Green Tech

Les Fritzemeier heads up a tiny solar-energy start-up that most people have never heard of, Wakonda Technologies. But rather than worry about being steamrolled by the sliding economy, he feels like he's in a great spot.

"In a lot of respects, the best time to start a company is in the middle of a recession, assuming you've got money," he said. "Our target is to go to market when most people expect the economy to turn around."

Without a doubt, the recession and lower oil prices are hurting many companies in clean tech, a situation likely to slow what has been a frenzied pace of innovation.

But investors and entrepreneurs say that so far, smaller green-tech firms appear to weathering the storm the best, allowing them to continue developing new energy technologies.

To a large degree, that's simply because younger firms, in general, demand less capital to operate. Those green ventures most vulnerable are the ones that need late-stage funding--the tens or hundreds of millions of dollars to build a biofuel plant or solar-manufacturing line, they said.

Across the board, though, investors and entrepreneurs report that the valuations of green-tech start-ups--once considered in bubble territory--are going down, and there is a growing emphasis on having cash.

"What's out there is a level of nervousness in every business," said Mitch Tyson, CEO of Advanced Electron Beams, which makes equipment to make industrial processes more energy- and water-efficient. "People still don't have a good sense of where the bottom is."

Seeking new sources
As a result, green-tech entrepreneurs--after being lavished with money and attention for the last three years--need to get creative with how they fund their ideas.

Consider Qteros, a young firm with a potential breakthrough process for making ethanol from agricultural waste, such as corn stover. One of its initial investors, ethanol maker VeraSun Energy, declared bankruptcy, shutting it out of any follow-on round.

Other sources of money, including BP and George Soros' fund, filled the void. But the added work--compounded by cautious lenders--strung the process out from six months to nine.

"This Wall Street meltdown is having effects on early-stage green-tech companies getting the money they need to grow," said Jonathan Gorman, the manager of business development at Qteros. "There was a huge due diligence process, with outside scientists, as we looked for money, which they probably wouldn't have done before."

In another case of Wall Street colliding with green-tech garage start-ups, one newly formed firm nearly lost an investor when he lost half a million dollars on the stock market.

Late last month, SunRun, which installs and finances consumer solar-panel purchases, secured a $105 million commitment from U.S. Bank, but it wasn't as easy as it would have been a few months ago: one investor said getting a bank to sign on to a tax equity fund was like getting on "the last helicopter leaving Saigon."

Fritzemeier of Wakonda Technologies seems have gotten the timing right too: he was fortunate enough to raise money in July, before the financial markets' meltdown.

He's optimistic about the future because demand for technology that reduces the cost of solar electricity will remain strong, even in a down economy. The company is trying to develop disruptive solar-cell technology by combining low-cost, thin-film manufacturing techniques with very efficient cells.

Like most people in clean tech, he's eager to see the shape of the Obama administration's energy and green-job initiatives.

"The continued emphasis on renewable energy and economic development from the incoming (Bush) administration may put additional support in place to accelerate our efforts," Fritzemeier said.

Flight to quality
Certainly, being in the right industry helps a small company's chances. While biofuels are closely tied to falling commodity and gasoline prices, products that save energy can appeal to cost-cutting businesses or utilities looking to make the electricity grid more efficient.

"We feel better that we're in the efficiency business selling to businesses," said Robert LeFort, the CEO of Ember, a wireless-networking firm that has shifted its focus to smart-grid products. "That's better than putting something on the shelf at Wal-Mart, and hoping the consumer picks it up...It's the lesser of two evils."

As more bad economic news comes out seemingly every day, many predict that the best companies--with paying customers--are the ones that have the best chance of thriving. A number of successful companies, including Google and Cisco Systems, were founded during an economic downturn.

Nicholas Parker, executive chairman of the Cleantech Group research firm, said the difficulty in getting financing in the coming year will thin the ranks of clean-tech start-ups and, from an investment point of view, result in a "flight to quality."

Advanced Electron Beams' Tyson is out, trying to raise another $20 million to $25 million Series C round, and he's gotten a commitment from existing investors and a good reception from others. The interest could well stem from the fact that the company already has customers using its product.

