to be too cavalier — at least for very long.

Khosla’s mantra is “shots on goal”:  making lots of bets in potentially transformative technology areas.  In his paper, he singles out twelve of the portfolio companies of Khosla Ventures as being particularly ambitious, with the potential for huge returns.

His lament is that there aren’t more firms or funds or organizations taking similarly audacious and numerous “shots on goal”.  “If there were a hundred such Black Swan venture funds [similar to ours], each with its own points of view, we would have 10,000 ‘technology’ shots on goal over a decade, or at least more than 1,000 non-overlapping attempts.  With that number of shots, or even just a thousand, I believe we would have a near certainty of at least ten assumption-shattering successes in major market segments.”

I don’t have a clue as to where the other 99 funds like Khosla’s will come from.  I don’t know many investors who have that risk-appetite, especially in today’s turbulent world.  There may be some needles in the haystack out there, but they are few and far between.  Moreover, it’s unclear how much wealth those rare individuals possess and can allocate to helping hatch the Black Swans of cleantech.

It’s notable that Khosla supports the efforts of ARPA-E, the group within the U.S. Department of Energy tasked with providing funds to risky but promising energy innovations.  He probably knows that the other Black Swan funds he’d like to see from the private sector aren’t likely to emerge.  Indeed, in his white paper, Khosla really doesn’t offer much of a logical investment thesis for Black Swan investing, beyond some wishful thinking and a deep trust in the law of large numbers.

Alas, low-cost public sector capital is simply more well-suited than private capital to cleantech Black Swans, which after all are big/bold bets offering large long-term social value.

In turn, this reliance on public sector grant support for new energy innovation causes many observers in the political realm to buck up their backs in opposition, complaining that the government shouldn’t be in the business of “picking winners and losers”.  Unstated but underlying this criticism is the belief that our conventional energy system based on hydrocarbons never benefited from such largesse, so why should cleantech?

Tell that to George Mitchell.

For many years during the 1980s and 1990s, Mitchell and his firm experimented with fracking, with limited success.  Many in the oil patch told him that he was wasting his time…and his money, about $6 million of it.

But, as this recent analysis by The Breakthrough Institute concludes convincingly, the development of fracking technology to enable the production of shale gas would not have happened if the U.S. DOE hadn’t provided a substantial amount of support for decades along the way.

Today, years later, shale gas has dramatically reshaped the playing field in the energy sector.  The tireless efforts of George Mitchell and his willingness to bet big bucks have rewarded him with a fortune worth billions.  He built that Black Swan.

But, then, he did so with the help of U.S. taxpayers.  Mitchell almost certainly wouldn’t have achieved what he did without substantial involvement of the government.

It’s the kind of public-private partnership that will need to be replicated to achieve more breakthroughs in cleantech in the decades to come.  The resulting Black Swans will also generate a number of cleantech fortunes, and these should be celebrated, as the appetite for risk-taking by devoted entrepreneurs and inventors must be commensurately rewarded by enough examples of success.

And, it should be hoped, these future cleantech billionaires can plow back large shares of their fortunes into philanthropy and investment in efforts to address and solve the world’s problems of that later era for subsequent generations.  Much like Vinod Khosla is doing today.

Stunning Cleantech 2012

It’s been a busy, ummm interesting year.  We’ve tracked profits to founders and investors of $14 Billion in major global IPOs on US  exchanges and $9 Billion in major global M&A exits from venture backed cleantech companies in the last 7-10 years.  Money is being made.  A lot of money.  But wow, not where you’d imagine it.

5 Stunners:

  • Recurrent Energy, bought by Sharp Solar for $305 mm, now on the block by Sharp Solar for $321 mm.  Can we say, what we have here gentlemen, is a failure to integrate?  This was one of the best exits in the sector.
  • Solyndra Sues Chinese solar companies for anti-trust, blaming in part their subsidized loans????????  Did the lawyers miss the whole Solyndra DOE Loan Guarantee part?  It kind of made the papers.
  • A123, announced bought / bailed out by Chinese manufacturer a month ago, now going chapter bankruptcy and debtor in possession from virtually the only US lithium ion battery competitor Johnson Controls?
  • MiaSole, one of the original thin film companies, 9 figure valuation and a $55 mm raise not too long ago (measure in months), cumulative c $400 million in the deal, sold for $30 mm to Chinese Hanergy just a few months later.  (Not that this wasn’t called over and over again by industry analysts.)
  • Solar City files for IPO, finally!

 

My call for the 5 highest risk mega stunners yet to come:

  • Better Place – Ummmmmmmmmm.  Sorry it makes me cringe to even discuss.  Just think through a breakeven analysis on this one.
  • Solar City – a terrifically neat company, and one that has never had a challenge driving revenues, margin, on the other hand . . .
  • BrightSource – see our earlier blog
  • Kior – again, see our prior comments.  Refining is hard.
  •  Tesla – Currently carrying the day in cleantech exit returns, I’m just really really really struggling to see the combination or sales growth, ontime deliveries, and margins here needed to justify valuation.

I’m not denigrating the investors or teams who made these bets.  Our thesis has been in cleantech, the business is there, but risk is getting mispriced on a grand scale, and the ante up to play the game is huge.

 

Fifty Years

Earlier this month, I turned 50 years old.  Such milestones are natural occasions for reflection.

Beyond recalling many of the phases and individual episodes of my life, my reflection included a consideration of how the world had changed in the 50 years in which I had lived.  And, naturally, given my profession, I pondered what it would have been like to have been a “cleantech” practicioner 50 years ago, in 1962.

Frankly, it’s not really possible to imagine “cleantech” back then.  50 years ago, there wasn’t much “clean” and there wasn’t much “tech”.

In the U.S., the Clean Air Act and the Clean Water Act hadn’t been passed, and there wasn’t even an Environmental Protection Agency.  Silicon Valley was still mainly apple orchards, and computers less powerful than your smartphone barely fit into large warehouses.

In the energy sector, the U.S. still dominated the petroleum industry.  Not only did Americans consume more petroleum than anyone else (accounting for about 40% of world demand), U.S. oil production was still a major factor, representing almost 30% of worldwide production.

The oil industry’s operations would still have been very recognizable by John D. Rockefeller:  production was mainly from “conventional” onshore seesaw pumpers dotting the countryside; remote locations such as Alaska hadn’t yet been touched, nor had any material production yet been achieved from offshore wells.

Other than perhaps by watching the recently-released “Lawrence of Arabia”, few Americans paid much attention to the deserts of the Middle East in 1962.

Though unnoticed by most Americans, important forces in the oil industry were already beginning to shift in the early 1960s.  Although Texas oil production had been decisive in fueling the Allied victory in World War II just two decades previously, by 1962, the U.S. had become a net importer of oil.  Yet, only King Hubbert projected a future waning of American supremacy in oil production.

Oil prices in 1962 were a little less than $3/barrel, largely due to the price-setting powers of the Railroad Commission (RRC) of Texas, then still the source of a significant share of world oil production.  When a hitherto little-noticed group formed in the early 1960s called the Organization of the Petroleum Exporting Countries (OPEC) assumed the dominant influence in pricing oil a decade later, the world would change forever, as oil prices would never again be anywhere near below $10/barrel.

