By Sanford Selman
We live in an age of intense global competition for more sustainable ways of providing food, water, energy and transportation to a growing population against a backdrop of diminishing and deteriorating natural resources. And thus, the race is on to create the next generation of technologies, business models and companies to provide these essential services and commodities. At stake are new, high quality jobs, export earnings, reduced dependence on imported energy, improved quality of life and host of other positive impacts. Investing in R&D would seem a no-brainer.
And invest we do. According to the National Science Foundation, public and private sector R&D investment in the US was $369 billion in 2008 – over twice that of Japan (No. 2 at $148 billion) and over 3.5 times that of China (No. 3 at $102 billion).
According to the National Business Incubator Association, the US has over 1100 business incubators as compared to roughly half that number in China. In cleantech, however, the US is losing the race to China in important areas such as solar photovoltaics and batteries where the technology traces its roots to the US and Europe.
Why, then, does the US, with its much larger pool of venture capital funds, lag in moving clean technology from lab to market, especially compared to a relative latecomer to cleantech such as China? Both countries have first rate university systems and enjoy a culture of entrepreneurship. But there are stark differences which give China a distinct edge, especially in cleantech, including:
- A more stable policy environment that unambiguously supports cleaner forms of energy supply and energy use.
- More diffuse boundaries between government, academia and industry which allows for greater pooling of resources – commercial, financial and technical.
- Lower costs of de-risking technology, due to the lower cost of highly qualified technical talent, and manufacturing.
- Huge, state-controlled infrastructure markets (e.g. power generation, water/wastewater, hydrocarbons, etc.) where the playing field can be tilted in favor of domestic suppliers.
In today’s highly disrupted capital market, early-stage venture investment has dropped precipitously and this is especially true for cleantech – a sector which has struggled to demonstrate strong, broad-based financial returns. Additionally, scaling and deploying clean technologies often involves significant capital investment while venture funds are trying to do just the opposite – invest as little as possible to get to positive cash flow. This focus on “capital efficiency” also means early-stage companies are out of favor. Hence, the gap between the early-stage cleantech companies found in incubators and what venture investors are buying has widened while countries such as China plow ahead with their national priorities.
A new incubator model
One of the main roles of an incubator is to prepare their clients for presentation to outside investors and to help facilitate those introductions. But their clients often have little progress to show in technology scale-up or customer acquisition. Frequently, their business model has not been vetted, key members of the management team are not on board and a helpful, engaged Board is not in place. Another approach is needed to close the widening gap between incubator clients and the venture community.
By acting more like a seed-stage fund itself, an incubator can add the value required to make its clients marketable to outside investors. In this model, the incubator’s advisory board must be sufficiently qualified and engaged to undertake preliminary vetting of applicants so that only the most technically and commercially promising businesses are admitted. Once admitted, the incubator should “smother” the client with resources, including missing commercial and technical talent, access to strategic partners, access to prospective customers and the seed-stage capital necessary to pull the plan together. A more resource-intensive approach focused on fewer clients stands a better chance of achieving the longer-term goal of graduating more successful businesses out of the incubator, creating jobs and enhancing the opportunity for the seed capital to earn a return.
A new strategic partner engagement model
Early-stage companies need to conserve cash by leveraging relationships with strategic partners and suppliers who can help grow their businesses. Risk sharing or the more appealing term, “gain sharing”, is becoming more popular. Two examples are worth noting.
Autodesk, a leading global vendor of engineering and design software, launched the Autodesk Clean Tech Partner Program (www.autodesk.com/cleantech) to support early-stage clean technology companies by providing up to $150,000 worth of software for a nominal fee. Autodesk’s long-term objective is to build brand loyalty by giving participants with design tools they wouldn’t otherwise be able to afford, and thus help them become successful more rapidly.
PLUSHnyc (www.plushnyc.com) is a Manhattan-based post production audio/video company whose clients include some the biggest names in media, advertising and retailing. PLUSHnyc offers their excess design and production capacity to early-stage, venture-backed companies at a nominal rate and, in return, receives equity in proportion to the market value of their services. Similar to Autodesk, PLUSHnyc affords access to world class services their clients could not otherwise afford.
In order to maximize the effectiveness of US R&D spending, innovative business models must be called upon to more effectively that tap the vast talents and resources of the private sector and accelerate the commercialization of US-developed technology by American companies.
Sanford J. Selman is Managing Director of Asia West LLC in Oyster Bay, NY. Mr. Selman founded and managed the Asia West Environment Fund, an early-stage cleantech venture fund that invested in North America and Europe with proprietary technologies that are commercially and environmentally relevant to China and/or India. Mr. Selman has 30 years of experience developing and financing of energy and environmental infrastructure and technology globally. Mr. Selman holds a BS in Mechanical Engineering (with Distinction) from Worcester Polytechnic Institute and a MBA in Finance and Investments from The George Washington University.