How investors can help energy startups survive the valley of death
With venture capitalists chasing easier returns in the online sector, new investment models are needed to fund clean-energy innovation and bring technologies to market, says Richard Adams, director of the Innovation and Entrepreneurship Center at the National Renewable Energy Laboratory. Speaking with Entelligent, Adams argues that there are opportunities for corporate players, family offices, and late-stage investors to help guide promising clean-tech startups through the valley of death.
Are investors doing enough to bring new clean-tech to market?
That’s the critical question for the sector. We’ve had pullback by venture capitalists over the last five or six years, and while we’re seeing more players enter the space, it’s a very mixed approach. The emergence of family offices has made a big difference, and corporate firms are also stepping in to fill the gap, but they’ve so far been picky about what they’ve invested in.
The problem is definitely a shortage of investment capital, not a shortage of ideas. We’ve got tons of great ideas out there, but there aren’t a lot of investors willing to take early stage risks. One area where we’re missing investment is very early-stage technology — going from lab to prototype to first product is still a gap in the ecosystem. That’s worrying, because if we don’t have people funding that stage of the pipeline, it limits opportunities for investment later on.
Why do clean-tech startups struggle?
There are two “valleys of death”: an early-stage valley of death, as companies work to get their ideas off the ground, and a later-stage valley of death as they seek to commercialize. The second one is critical, because in the energy sector, there’s no room for something not working. With software you can code it anywhere, and you’ve got very low cost of product development, you can distribute at low cost, and if it doesn’t work you can send a patch to fix the bugs. With energy, when you turn on the switch there’s an expectation the lights will turn on — if they don’t, it’s a big deal.
Will that get easier as the sector matures?
The short answer is yes. If you look at any sector, from pharmaceuticals to biotech, they all had pretty long lead-times before they were widely accepted and adopted. It takes time for new technologies to gain a foothold, and for consumer and business adoption to take hold. Right now, on the technology side we’re in good shape, but adoption is what’s holding us back.
The emergence of new business models could help speed up adoption rates. SolarCity’s (NASDAQ: SCTY) leasing model, which lets homeowners put solar on their roof without paying out of pocket, has made a huge difference — we’ve gone through a deep trough where there was a lot of skepticism, but now products like rooftop solar are becoming mainstream. So we’re already seeing the ecosystem move past these hurdles. The adoption of solar and wind globally, at scale, is indicative of where we’re heading.
What can be done to help startups get past these “valleys of death”?
We’re seeing the emergence of new models to address that gap. Incubators like Cyclotron Road, and the NREL’s own IN2 partnership with Wells Fargo (NYSE:WFC), are serving a critical need by giving startups an opportunity to take their technologies to a point where they’re attractive to investors.
We’re also seeing more strategic partnerships between startups and corporates. That solves several key challenges. First, corporate partners have market access and distribution units that would be highly expensive for an entrepreneur to replicate. Secondly, they understand manufacturing, and know how to take a nascent product and build it out at scale. And finally, there’s the credibility piece — when a representative of a Fortune 1000 company pitches something to a customer, that carries a lot more weight than a startup saying trying to sell a new, unproven technology or solution.
What kind of companies are launching these partnerships?
It’s the ones you’d expect: the Ciscos (NASDAQ:CSCO) of the world, and the Siemens (ETR:SIE), and Schneiders (EPA:SU) and Johnson Controls (NYSE:JCI), which have a strong presence and a strong need for new product development. What’s interesting, though, is that nontraditional players are also getting involved. You wouldn’t think about them as clean-energy companies, but Google (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) are having huge impacts. Then there are financial companies like Wells Fargo, which has made a $100 million commitment to sustainability through their Foundation and a $35 billion dollar commitment to the sector through the bank. While we don’t think of them as traditional players in the energy space, they’re already having a huge impact.
Do later-stage or institutional investors have a role to play?
Certainly there’s a role — it’s whether they’re willing to accept it. Our NREL Investor Advisory Board isn’t just made up of VCs: we have family offices, corporates, individuals, banks — we’re covering the spectrum of investors. There are lots of people out there with money looking for opportunities to invest in, and we’re trying to address the gap, and get them to invest more. We want to make companies with new technologies more investable by giving them appropriate support— we help them reach key milestones, and to test and deploy in the field, so they can offer a higher level of confidence to investors.
Where are the big opportunities for investors?
There are lots of opportunities — the future’s very bright, and investment is a critical piece of how we get to the energy system of the future. If I was entering this space right now, I’d look at the intersections of existing technologies, and opportunities for energy integration. There are a lot of clean-tech solutions available, but we’re lacking ways to make them all work together. That’s something that applies to smart grid, to transportation, to buildings, even the next phase of generation assets — there are opportunities across-the-board for investment.
Ben Whitford is the US correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.