It’s almost quaint to summon up memories of the oil sector of the era.  Remember what filling up at a gas station was like in the 1960s?  The attendant would come out, put the nozzle in the tank (always with the filler behind the rear license plate), cheerfully wipe the windshield and ask “may I check your oil?”.  Looking out the window, I remember seeing “29.9” on the gas pumps.  That’s 29.9 cents per gallon — which seems almost surreal to us now, but remember, oil prices were then only a few percent of what they are today.

Of course, given the now-unbelievably appalling gas mileage of those Detroit beasts, usually under 10 miles per gallon, you still had to fill up about as often then as you do now.  Back then, it was all about horsepower — it certainly wasn’t about efficiency, nor about cleanliness.  (Nor, for that matter, reliability.)

Every once in awhile these days, I find myself behind a 1960s-vintage car at a stoplight, most often on a sunny summer afternoon.  When the light turns green, I am left in a thin cloud of light bluish smoke and the fragrance of octane and unburned hydrocarbons.  Odors of my youth.  You don’t see and smell that anymore — and I don’t miss it.

Thank goodness for a plethora of cleantech innovation during the past decades:  unleaded fuels, pollution controls and fuel injection systems.

And, let’s not forget that these advances were pushed by, only happened because of, foresightful proactive policies.

While the financial bonanzas and corporate/family dramas enabled by oil discoveries and production had thoroughly captured the American imagination by the early 1960s — consider everything from “Giant” to “The Beverly Hillbillies” — natural gas in 1962 was an afterthought.  Other than some use for power generation in Texas and Oklahoma (where there was no local coal resource), natural gas was mostly flared at the wellhead.  In many ways because (and many people now forget this) natural gas prices were then regulated at depressed levels, the companies that produced gas as a side-consequence from oil production didn’t see much value in making the investments necessary to collect it and transport it to markets.  In fact, natural gas was widely considered a nuisance in 1962.

Certainly, gas is no longer considered a nuisance.  In fact, it’s now being touted by politicians across the U.S. as the Godsend:  providing lower energy prices, lower emissions, higher domestic employment and reduced dependence on foreign energy sources.

No, the oil/gas industry — and those two fuels are today inextricably intertwined — is now much more aggressive in capturing and processing every Btu that courses through the markets.

In the late 1960s, our family lived in the Philadelphia area, and I remember being awed – almost scared, really – by the immense flames emitted by the refinery near the mouth of the Schuylkill River.  All those now-valuable hydrocarbons…gone, wasted, up in smoke.  You don’t see that anymore at refineries, thankfully.

Oil company practices have massively changed in the past 50 years to capture everything of possible economic value.  Of course, that’s the effect of a 30x increase in oil prices, driven by a worldwide search and race to find and produce new reserves to replace five decades’ worth of depletion of much of the cheap/easy stuff in the face of a tripling of global oil demand (mostly from outside the U.S.), counterbalanced by technological progress on a host of fronts over the span of five decades.

Today, oil is pretty consistently trading between $80-100/barrel, and while U.S. oil production has rebounded a bit to approach early 1960s levels, American production now accounts for less than 10% of world oil production.

But think about how low U.S. oil production would be and how high oil prices might be today if not for offshore oil production, directional drilling, 3-D seismic, and an untold number of other innovations produced by the oil patch in the last half-century to enable production from hitherto undeveloped places.

Of course, beauty is in the eye of the beholder, and not all of these developments are viewed positively by everyone.  The current debates about fracking and development of the Alberta oil sands would have been unimaginable in 1962.  At the time, fracking barely existed as a practice, and the Alberta oil sands were then hopelessly uneconomic as a source of fuels.  Moreover, there was virtually no environmental movement to give voice to the concerns of citizens.

It wasn’t really until Rachel Carson published Silent Spring just a few weeks after I was born that much attention was paid to pollution.  Later in the decade and into the 1970s came the grassroots emergence of the environmental groups, such as Greenpeace and the Natural Resources Defense Council.

If you are about my age or older, you may well remember this 1971 commercial.  The tagline (“People start pollution, people can stop it”) and the image of the Native American shedding a tear remain indelible decades later.

Before this, there was virtually no accountability placed on emitters, and anyone could pretty much dump whatever they wanted, wherever they wanted, whenever they wanted.  And, in the early 1960s, no set of interests benefitted from ongoing inattention to environmental considerations in the U.S. more than the coal sector.  For those with coal interests, the times before environmentalists were truly the glory days — and in 1962, the future for coal in the U.S. at that time was terrifically bright.

Sure, trains had just moved from coal steam to diesel-electric, but over half of all the electricity generated in the U.S. in 1962 was based on burning coal.  With burgeoning demand for electricity (especially to keep pace with the exploding utilization of increasingly-ubiquitous air conditioning), coal was poised for significant growth, as thousands of megawatts of new coal powerplants would be added to the nation’s energy grid each year during the 1960s.

While coal is certainly no poster-child for the cleantech sector today, back in 1962, coal remained a particularly brutish and nasty form of energy.  288 American miners were killed on the job in 1962, and all of the coal burned was subject to minimal pollution control – no electrostatic precipitators or baghouses to capture particulates (i.e., soot), much less scrubbers for sulfur dioxide or selective catalytic reduction for nitrogen oxide emissions.  You pretty much didn’t want to be a coal miner or live anywhere near a coal-burning powerplant, as your health and longevity were seriously at risk.

Indeed, some observers speculate that the uncontrolled emissions from powerplants (not to mention other industrial facilities, such as steel mills) threw up such large amounts of material into the atmosphere that the 1970s became a period of unusually cold temperatures — to the point that many scientists were projecting a future of damaging global cooling.  (Although the then-common theory of global cooling is now mainly forgotten, climate change deniers are quick to employ this prior dead-end of thought as one reason for dismissing the strong likelihood suggested by climate scientists that global warming is probably occurring today.)

Of course, the U.S. still mines coal, lots of it, to fuel lots of coal-fired powerplants.  Production in 2011 was 1.1 billion tons, more than double 1962 levels.  However, employment in the coal industry had fallen by over 40% during the same period.  (And, mercifully, annual fatalities have decreased by a factor of 10.)  The primary factors for these changes:  productivity increases due to new technologies (e.g., longwall mining), lower rates of unionization, and a shift from underground to surface mining (now accounting for nearly 70% of U.S. production).

With respect to the latter factor, Wyoming coal activity has exploded — now representing more than 40% of U.S. production — at the expense of Appalachia, whose coal sector is now but a shell of what it was 50 years ago.  The causes are simple:  the subbituminous Powder River stuff from Wyoming is much more abundant and cheaper to mine, and generally has much lower sulfur content to boot, than what is available from Appalachia.

On a broader level, coal is on the retreat in the U.S.:  while coal still accounts for almost 50% of power generation, this share is dwindling.  It seems as though U.S. coal production levels have plateaued at just over 1 billion tons a year.  While so-called “clean-coal” technologies may at some point provide the basis for a resurgence in the industry, the possibility of future growth certainly seems far from obvious today.

Many legacy coal powerplants – some of which remain in operation from well more than 50 years ago – are fading away.  Tightening emission requirements, particularly on toxic emissions such as mercury, are just one  competitive disadvantage facing coal; coal power is increasingly uncompetitive with cheap and cleaner natural gas powerplants and (in some places) wind and solar energy.

“Wind energy” and “solar energy”:  50 years ago, these would have been oxymorons.  Other than the minute niches of sailboats and waterwell pumping in the Great Plains, a good wind resource had virtually no commercial value in 1962.  At the same time, Bell Labs scientists were wrangling some with solar energy technologies — primarily for satellites – although a lot more attention was being paid to a related device called the semiconductor.