"I say to potential investors, 'We have a product in the field now and look at the customer base--the market risk is low,'" he said. "Knock on wood...So far, my experience, has been typical of normal times."

It's pretty difficult to find free money these days. With the economy ailing and venture capital money as scare as a Republican sighting in Silicon Valley, it's pretty remarkable that the Clean Tech Open is offering $100,000 prize packages to six clean-tech start-ups.

To be clear, the founders and CEOs of these companies had to work a bit for their money. Forty-three finalists were selected across six categories and put through a mini-business school course load on how to run a company, how to raise money, and how to get a product out of the laboratory and into the marketplace.

The 3rd annual Clean Tech Open Awards Gala held Thursday evening in San Francisco honored the six winners who showed the most promise to launch a viable, clean energy solution. And yes, that prize is pretty sweet: $50,000 in cash and an additional $50,000 worth of business tools like legal and accounting services, public relations consulting, office space and other goodies that are considered part of the "start-up in a box" package.

Here are the six categories and their respective winners:

• Air, Water & Waste Award: Over the Moon Diapers

• Energy Efficiency Award: Viridis Earth

• Green Building Award: BottleStone

• Renewables Award: Focal Point Energy

• Smart Power Award: Power Assure

• Transportation Award: ElectraDrive

The California Clean Tech Open, dubbed the "start-up in a box" contest, named 44 finalists Tuesday. It awards $100,000 in cash, office space, and professional services to each of the six winners. Categories are air, water, and waste; energy efficiency; green building; renewables; smart power; and transportation.

The Google-sponsored contest, run by the nonprofit Acterra, touts success stories such as GreenVolts, which makes photovoltaic solar concentrating systems, and BuildFast, which sells eco-friendly house kits for developing regions. Contest organizers said that tech for the developing world has become an increasing area of focus.

Prizes are due to be announced November 6. Click here for a list of the finalists.

Kleiner, Perkins, Caufield & Byers is forming a "Green Growth" fund for green-tech start-ups looking to scale up their operations.

PEWeek reported on Thursday that the fund will be over $400 million and have input from Kleiner Perkins partner Al Gore.

The idea behind a late-stage funds such as this is to give up-and-coming companies the money to ramp up, rather than develop their core technology.

This late-stage funding is particularly important in the energy business because companies require a large amount of capital to test their technology at commercial scale.

Google.org, the philanthropic arm of Google, has also chosen to invest this sort of capital as part of its energy initiative to avoid what is called the Valley of Death--the transitional terrain that start-ups face when shifting from technology development to commercialization.

Kleiner Perkins partner John Doerr last week gave the keynote speech at the MIT Energy Conference where he said that green tech needed much more investment.

Doerr said that although there were pockets of green tech where too much money is chasing too few good deals, the amount of money going into energy is far too little to address climate change.

Kleiner's first green-tech fund was closed in 2006.

Solar power start-up eSolar has raised $130 million in funding, according to a report in The Wall Street Journal (subscription required).

The Journal says one of eSolar's investors is Google, which announced last November that it would begin investing in alternative energy companies in an effort called RE

Pasadena, Calif.-based eSolar has plans to build large solar-thermal plants using the heliostat design, which utilizes an array of flat mirrors that direct sunlight onto a water tower, turning the water inside to steam, which then turns a turbine to make electricity.

Now, the company says, it has come up with a modular design that also enables it to build mini power plants. Such plants are faster to install, smaller, and less expensive to construct than most solar power plants, the company says. eSolar adds that its modular technique can scale, creating power plants that produce anywhere from 25 megawatts of electricity to more than 500 megawatts.

The Department of Energy announced on Wednesday its choice of three venture capital firms to send promising clean-tech entrepreneurs to collaborate with national laboratories.

The government's new Entrepreneur in Residence plan is designed to speed the development of the green technology sector.

"Government has to cultivate the conditions for these technologies to thrive," U.S. assistant secretary of energy Alexander Karsner told attendees of the Cleantech Forum in San Francisco. "We felt very strongly we had to build bridges over the commercialization valley of death."