For energy, scientists were mainly working on nuclear power, moving from weapons and Navy submarines to powerplants.  The nuclear era was dawning:  electricity was going to be “too cheap to meter”.

The very first commercial nuclear powerplant, the relatively puny 60 megawatt plant at Shippingport in Western Pennsylvania, had been running for only a few years in 1962, though dozens of nuclear powerplants were just coming onto the drawing boards.  Visionaries were even talking about nuclear-powered automobiles in 1962.  (“Electric vehicles?  Puh-lease.  Batteries are for cheap portable Japanese radios.”)

Perhaps as a psychological defense mechanism to drown out the anxieties associated with potential Armeggedon from a Cold War missile exchange, such was the sense of optimism in the possibilities of the age.

Apparently, no-one could foresee Three Mile Island, Chernobyl or Fukushima at the time.

The future held boundless possibilities.  Back then, who needed to recycle?  To think about efficient utilization of resources?  To care about water quality or air quality?  There was always more and better, somewhere, to be had.  And we Americans would surely obtain it, somehow and someway.  It was Manifest Destiny, ever-onward.

This American philosophy may have confronted its limits early in my lifetime with the ultimate realization, brought home so vividly at the end of the 1960s by the first-ever images of the solitary Earth as provided by the Apollo program, that we’re all utterly dependent upon a finite planet in an infinite sea of otherwise-unpopulable space.  Earth Day followed in April 1970.

To commemorate this first Earth Day, I remember our second-grade class picking up scads of litter along the side of a section of highway.  Upon reflection, I am glad to note how much litter has declined in subsequent years — a case of how values can be reshaped and behaviors can be changed, if people are just a bit more conscious.

That’s a positive take.  However, one can reasonably look back on 50 years of the evolution of the energy sector and say, well, that not that much has really changed in America.

True, the basic structure of American life may not have changed too dramatically.

We still primarily live in single family dwellings, in suburbia, dependent upon cars that look more or less the same, fueled by gasoline available at stations just down the road.  The power grid is still there, powered by central-station powerplants; the light switches and outlets haven’t changed, with refrigerators still in every kitchen and TVs in every living space.

By all measures, Americans are still energy hogs, relative to the rest of the world.

Even so, I would assert that a lot has changed, at both the macro and micro-level, that have consequentially altered the trajectory of resource utilization in America from the path determinedly being travelled 50 years ago.

Admittedly, some of the changes we have experienced are a bummer:  niceties like summer evenings with the windows open are much rarer.  Nevertheless, I claim that most of the changes of the past half-century are positive – and can be attributed to a significant degree to what we now call “cleantech”.

Our energy bounty, improved so significantly by technological innovation, has been achieved while simultaneously improving environmental conditions in almost every respect.  Notwithstanding the substantial increase in carbon dioxide emissions, almost all other manifestations of environmental impact from energy production and use have dramatically improved in the past half-century.  Standards of living enabled by modern energy use, here in America and even more so in the rest of the world, have dramatically improved.

Moreover, the trends for further future improvement on all these fronts are favorable.

With the proliferation of improved technologies such as LED lighting, energy efficiency continues to advance.  Renewable energy continues to gain share:  wind and solar energy represented about a quarter of new U.S. electricity generation additions in 2010.  Citizen understanding of energy and environmental issues continues to become more sophisticated.

Beyond the forces specifically pertaining to the energy sector, a number of broader influences in U.S. society are improving the prospects for accelerating cleantech innovation and adoption.  Entrepreneurship is booming, consumerism is increasingly being called into question, capital markets are more amenable to investment in this sector and more capital is arriving accordingly, and the Internet makes an immense and ever-expanding pool of information freely available to enable better decisions.

Not to mention:  much of the opposition to a transition to the cleantech future emanates from people in generations that are older, that will die out in the next couple of decades, to be replaced by younger generations that are generally more supportive of increased cleantech activity.

So, while it’s easy to get discouraged by the impediments to cleantech progress on a day-to-day basis, over the long-view, it’s pretty apparent that big positive things can happen and in fact are happening.

50 years from now, in 2062, I hope to be alive and well at 100 and still contributing to the cleantech sector.  That may be overoptimistic.  But I don’t think it’s at all overoptimistic that we’ll see more changes, and more changes for the better, in the cleantech realm over the next 50 years than in the previous 50.

Chief Blogger’s Favorite Cleantech Blogs

I’ve personally written hundreds of articles over the years.  I selected a few I thought were pretty timeless or prescient, and worth rereading:

What is Cleantech?  Always a good starting point:

or try, The Seminal List of Cleantech Definitions

 

The “Rules” in Cleantech Investing – Rereading this one after the cleantech exits study we just did, wow, was I on the money!

 

VeraSun IPO analysis – Read this carefully, I predicted exactly what would happen, and try the later version Beware the Allure of Ethanol Investing

 

Cleantech Venture Capitalists Beware, What You Don’t Know about Energy CAN Kill you – The title says it all.

 

 

Cleantech Venture Backed M&A Exits? Well, Yes, Sort of . . .

When people ask me, are investors making money in cleantech, I tell them yes, but not by whom or in what you thought they were.

Most of the analyses of cleantech exits do not differentiate for venture backed companies.  So we conducted our own study.

In the last 10 years, Cleantech.org’s Cleantech Venture Backed M&A Exit Study shows a grand total of 27 venture backed cleantech deals > $50 mm.

All in all, very tough returns.   A number of 8 to 10 figure fortunes made, just laregly not by the investors spending the 9 and 10 figure investments.

19 where we had data on both exit values and venture capital invested, 8 where we had revenue estimates.

We found a 2.78x Median Exit Value Multiple on Venture Capital Invested

– Those exit numbers include the founders and management’s shares, so average returns to investors would be somewhat lower.

We found a 2.2x Median Exit Value Multiple on Revenues.

$13 Billion in total M&A exit value.  Not bad, until you realize that’s over 10 years where cleantech has seen tens of billions in investment, and we used a pretty broad definition of “venture backed”.  To get there we included Toshiba’s Landys+Gyr, Total’s Sunpower, EDP’s Horizon and ABB’s Ventyx deals.  Those are the top 5 deals by value, and represent 60% of the $13 Billion.  None were backed by investors you would normally think of as cleantech venture capital powerhouses (Bayard Capital, Cypress Semiconductor, Zilkha and Goldman Sachs, Vista Energy).  Three of them included prior acquisitions themselves.

Excluding those and looking at only the transactions where we had both valuation and exit data we found and even weaker $3.8 Billion on $1.8 Billion in venture capital, 2.1x.

Most surprising, if you looked at the list of investors in these Nifty 27 exits, you’d have heard of very few of them.  This is truly not your father’s venture capital sector.

The exits have a surprisingly low tech flavor, and were carried by renewable energy project developers, ESCOs, and smart grid, and solar balance of system manufacturers.

If we had limited this to Silicon Valley venture investors in high tech deals, well, you’d have wondered if M&A were a four letter word.

Interesting, isn’t it?  Contact me at dikeman@janecapital.com with any questions or if you’ve got deal data you’d like to see included.

Is the “Weak Force” the Key to LENR?

By David Niebauer

In the early part of the 20th Century physicists theorized that a mysterious force held the nucleus of an atom together.  When it was demonstrated that this force could be tapped, releasing tremendous amounts of energy, a wave of excitement swept the scientific world.  It took only a few short years before atomic energy theories were experimentally validated in the first nuclear weapon detonations.  Hiroshima and Nagasaki followed.  Most of us alive today were born under the mushroom cloud that has loomed over humanity ever since.  Accessing the power of the strong nuclear force has been a mixed blessing:  it has brought the possibility of energy beyond our wildest dreams but with nightmarish consequences that were literally unimaginable a generation ago.

That physicists would become enamored of the strong nuclear force is understandable:  the energy locked in the nucleus of the atom is potent, it is real, and the challenge of harnessing it for useful purposes has become the “holy grail” of scientific endeavor.

But could another, more subtle, “fundamental force” hold the key to our energy future?

The Fundamental Forces of Nature and the Weak Force

Of the four fundamental forces (gravity, electromagnetism, strong nuclear force and weak nuclear force), the “weak force” is the most enigmatic. Whereas the other three forces act through attraction/repulsion mechanisms, the weak force is responsible for transmutations – changing one element into another – and incremental shifts between mass and energy at the nuclear level.

Simply put, the weak force is the way Nature seeks stability.  Stability at the nuclear level permits elements to form, which make up all of the familiar stuff of our world.  Without the stabilizing action of the weak force, the material world, including our physical bodies, would not exist.  The weak force is responsible for the radioactive decay of heavy (radioactive) elements into their lighter, more stable forms.  But the weak force is also at work in the formation of the lightest of elements, hydrogen and helium, and all the elements in between.

A good way to understand the weak force is in comparison with the actions of the other forces at work in the center of the Sun.  The Sun, although extraordinarily hot (10 million degrees), is cool enough for the constituent parts of matter, quarks, to clump together to form protons.  A proton is necessary to form an element, which occurs when it attracts an electron – the simplest case being hydrogen, which is composed of a single proton and a single electron.  By the force of gravity, protons are pulled together until two of them touch – but because of the electrostatic repulsion of their two positive charges, their total energy becomes unstable and one of the protons undergoes a form of radioactive decay, turning it into a neutron and emitting a positron (the antiparticle of an electron) and a neutrino.  This action forms a deuteron (one proton and one neutron), which is more stable than the two repelling protons.  This transmutation of proton into neutron plus beta particles is mediated by the weak force.

A neutron is slightly heavier, and therefore less stable, than a proton.  So the normal action of the weak force causes a neutron to decay into a proton, an electron and a neutrino.  At any rate, at the center of the Sun, once a deuteron is formed, it will fuse with another free proton to form helium-3 (one neutron and two protons), releasing tremendous amounts of energy.  These helium-3 atoms then fuse to form helium-4 and releasing two more protons and more energy.  The release of energy in these fusion reactions from the strong force is what powers the Sun.  But the entire process is set in motion by the weak force.

Enter “Cold Fusion”

When in 1989 Pons and Fleishman stunned the world by reporting nuclear reaction signatures at room temperatures, physicists were understandably baffled and skeptical.  Given that virtually all nuclear physicists at the time were trained in the powerful energies of the strong force, table top fusion made no sense.  The fact that the phenomenon was dubbed “cold fusion” was unfortunate and likely contributed to almost universal rejection by the scientific community.  Standard theoretical models were not able to explain how cold fusion might even be possible and unless it could be understood it was pointless and a waste of time.  A comment attributed to Wolfgang Pauli describes the reaction of most physicists at the time: “its not right; its not even wrong”.  Without a coherent theory to explain it, it wasn’t even science at all.

This all changed in 2006 with the publication of a paper in the peer-reviewed The European Physical Journal by Allan Widom and Louis Larsen titled “Ultra low momentum neutron catalyzed nuclear reactions on metallic hydride surfaces”.

In this paper for the first time a theoretical basis was put forth that explained many of the anomalous results being reported by experimentalists in the new field of Low Energy Nuclear Reactions (LENR) – and the common explanatory action was the weak force.

As explained by Dennis Bushnell, Chief Scientist at NASA Langley Research Center in his article “Low Energy Nuclear Reactions, the Realism and the Outlook”:

“The Strong Force Particle physicists have evidently been correct all along. “Cold Fusion” is not possible. However, via collective effects/ condensed matter quantum nuclear physics, LENR is allowable without any “miracles.” The theory states that once some energy is added to surfaces loaded with hydrogen/protons, if the surface morphology enables high localized voltage gradients, then heavy electrons leading to ultra low energy neutrons will form– neutrons that never leave the surface. The neutrons set up isotope cascades which result in beta decay, heat and transmutations with the heavy electrons converting the beta decay gamma into heat.”

Brief Description of Widom-Larsen Theory

Not everyone agrees that the Widom-Larsen Theory (“WLT”) accurately explains all, or even most, of the observed phenomenon in LENR experiments.  But it is worth a brief look at what WLT proposes.

In the first step of WLT, a proton captures a charged lepton (an electron) and produces a neutron and a neutrino.  No Coulomb barrier inhibits the reaction.  In fact, a strong Coulomb attraction that can exist between an electron and a nucleus helps the nuclear transmutation proceed.

This process is well known to occur with muons, a type of lepton that can be thought of as very heavy electrons – the increased mass is what pulls the lepton into the nucleus.  For this to occur with electrons in a condensed matter hydrogen system, local electromagnetic field fluctuations are induced to increase the mass of the electron.  Thus, a “mass modified” hydrogen atom can decay into a neutron and a neutrino.  These neutrons are born with ultra low momentum and, because of their long wavelength, get caught in the cavity formed by oscillating protons in the metal lattice.

These ultra low momentum neutrons, which do not escape the immediate vicinity of the cavity and are therefore difficult to detect, yield interesting reaction sequences.  For example, helium-3 and helium-4 are produced often yielding large quantities of heat.  WLT refers to these as neutron catalyzed nuclear reactions.  As Dennis Bushnell explains:  “the neutrons set up isotope cascades which result in beta decay, heat and transmutations.”  Nuclear fusion does not occur and therefore there is no Coulomb barrier obstruction to the resulting neutron catalyzed nuclear reaction.

Brief Description of Brillouin Theory

Robert Godes of Brillouin Energy Corp., claims that WLT explains some, but not all, of the observed LENR phenomena.  As Godes understands the process, metal hydrides stimulated with precise, narrow, high voltage, bipolar pulse frequencies (“Q-pulse”) cause protons or deuterons to undergo electron capture.  The metal lattice stimulation by the Q-pulse reverses the natural decay of neutrons to protons, plus beta particles, catalyzing an electron capture in a first endothermic step.  When the initial proton (or deuteron) is confined in the metal lattice and the total Hamiltonian (total energy of the system) reaches a certain threshold level by means of the Q-pulse stimulation, an ultra cold neutron is formed.  This ultra cold neutron occupies a position in the lattice where dissolved hydrogen tunnels and undergoes transmutation, forming a cascade of transmutations – deuteron, triton, quadrium – by capturing the cold neutron and releasing binding energy.  Such a cascading reaction will result in a beta decay transmutation to helium-4, plus heat.

The Q pulse causes a dramatic increase of the phonon activity, driving the system far out of equilibrium.  When this energy reaches a threshold level, neutron production via electron capture becomes a natural path to bring the system back to stability.