The venture capitalists include Kleiner, Perkins, Caufield, and Byers to work with the National Renewable Energy Laboratory in Colorado; ARCH Venture Partners to partner with Sandia National Laboratory in California; and Foundation Capital to collaborate with Oak Ridge National Laboratory in Tennessee.

"This is the most exciting time I've seen at the lab for commercialization," said Tom Williams, director of technology transfer at the National Renewable Energy Laboratory in Golden, Col.

Each firm has 12 months to assist one start-up at a time in working directly with laboratory staff, aiming to spin off successful clean-tech companies. The Department of Energy will offer $100,000 per entrepreneurial round for overhead costs, with additional funds provided by venture capitalists. After each year-long period ends, the government will newly select venture firms for the ongoing program.

"This is a brilliant program," Paul Thurk, principal of Chicago's ARCH Venture Partners, told CNET. "It forces us to focus on one particular institution."

Areas that interest Thurk include energy efficiency, green building and smart-grid systems.

Kleiner, Perkins, Caufield and Byers of Menlo Park, Calif., has some 30 clean tech companies in its portfolio, with a particular emphasis on solar and biofuels, said managing partner Ray Lane. And his firm would also likely consider for the national labs effort entrepreneurs in energy efficiency and storage, among other technologies.

Steve Vassallo, a principal at Foundation Capital of Menlo Park, noted that it usually takes up to six months to help a start-up get its feet off the ground, but he hopes that the program can spin off successful companies in half that time.

The sooner a new venture can be established within the year-long residency program, the sooner a new entrepreneur can be sent to a national laboratory.

"We've had that inertia for quite a long time, so much so that many of you turned away from Washington," said Karsner, telling the conference nevertheless not to consider the government's commitment to reducing greenhouse gases as too little, too late.

He called the public-private partnership the first of its kind in the world. The United States and Japan--whose ministry of trade's clean tech support most echoes that in this country--are responsible for 80 percent of global research and development, Karsner told CNET.

BOSTON--Even with positive long-term trends at their backs, a huge wave of newly created clean-tech companies will have to navigate a tricky business and regulatory environment to succeed.

At the MIT Enterprise Forum's "Power, Drugs, and Money" conference last Thursday, financiers and business people offered alternating upbeat and cautious advice on the prospects in clean tech, which has become one of the hottest areas for entrepreneurs and investors.

The positive scenario was summed up by Dennis Costello, an investor at Braemer Energy Ventures: the energy field is a great business to be in now because it is changing rapidly--a situation that favors small companies over incumbents.

Still, executives from both new and established clean-tech companies say that energy is complicated by politics, regulations, and large capital requirements on a scale that other industries don't have to contend with.

The question over green-tech start-ups' success--and the role they play in the massive energy industry--is worth tracking closely.

Thousands of new companies have been funded and formed in the past few years. But how and whether new technologies will be adopted is still unclear in many cases--a factor that can make or break new ventures.

For example, bringing energy efficiency technologies to household appliances has been considered "low hanging fruit" for 10 years but there's still much more than can be done, said Stephen Connors, a director at the Massachusetts Institute of Technology's Energy Initiative who spoke at the conference.

"These things are on the ground rotting at this point," he said. Connors also argued that many green-tech products are still not "plug-and-play" easy for consumers.

Financing is a challenge faced by a number of companies. Despite a lot of venture money going into the field, crossing from technology demonstration to a pilot project or commercial plant is referred to as the "Valley of Death" because there's a lack of funding for large-scale projects.

"There's a huge funding gap that exists," said Bill Davis, the CEO of Ze-Gen, which is developing a gasification process for turning municipal waste into electricity. "It's the defining challenge of this company going forward."

Ze-Gen needs to negotiate financing from people who are not necessarily familiar with the energy field or his company's new technology, he noted.

Nimby
Actually finding sites for some projects can also be burdensome because of environmental reviews or local opposition, Davis added. That sentiment was loudly echoed by Jim Gordon, the CEO of Cape Wind, a controversial wind project off the coast of southern Cape Cod.