Theory and Experiment

Other well-known LENR theorists have implicated the weak force, including Peter Hagelstein, Tadahiko Mizuno, Yasuhiro Iwamura and Mitchell Swartz.  The project now, as with all scientific endeavor, is to match experimental evidence to theory.  The hope is that the electron capture/weak force theories will help guide new, even more successful experiments.  This process will also allow theorists to add refinement and new thinking to their models.  I am reminded of the two “laws” of physicists proposed by an early weak force pioneer:

1. Without experimentalists, theorists tend to drift.

2. Without theorists, experimentalists tend to falter.

(T.D. Lee, as quoted in “The Weak Force: From Fermi to Feynman” by A. Lesov).

Experimentalists have been reporting anomalous heat from metal hydrides since before Pons and Fleischmann.  But without a cogent theory, they have had to rely on ad hoc, trial and error methods.  Given this state of affairs, the progress made in the LENR field in the last twenty years is remarkable.  Perhaps we are now at the beginning of a new era in which theoretical models will guide a rapid transformation of the science.

Conclusion

Scientists have focused on the strong nuclear force due to the immense power that can be released from breaking the nuclear bond.  Less attention has been paid to the weak force, which causes transmutations and the release of energy in more subtle ways.  Recent theories that explain many of the phenomena observed in low energy nuclear reactions (LENR) implicate the weak force.  We are now at the stage where theory and experiment begin to complement each other to allow for the rapid transformation of the new science of LENR.

Journalistic disclosure:  David Niebauer is general legal counsel to Brillouin Energy Corp.

Top 10 Cleantech Subsidies and Policies (and the Biggest Losers) – Ranked By Impact

We all know energy is global, and as much policy driven as technology driven.

We have a quote, in energy, there are no disruptive technologies, just disruptive policies and economic shocks that make some technologies look disruptive after the fact.  In reality, there is disruptive technology in energy, it just takes a long long time.  And a lot of policy help.

We’ve ranked what we consider the seminal programs, policies and subsidies globally in cleantech that did the helping.  The industry makers.  We gave points for anchoring industries and market leading companies, points for catalyzing impact, points for “return on investment”, points for current market share, and causing fundamental shifts in scale, points for anchoring key technology development, points for industries that succeeded, points for industries with the brightest futures.  It ends heavy on solar, heavy on wind, heavy on ethanol.  No surprise, as that’s where the money’s come in.

1.  German PV Feed-in Tariff – More than anything else, allowed the scaling of the solar industry, built a home market and a home manufacturing base, and basically created the technology leader, First Solar.

2. Japanese Solar Rebate Program – The first big thing in solar, created the solar industry in the mid 90s, and anchored both the Japanese market, as well as the first generation of solar manufacturers.

3. California RPS – The anchor and pioneer renewable portfolio standard in the US, major driver of the first large scale, utility grade  wind and solar markets.

4. US Investment Tax Credit for Solar – Combined with the state renewable portfolio standards, created true grid scale solar.

5. Brazilian ethanol program – Do we really need to say why? Decades of concerted long term support created an industry, kept tens of billions in dollars domestic.  One half of the global biofuels industry.  And the cost leader.

6. US Corn ethanol combination of MTBE shift, blender’s, and import tariffs – Anchored the second largest global biofuels market, catalyzed the multi-billion explosion in venture capital into biofuels, and tens of billions into ethanol plants.  Obliterated the need for farm subsidies.  A cheap subsidy on a per unit basis compared to its impact holding down retail prices at the pump, and diverted billions of dollars from OPEC into the American heartland.

7. 11th 5 Year Plan  – Leads to Chinese leadership in global wind power production and solar manufacturing.  All we can say is, wow!  If we viewed these policies as having created more global technology leaders, or if success in solar was not so dominated by exports to markets created by other policies, and if wind was more pioneering and less fast follower, this rank could be an easy #1, so watch this space.

8. US Production Tax Credit – Anchored the US wind sector, the first major wind power market, and still #2.

9. California Solar Rebate Program & New Jersey SREC program – Taken together with the RPS’, two bulwarks of the only real solar markets created in the US yet.

10. EU Emission Trading Scheme and Kyoto Protocol Clean Development Mechanisms – Anchored finance for the Chinese wind sector, and $10s of Billions in investment in clean energy.  If the succeeding COPs had extended it, this would be an easy #1 or 2, as it is, barely makes the cut.

 

Honorable mention

Combination of US gas deregulations 20 years ago and US mineral rights ownership policy – as the only country where the citizens own the mineral rights under their land, there’s a reason fracking/directional drilling technology driving shale gas started here.  And a reason after 100 years the oil & gas industry still comes to the US for technology.  Shale gas in the US pays more in taxes than the US solar industry has in revenues.  But as old policies and with more indirect than direct causal effects, these fall to honorable mention.

Texas Power Deregulation – A huge anchor to wind power growth in the US.  There’s a reason Texas has so much wind power.  But without having catalyzed change in power across the nation, only makes honorable mention.

US DOE Solar Programs – A myriad of programs over decades, some that worked, some that didn’t.  Taken in aggregate, solar PV exists because of US government R&D support.

US CAFE standards – Still the major driver of automotive energy use globally, but most the shifts occurred before the “clean tech area”.

US Clean Air Act – Still the major driver of the environmental sector in industry, but most the shifts occurred before the “clean tech area”.

California product energy efficiency standards – Catalyzed massive shifts in product globally, but most the shifts occurred before the “clean tech area”.

Global lighting standards /regulations – Hard for us to highlight one, but as a group, just barely missed the cut, in part because lighting is a smaller portion of the energy bill than transport fuel or generation.

 

Biggest Flops

US Hydrogen Highway and myriad associated fuel cell R&D programs.  c. $1 Bil/year  in government R&D subsidies for lots of years,  and 10 years later maybe $500 mm / year worth of global product sales, and no profitable companies.

Italian, Greek, and Spanish Feed in Tariffs – Expensive me too copycats, made a lot of German, US, Japanese and Chinese and bankers rich, did not make a lasting impact on anything.

California AB-32 Cap and Trade – Late, slow, small underwhelming, instead of a lighthouse, an outlier.

REGGI – See AB 32

US DOE Loan Guarantee Program – Billion dollar boondoggle.  If it was about focusing investment to creating market leading companies, it didn’t.  If it was about creating jobs, the price per job is, well, it’s horrendous.

US Nuclear Energy Policy/Program – Decades, massive chunks of the DOE budget and no real technology advances so far in my lifetime?  Come on people.  Underperforming since the Berlin Wall fell at the least!

 

Clean Coal Technology Is Making Venture Investors Money

One of my friends, John Moore. the CEO of Acorn Energy (NASDAQ:ACFN), recently sold off their rapidly growing CoaLogix investment for a quick return. I caught up with John to get the story.

So John, who the hell is Acorn Energy anyways?

Acorn Energy (NASDAQ:ACFN) is the Sun Studios of the energy sector. We have created companies and categories like Demand Response (Comverge-(NASDAQ:COMV)) and the less well known SCR catalyst regeneration market through CoaLogix which we just sold to Energy Capital Partners for $101 million yesterday.

Why did you invest in this deal in the first place?