That project--a proposed 420 megawatt off-shore wind farm, which would be the first in the U.S.--has faced intense political and local opposition. Gordon said wealthy Cape Cod residents, who don't want the wind farm to spoil their view of the ocean, have spent $25 million fighting the project.

Also in the cautious camp is Scott Anthony, the CEO of business consulting firm Innosight. In an interview with CNET's Green Tech blog published Monday, Anthony said many green-tech companies are falling into the trap of expecting too much from their technology.

"When entrepreneurs or an industry frame a problem purely in technological terms, often times they miss the mark and end up creating over-engineered products or solutions that never connect with the market," he said.

But for all the hurdles, the long-term trends are pointing in the right direction. Energy prices are expected to stay high, and countries are more willing to mandate regulations that favor energy security.

And even though the energy industry tends to be dominated by giant corporations, those incumbents are looking to academia and private sector start-ups for innovation.

"Energy is a huge industry. Most start-ups don't even to begin to comprehend that it will take decades for it to change," said Justin Adams, director of long term technology at oil giant BP, which is diversifying into renewable energy and biofuels. BP is very much looking outside the company for new technologies.

"Innovation in the energy industry from small companies is changing on the periphery at a pace that's unprecedented," he said.

Massive build-up predicted
If you're looking for another indicator of the inevitable "cleaning" of the energy business, check out what Daniel Yergin has to say.

A well-known author and prognosticator of world oil reserves, Yergin is chairman of CERA (Cambridge Energy Research Associates), the granddaddy of energy research firms which advises the world's incumbent oil and gas producers.

CERA earlier this month published a report titled "Global Climate Change Response Can Spur $7 Trillion in Clean Energy Investment by 2030." It's certainly not the first study to forecast a massive build-up of clean energy businesses, but it's significant coming from CERA, which predicts that oil production will increase over the next decade.

Among it's more provocative conclusions is the potential for "disruption" in energy, some of which could presumably come from industry upstarts.

From its study:

Clean energy technology could have disruptive rather than incremental impact. Modular and distributed PV could disrupt traditional central-station models of electricity production and distribution. Breakthroughs in cellulosic ethanol can disrupt the traditional vehicle fuel system if scale, logistics, and costs prove manageable. Conventional biofuel feedstocks, such as grains and oilseeds, may also produce serious unintended consequences such as disruption in global agricultural prices as well as land and water use patterns, as well as a policy backlash.

It's hard to draw a sweeping conclusion from all the discussion surrounding the green technology wave.

It's clear there's a lot of money being put behind new ventures and odds are that many of those won't work out. That's simply how the venture capital industry works: potentially big pay-outs but big risks as well.

But countering that exuberance is an understanding that the energy business is capital-intensive and extremely cost-competitive.

After all, a solar or biofuel company is delivering a commodity product in the end, no matter how sophisticated the technology is. The innovation lies in either novel business models (like renting solar panels) or how clean the technology is.

Type "green+tech+bubble" into Google search and you get 228,000 results--quite a bit considering the terms "green tech" and "clean tech" are relatively new.

Discussion of an over-investment in energy-related start-ups is hard to avoid when the amount of venture capital dollars--which financed the Internet bubble--going into the field just goes up and up.

All digital ink spilled over the bubble is justified, but for reasons that may seem counter-intuitive, according to Scott Anthony, the president of Innosight, a consulting firm founded by business guru Clayton Christensen.

Anthony contends that many business people jumping into green or clean tech aren't heeding the lessons that Christensen, a Harvard Business School professor, laid out in his oft-cited book, The Innovator's Dilemma.

Namely, green-tech companies appear to be overly optimistic with what their technology can do.

Instead of taking on the gigantic energy industries head-on with technology breakthroughs, small companies should try to commercialize simpler technology, perhaps selling it in developing countries. Or, they should try to disrupt the market with a completely new business model.

Make no mistake, Anthony sees huge economic opportunity to apply more innovation to energy and the environment. And the long-term trends--high energy costs, climate change, green consumerism--make it a sensible market to enter.