We look for companies that have created a new category in energy technology but have yet to be recognized. We look for specialty businesses that help the energy industry “get more out of what it’s already got”. Given that coal provides 48% of our electricity in the USA and 75% of China’s output we felt it was an area where we could make an impact. At ACFN we believe in the Power Law which states a small change in a big number is still a big number. In CoaLogix we found a proven technology where the regulations were in place, a great management team and a market near an inflection point. Acorn provided the capital and management really executed. We created the world’s largest catalyst regeneration business with 75% US share and 40% of the SCR capacity under long term contracts. We exited with a 43% IRR after three years and ten months.

Who does Coalogix compete with for these products, and what made you comfortable originally that they could take market share?

CoaLogix competes with new catalyst producers like Hitachi. The company’s value proposition was that we regenerate the catalyst at half the cost of new catalyst. The competition with the new catalyst producers was driven by the new functionality that they were adding to the new generations of catalyst. The key risk factor in the investment was whether we could keep up the net value proposition to the end users versus the new catalyst offering. Management changed the industry by forming an alliance with the largest US catalyst producer, Cormatech- a joint venture between Corning and Mitsubishi and we both prospered.

I thought “clean coal” was dead as an investment category?

There have been some notable flops in the clean coal business like coal benefication and coal gasification deals. What these failed investments have in common is unproven technology and business models that require massive investment to achieve commodity margins at scale. I would refer readers to your insightful blog post on Jane Capital’s rules on energy technology investing.

How did this exit come together?

China passed NOx regulations as part of their new five year plan. We visited China in September 2010 and discovered the new NOx regulations were going to require $6 Billion of catalyst to be installed and there was going to be a really big market for regeneration. We decided that CoaLogix’s epic opportunity was China and management needed a sponsor with a lot of resources and contacts to repeat the company’s success in China. We hired UBS to lead the process and they found the perfect partner, Energy Capital Partners which manages $7 Billion in capital. They did such thorough due diligence on the company that in the end I think they knew the company and the management team better than we did.

So this is Acorn’s second big hit after Comverge?

Yes. We exited most of our stake in Comverge after the Goldman Sachs led secondary at a $600 million valuation or $29 per share. The CoaLogix ransaction was our second successful transaction with EnerTech Capital. They have incredible domain knowledge and initially sourced the CoaLogix opportunity but were between funds. We invited them in after we acquired the company and they added a lot of value. I get by with a little help from my friends.

What are the metrics on this deal? How much was Acorn in it for and when? How much did the business grow during that time? And what was the exit multiple for Acorn?

Acorn bought CoaLogix for $9.6 million in November 2007. We invested an additional $8.6 million to build a new plant and our gross sale proceeds were $61.9 million for a 43% IRR or 3.4 times our investment.

So you guys do both minority and controlling investments?

We have done both but we only make minority investments with an eye to buying a majority stake if we like management. One of the lessons I have learned is management must have a really large economic opportunity and that means ACFN owning 85% and management around 15%. We provide a balance sheet, some big picture guidance and contacts and stay out of the way and let management execute.

You’re essentially an evergreen fund, so what are you going to do with the proceeds?

We plan to reinvest in our three operating businesses; DSIT the leading underwater security company, GridSense a very promising smart grid distribution optimization provider and US Seismic a pioneer in the emerging field of 4D seismic for the oil and gas industry. We feel that each of these three businesses have huge potential and are capital light so we can stick with them longer than CoaLogix or Comverge. Of course, we always have our eyes open for new opportunities that benefit from “economies of connection” amd solve a major energy industry pain point.

One more thing John, your comment “We look for specialty businesses that help the energy industry “get more out of what it’s already got”. This is very articulate thesis that certainly isn’t typical for venture investors, can you expound a bit on what you mean by that?

Great entrepreneurs look for a fulcrum from which to leverage their ideas to market. The number one use of energy is the extraction, refining and distribution of energy. The existing energy systems waste and scale is the fulcrum. The entrepreneur’s new technology or system is the lever. I have been astonished by how many cleantech entrepreneurs want to try to reinvent our huge scaled energy systems from scratch missing the opportunity to use the fulcrum. Even the biggest venture funds don’t have the activation energy necessary to radically change our energy supply. The smartest play available is to make the existing infrastructure smarter. Last year I wrote a short book “The Hidden Cleantech Revolution” to investigate the really important changes that were happening to the “other 97%” of our energy supply that nobody was talking about. I would invite your readers to e-mail my assistant at jvoisin@acornenergy.com for a free copy.

OMG Solyndra’s Dead! How Much is This Going to Cost Whom?

Yup.  Solyndra’s going BK.  Taking with it US government loans to the tune of $10 for every taxpaying household in the country and $500K or so for every job it created for one year.

But seriously, raise your hand if you DIDN’T see this coming.  Like, OK, those with their hand’s raised, you are no longer allowed to comment on this blog.  This deal’s been close to a running joke among the cleantech cynics for a couple of years now.

We wrote about this before.  The theory on the product was that rooftop install issues and low wind resistance were so important that they should be coating CIGS on a circle and encapsulating it in the most weird and costly way possible (or maybe because they liked the cattle-grate aesthetic), and then demanding a premium price for it.  Keep in mind, it was roughly the same amount of CIGS material they would have used if they had done a similiar size flat plate module.

Um, only their PR people and the original inventor must have ever really believed that product design was a good idea to sink a billion and change dollars into (the “and change” part by itself being well larger than the average venture fund OR the average venture backed exit).

Open question, does this go down as the largest venture capital bust in history?  Like a billion in equity? Certainly bigger than Webvan.

List of venture firms that look like they came close to or exceeded the typical contractual or house investment concentration limits in this deal for at least one of their funds, and/or had to cross-over investments in later funds to keep up.

  • Rockport
  • CMEA
  • Virgin Green Fund
  • Masdar
  • Redpoint
  • USVP

List of hedge funds/family offices that provided most of the cash to cram down those VCs in the last few of rounds including anchoring the equity for the DOE Loan Guarantee and replacing the the $300 mm IPO with $250 mm private equity deal along the way.

  • Artis
  • Argonaut (George Kaiser family)
  • Madrone (Walton family)

List of those government entities dumb enough to fund a half a billion dollar senior secured loan that went up in smoke within what, a year?  Going poof that fast is usually the lender’s mistake, not the borrower’s.

  • DOE – AKA the guys who created jobs at the price of like $500K per job created – for like 12 months?

My guess as to actual recoveries for the DOE:

It’s specialty equipment in a commodity business and they let the entire manufacturing staff go.  Nobody’s restarting this thing.

  • So you’re looking at tops very low 7 figures for the patents, maybe, I haven’t done a review to see whether there is anything of interest outside of their own product defense.
  • The c. $216 mm (as of Jan 2010)  in equipment gets sold off for tops 5-10 cents on the dollar for other uses, parts, or scrap.  And I think I recall they owned one of their chunks of land and building right? The S-1 has land in it as $32 mm, plus building construction in process.
  • And a few million in inventory and A/R gets recovered at 5-10 cents and 20-30 cents on the dollar.
  • Then, do they have a saleable customer pipeline or development pipeline of contracts that could be sold, or do all those simply evaporate?  Probably the latter, but some possibility here.
  • MAYBE the government gets back 10-20 cents on the dollar tops, assuming that building and land sell off well.  Everyone else?  Nada.  :(

Part of me wants to say I told you so, and part of me is literally cringing from the fallout this could  have on the cleantech investment sector and a lot of smart, dedicated people I know who were involved in this company.  My one nagging fear is that this is just the first of many other multi-hundred of million dollar cleantech venture deals are in the pipeline to go straight to zero.

 

IPOs and Bankruptcies and Cleantech “Hot or Not”

Last night while watching Office reruns, I realized I’d been remiss, and a lot’s had been happening in the public equities end of the cleantech sector.  Not to mention yesterday’s billion dollar BK broiler announcement by the one-time Next Greatest Thing, Solyndra.

So, with my usual aplomb, I thought I’d simply peanut gallery what’s “Hot or Not” in cleantech.

 

Bled Out on the Operating Table

Solyndra – BK (and not the burger kind). Well, we wrote about it a lot, and nobody believes us.  But bad product is bad product, and high cost is high cost, regardless of how much money you throw at it.  So who’s going to calculate the impact on the DOE loan guarantee program’s projected loan losses? Not.

Evergreen Solar (NASDAQ:ESLR)  – :(  And it was such cool technology, too.  I’m very sorry to see this one go.  At one point some years back it was the savior deal of the sector.  But we are in a race to cost down or die. Not.

 

Filed, Not Yet Hell for Leather

Enphase – I’m very very interested in seeing these guys make it.   Lots of growth.  Very thin margins so far.  Product costs looks miserably high.  Need to cost down like a banshee running from the Bill Murray.  But you’ve got to love the category killer potential and how fast they’ve executed.  First microinverter guy to manufacturing maturity eats the others like oatmeal (sloppy but eaten nonetheless). Hot.

Silver Spring – Hmmmmmmmmh.  Home run potential, but what’s the term?  Very high beta?  These contracts are massive, far strung, very very tight margin.  They’ve shown they can get the growth.  But with long lead time sticky contracts, it’s about managing costs during slippage and change-orders well, and it’s a very competitive business.  One blown contract gives back all the profits on the last 8.  But, give kudos for getting this far and making it to be a real player.  Now we’ll see if you can execute. Hot.

Luca Technologies – Hello?  Are you serious?  I read this S-1 cover to cover.  I had my technologist read it and go find their patents.  We love this area.  The concept of microbes for in situ is old as can be, but very very interesting..  The challenge is always cost and performance (not really a new nutrient mix?).  How do you get the bugs, nutrients, whatever you’re doing, down the hole and into the formation far enough and cheap and effectively enough to make a difference.  But in the entire S-1 and website, there is not a single technology description, fact, proof point or ANYTHING that suggests they’ve actually cracked the real nut.  The few numbers they do mention are not even to the ho-hum level.  Did a real investment banker really sign up to this?  Who wrote this?  Their PR guy with a liberal arts studies degree?  Really?  This smacks of a “trust us I’m Jesus and daddy needs an exit” deal.  In reality, probably interesting, but still very very very very very very very early science project.   Not.

 

We have a whole collection of biofuels stocks to discuss now.

Solazyme (NASDAQ:SZYM) – half of its 52 week, less than a buck over its low. Not.

Kior (NASDAQ:KIOR) – Somebody correct me, but did the filings really indicate Khosla put money IN to this IPO?  And it got off at low end of the range even after that? From one of their filings: “In conjunction with the Issuer’s IPO, an entity affiliated with the Reporting Persons purchased 1,250,000 shares of Class A common stock, resulting in an increase in beneficial ownership by the Reporting Persons by that amount. The
purchase was made at the initial public offering price of $15.00 per share, for an aggregate purchase price of $18,750,000. The source of funds used to purchase the shares of Class A common stock was Khosla’s personal assets.” At least it’s money where it’s mouth is.  Not.

Amyris (NASDAQ:AMRS) – 58% of its 52 week high, 20% over it’s low. Not.

Gevo (NASDAQ:GEVO) – 40% of its 52 week high, c. 20% off it’s low. Not.

Codexis (NASDAQ:CDXS) – 55% of its 52 week high, c. 20% off it’s lows. Not.

I’d comment on the fundamentals of each one, but I don’t want you to think I’m depressed.  Oh, by the way.  Did I ever tell you the story about the cleantech sector’s magically changing cellulosic biofuels business plans to “cellulosic bio-anything-but-fuels” plans as people finally woke up and realized how tough using lousy feedstocks and high cost processes in a commodities market actually is.  Of course, careful you don’t change from targeting fuels to making feedstock for dirt cheap who would want to be in that business commodity chemicals or specialty chemicals with a global aggregate gross margin market less than your cash on balance sheet.

And a Few Tidbits

Advanced Energy (NASDAQ: AEIS) – I still really like this company.  Somebody’s going to own inverters.  And the numbers look very interesting.  Very. Need to dig deeper. Hot.

American Superconductor (NASDAQ:AMSC) – Ummm.  Do you believe their wind business ever recovers?  One customer.  Buying a competitor with one customer.  Both in China.  Customer doesn’t like single supplier risk where the supplier makes high margins?  What did you think was going to happen?  Ugly ugly story.  Very real possibility that they trade on a log curve to straight zero.  Some chance of sunshine, but I’d cancel the picnic. Not.

A123 (NASDAQ:AONE) – I really really really want this to work.  But what’s the path to profits?  Not feeling it. Not.

Tesla (NASDAQ:TSLA) –  “Don’t worry, the NEXT car will fix my company’s fundamental problems” – quote attributed to the Tesla CEO who replaces the next Tesla CEO. Not.

Active Power (NASDAQ: ACPW) – Hey, did anyone notice these guys are growing revenues AND margins?  A long haul, but keep it up!  Need careful consideration before I’d jump into flywheels, but someone deserves a ton of credit as coach of the year.  Hot.

Satcon (NASDAQ:SATC) – Hammered, but still a market leader.  Got to think about this one – it’s historically traded for more than it’s fundamentals justified, but with PV Powered and Xantrex snapped up, hard to imagine they stay independent for long. Hot.

SunPower (NASDAQ:SPWR)  – Wow.  Total. No guts no glory.  Highest cost producer, shall we call it the “performance queen”.  I do like this bet by Total, but it takes guts.  But when a market leader’s stock’s been hammered that far down somebody’s got to move and Total did . . .  Whether an individual investor can play is another story. Hot.

Ascent Solar (NASDAQ:ASTI) – Holy star solar batman!  These guys can sell ice to eskimos are have always been great R&D guys.  Still maybe the highest cost CIGS process known to astronauts.  I like these guys, but I’m not sure more cash fixes anything. Not.

Solon – What does “New US operational strategy” mean?  It means solar is a game of scale and execution.  Not.

 

What cleantech should know about chasm crossing

If there’s really a significant gulf, as onetime marketer Geoffrey Moore put it, between selling to early adopters and the majority of technology buyers, what does this mean for companies in cleantech?

The technology adoption lifecycle and the chasm

The chasm model holds that there’s a big difference between what companies need to do to effectively sell technology products to early adopters and what they need to do to sell to the early and late majority of the technology adoption lifecycle (source: Joe M. Bohlen, George M. Beal and Everett M. Rogers)

 

In the mid-90s, I was a senior consultant at the venerable Silicon Valley strategy consultancy Regis McKenna Inc. (RMI). The firm is credited with innovative marketing and business insights that helped put Intel, Apple, Electronic Arts, Microsoft, 3COM and many other tech companies on the map. It was an important company recognized for doing important work (valley lore holds that founder and author Regis McKenna’s business cards once bore the title “Himself.” If true, it was before my time.)