But he uses history as his guide and sees green-tech giddiness getting ahead of where it should be. I spoke with Anthony last week. Here is an edited transcript.

Q: In an article you wrote, you said that the very tech-centric approach that start-ups are taking to the energy industry may be flawed. Why?
Anthony: Because in our observation at least, most of the people who are framing a lot of the challenges related to green have framed things predominately in technological terms. Which is, "How can we take emerging technologies and make them performance competitive if not better with technologies that have been in existence for 50 or 100, 200 years?" So you want to get something that is simultaneously better, cheaper, and better for the environment. It's an incredibly tough problem. If you look across the sweep of history in other developments like this, when entrepreneurs or an industry frame a problem purely in technological terms, oftentimes they miss the mark and end up creating over-engineered products or solutions that never connect with the market.

Give me some examples of where that's happening. Are there industries where this has happened before?
Anthony: Absolutely. So you can see some examples in history. Go back about 50 years ago to when the transistor first came into the market. All the big electronics companies took licenses to the transistor and they all framed it as a technological problem: "How do we make the transistor performance competitive with vacuum tubes?" They invested hundreds of millions of dollars and got no commercial results. Sony said, "How do we take this limited technology--because the transistor wasn't very good in its early days--and commercialize it in new ways?" They came up with transistor radios and other forms of simple innovation and created a big business. Apple's first foray into the personal digital assistant market. Do you remember that, the Apple Newton, back in the 1990s? They, Sony, Motorola, and HP all said, "How do we replace the laptop computer?" invested a few billion dollars and all failed.

Why? They failed because they were trying to do too much?
Anthony: Almost anytime you try to stretch an unproven technology to the most demanding application, it's an incredibly tough challenge and it's very difficult to succeed. So the disruptive innovation lenses show us that the path to success is trying to figure out a way to simply commercialize the technology in a new market. We're playing the game differently so that you can succeed--even with something that appears to be limited.

In IT we see lots of disruption--open source, mobile. The industry is just very dynamic that way. But I don't necessarily think of energy companies--power generators and fuel suppliers--as tech-led, risk-taking companies. Do you think this market is one where new business models can be introduced, or is just too set in its ways?
Anthony: Along some dimensions existing companies today take incredible risks. Some of the things they do to try to find new sources of raw material and new production technology, they're betting at times hundreds of millions if not billions of dollars. But there are particular types of risks that the existing industry at least, has not really shown itself willing to take. So, you do have a complicated situation when you've got a deeply entrenched incumbent, a very interdependent system with lots of players who have a lot to lose if the game changes, which makes it even harder to go squarely after the mainstream of the market.

But you are beginning to see at least a couple of people out there in the existing market look at the world in a different way. One of the examples that springs to mind is auto manufacturer Renault getting involved with Shai Agassi's Project Better Place to try to come up with a different way to play the electric car game (where a network of service stations will allow drivers to get fresh batteries). I think it is a very forward-thinking move for an established company.

Open source really shook things up because software like Linux was "good enough" for many jobs and replaced more sophisticated software. Do you think there's opportunity for that in the energy world?
Anthony: Yeah, absolutely. So, kind of parallel to the energy world; instead of trying to think of how you take an established electricity system and get people to change something that works pretty well, think about how you can bring a very simple solution to people who have no electricity at all.

Now an interesting example of this is a company called Magenn. The solution they have is a wind-power solution. What they essentially do is they float the turbine in the air. There are some limitations to the technology, but it's really flexible and really easy to install. So, from what we see at least, they really seem to be trying to bring this to markets where they have no power at all, where they uniquely value the flexibility and the simplicity, and they don't care if it is in a picture perfect solution.

On the other hand, investors often are putting lots of money into these ventures for some sort of pilot project to prove out the technology, which costs lots of money. But if you're selling to the developing world where low-cost energy is a big factor, will it work out for investors?
Anthony: The challenge is if you look at it at first you say, "Well, this doesn't make economic sense because, to make a large investment payoff, you've got to target the largest most lucrative market." And then you get into a cycle where it's almost impossible to succeed. The bigger the investment dollars, the more you push people toward demanding applications, the lower their chances of success actually are. So, in fact, the task that starts simply, we believe, has a greater chance of long-term payoff even though it appears kind of intuitive at first.