One of our methodologies, based on the technology adoption lifecycle—itself based on work by Iowa State University tracking the purchasing of seed corn, of all things—became known as the chasm model, which Geoff Moore—then a partner at RMI, now a venture partner at Mohr Davidow—expanded on as the basis of his now-seminal Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers. I didn’t overlap at RMI with Geoff. But my office was down the hall from his.

Twenty years later, I still find myself trotting out the same chasm model we used at RMI to help our cleantech clients today understand the non-intuitive changes that need to take place to most effectively introduce their clean technology products to mainstream markets.

Here’s a summary of what we at Kachan & Co. share with clients and how the chasm applies to cleantech.

Technology adoption lifecycle and chasm primer
One of the technology adoption lifecycle’s key insights is that the different constituents of the lifecycle adopt innovation for different reasons. Early adopters are technology enthusiasts looking for a radical shift, where the early majority simply seeks productivity improvement. Early adopters hope to get a jump on competition, lower their costs, get to market faster, have more complete customer service or get some other similar business advantage. Those in the majority of the market, however, want to minimize discontinuity. They want evolution, not revolution. They want technology to enhance, not overthrow, established ways of doing business. And they don’t want to debug someone’s product—they want it to work properly and to integrate with existing technology.

The chasm occurs because the majority of the market wants references from other customers like them, but all that pre-chasm vendors can offer are references to early adopters. Companies trying to cross the chasm run into trouble because they’re essentially operating without a reference base, trying to sell to a market that’s highly reference oriented.

Bridging this gulf is awkward, because if they’re to be successful, companies must adopt new strategies just at the time they’re becoming most comfortable with ones that seem to work.

The only reliable way to exit the chasm is to target a niche market on the other side made up of pragmatists united by a common problem for which there is no known solution. These pragmatists are motivated to help the new technology cross the chasm if it is packaged as a complete solution to their problem.

Moore uses the D Day metaphor for how to do this, and it’s apt. An invasion force, comprised of a company and its allies (the product), must establish an early beachhead niche market (Normandy), from which to take additional market segments (France) with a view to liberating the whole of the market (i.e. Europe). The metaphor argues that an overwhelmingly superior force concentrated on a highly focused target worked in 1944 for the Allies, and is equally relevant in high tech. It argues for laser-focused market segmentation, focusing 100% of a company’s sales and marketing budget on one, initial, small segment if it’s to be successful in the wide majority market.

Why is this counter-intuitive and hard?

  • Niche marketing feels like leaving sales on the table – Companies that are sales-driven and lured into selling to any market segment miss the opportunity to build momentum and authority in their strategically chosen segment
  • Everyone wants to be a big fish, but not in a small pond – Being a market leader is every company’s objective. But no company wants to be known of as king of a small hill. Even though conquering successive small hills leads to mountains.
  • Not all features and benefits may be required – For companies that have invested time and money developing a deep product, focusing on just one small niche and a subset of their features can feel insulting to engineering. Crossing the chasm means making decisions that are best for a narrowly defined customer, not for your product’s bragging rights.

What’s the relevance of all of this to cleantech? Are there chasms to cross? Absolutely. There are plenty of examples of clean technologies and companies to which the chasm metaphor applies, and for which learnings abound… or should:

Chasm crossing done well in cleantech
Some companies and industries appear to be doing things right.

  • Most resource sharing companies (e.g. car and bike sharing, tool sharing, etc.) all seek to be global powerhouses. But most of them, like P2P car sharing companies RelayRides, Spride and Getaround, start hyper-locally, then branch out to neighboring regions. Their segmentation is geographical, leveraging success in one locale to one nearby.
  • Vendors of EV charging, V2G, alternative fuel conversion, fuel additives and other related automotive technologies have appropriately targeted specific commercial vehicle fleets, often in their own backyards, as beachheads, and wisely don’t seek wide consumer adoption. Yet.
  • A123 Systems leveraged an initial modest focus on lithium ion batteries for power tools. The strategy succeeded, and A123 today is now known for its cell and full power solutions for transportation, the grid and commercial applications, and now employs more than 2,000 people worldwide.

At risk in cleantech chasm crossing
There are also companies and sectors in cleantech that would benefit from an understanding of the power of a well-defined target segment as path to the larger market they seek.

In all cases, the companies or sectors below would be best advised to focus more clearly on a specific initial beachhead segment. And then craft a whole product (first introduced by Theodore Levitt in The Marketing Imagination, and co-opted and used ad nauseam by us at RMI and now at Kachan & Co.) to best meet the expectations of that beachhead segment better than any other alternative on the market.

  • Geothermal equipment providers could stand to embrace chasm theory. Still stuck in relatively geeky early adoption, geothermal companies (and not just utility-scale providers like Ormat, U.S. Geothermal and Polaris, but companies with consumer and commercial-grade geothermal equipment like Trane, Carrier and Water Furnace) should focus better on segments for which their proposition is most compelling and target a single, self-referencing industry so as to leverage it to related segments.
  • The tech world is littered with the remains of mobile and stationary fuel cell companies that failed to achieve meaningful commercial traction in any specific segment. Even customers of Bloom Energy, perhaps the highest profile of the lot today, are all over the map: FedEx, Wal-Mart, Staples, Google and eBay. Interestingly, in fuel cells’ quest for widespread market adoption, at least one company now claims to have a volume deal with one of the top battery makers in the world (see description of Tekion, near the bottom of this here) – will it leapfrog past segmentation?
  • Tesla Motors is the poster child of EV startups. Its Roadster was classic early adopter candy. But will the company’s forthcoming Model S sedan allow it to cross the chasm by focusing on a specific market segment? Will Tesla implement all the non-intuitive whole product elements expected by its new, more mainstream customer (including delivery in quantity in reasonable timeframes?) Or will the company mistakenly rely too much on its Roadster experience and early customer resiliency and be relegated to an interesting footnote in the history of transportation?
  • Many still scoff at marine power, but breakthroughs can eventually be expected. Geographic segmentation for marine power makes most sense. Tidal and wave power developers, if they aren’t already, are advised to set up where there’s already critical mass for these technologies at the European Marine Energy Centre in Orkney, Scotland and focus all their work in the North Atlantic, working with Scotland as their narrowly-defined beachhead. It’s impractical to try to do expensive, far-flung installations of unproven marine power equipment away from the critical mass of support infrastructure, as Finavera and PG&E discovered trying to get their wave project in Humboldt County past the CPUC.

The chasm between early adoption and mainstream uptake is a formidable and unforgiving gulf. It typically goes unrecognized. So companies in cleantech are indeed advised to mind the gap.

Which market segments should cleantech vendors seeking mainstream adoption pick over others? In which single, narrowly-defined basket should they place their eggs? Beachhead segmentation is one of the highest-risk, lowest-data decisions a company will ever make. We at Kachan & Co. have developed methodologies to help cleantech companies make these decisions and minimize their risk.

My alum Geoff Moore, in books subsequent to Crossing the Chasm, introduces other metaphors like “bowling alley,” (co-opting one of RMI’s segmentation methodologies), “tornado,” “main street” and others to help businesspeople understand marketing precepts. But it’s the chasm he’ll be best remembered for. Cleantech companies and investors that don’t already own a copy of this book should. Those interested in details of more of the methodologies we used at RMI are encouraged to pick up The Regis Touch—one of Regis’ earlier, now-overlooked but surprisingly still relevant books. The examples in both books are so dated they’re distracting, but the methodologies in both are still sound.

Originally published here. Reproduced by permission.