I think one of the traps that everybody falls into is they expect things to come out of the gate and be really big really fast. You look at almost any great growth business and they actually started pretty modestly. So take Google as just a simple example. Google, obviously a hugely phenomenal company, had first-year revenue of 220,000 bucks. What's interesting is people just seem to forget this over and over again and they say, "Well, we've got to get big fast if we're going to justify investments," and this cycle of death makes it very hard to succeed.

Typically, a lot of the green-tech companies are going after the big markets with either biofuel refineries, solar power plants, and that sort of thing. Do you think some of this is being misdirected?
Anthony: I think, without a doubt, some of it is being misdirected. You can understand why smart, rational people are doing what they're doing because you do the math and you say, "Here is a big existing market; if we can capture X percent of this market it justifies the investment, and our scientists tell us this is what we have to do with the technology, and all of the math seems to work." But again, history shows that people are picking a harder path than they realize by borrowing this approach, and if they were able to take just a little bit of the brain power and the money they're directing toward this to think, "What are the novel ways we can commercialize this? What are the different business models we might follow?" they could have multiple times the impact that they will have following the traditional path.

Are you concerned that there is a bubble being created in this area with all the money going into it?
Anthony: It's hard not to be concerned with this, the bubble in this area. You just look at the dollars flowing in and it's just a big number. Any time you see this, you just get worried, and again the thing that gets you scared is, as the dollars go up, you increase some of the tendencies we talked about. So people invest more and more and more. And to make the numbers work in the spreadsheet, they've got to target bigger markets sooner. It leads to them having more pressure to stretch the technology to where it can't be stretched (any further), the technology disappoints, the bubble deflates.

What about the incumbents? Do you see them adopting technologies in intelligent ways?
Anthony: If history is any guide, the incumbents will not adopt technologies in a way that immediately deviates from the core business model, because again, in the short term, it doesn't appear to make sense to do that. They're making so much money now, it's hard to argue from an economic standpoint they're doing the wrong thing. But again, if history is a reasonable guide, the incumbents that don't invest in doing things differently ultimately will meet their demise. It might take 20 years, 30 years, 40 years, but to think that they're insulated because today's business is good, they're just kidding themselves.

Do you see a boom-and-bust kind of cycle or more sort of steady, rapid innovation in technology?
I think the Internet bubble could pose a reasonable parallel where you did have something where everything got overheated and the bubble burst. But in that period, some real game-changing innovations were born. And if you look at who really emerged from that bubble, you had Google, you had eBay, you had Amazon, you had Salesforce.com, you had Netflix--all companies following disruptive approaches creating huge amounts of value. So I think it's very possible (that) there will be a boom-burst period, but the seeds of industry transformation will certainly continue to flower.

My colleague Hunter Smith of frog design has used his entrepreneurial spirit to launch a budding start-up based on his two greatest passions: eco-design and skateboarding. Hunter's company, aptly named SuperGreen Boards, employs some of the most advanced eco-friendly technologies for producing custom longboards, slalom, and speedboards.

SuperGreen Boards uses bamboo, which is not only beautiful, strong, and flexible but is also sustainably harvested. Maple wood, known as the gold standard for skateboards because of its strength under the pressure of the rider, takes a minimum of 100 years to mature before it can be used. Bamboo, in comparison, takes only five years for a stalk to mature, converts eight times more CO2, and is 17% harder than maple. Adding even more strength to the board, Hunter uses a fiberglass alternative made entirely of finely woven strands of bamboo fiber, and bonds it to the board using very low VOC (Volatile Organic Compound) epoxy. In the next few months, Hunter is hoping to convert from low VOC to a soy-based epoxy as the technologies become available.

Hunter says: "I'm delighted to see skaters adopt a green mentality and a desire to preserve the Earth for future generations. I am proud to provide boards for down-to-earth, eco-conscious riders with an eye for style."