First published on the Cleantech Investor website, February 2012. Copyright Cleantech Investor Ltd., 2012
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by Elisabeth Jeffries
Abandon subsidies. Forget the Stern report. Take the World Energy Outlook with a pinch of salt. Forecasts are of limited use. Forecasters have a tendency to use the past to predict the future. After all – how many of them predicted shale gas? Instead, create the conditions for the black swan to swim – that rare, unpredictable event which makes a major impact and which seems obvious in hindsight. That, in a nutshell, is the philosophy of Vinod Khosla, the brilliant entrepreneur who got rich twice, first on IT and then on cleantech.
Though based in Palo Alto, California,Vinod Khosla could have been only two handshakes away from aspiring millionaires at the ECCI (Edinburgh Centre for Carbon Innovation)’s training camp for cleantech start-ups in January – the link being Joe Lassiter, professor at Harvard Business School and chair of the university’s innovation lab. But as Lassiter, a veteran entrepreneur who led the course, points out: “Khosla Ventures itself is a black swan event”. Other cleantech entrepreneurs, whether company founders or investors, could nonetheless learn from Khosla, he indicates.
Could any of the entrepreneurs attending that day even become one of Khosla’s protégés? He certainly has the fortune few start-ups possess, a huge wealth accumulated mainly from co-founding Sun Microsystems. Using that fortune, he could afford to prospect in a large number of small businesses in a wide range of cleantech areas, employing a technique that has been likened to random wildcatting in the oil industry – drilling intensively in an unproven area. Khosla has called it technology wildcatting. “It’s like hunting for rare events but you don’t know where they are – like drilling in the North Sea before scoring eight in a row. It’s never been done before,” contends Lassiter.
Khosla’s investment style, Lassiter explains, is not typical of clean energy investing and is more akin to the “silicon valley mentality. He’s a classic seed investor, investing in early and high risk companies.” What he does have in common with quite a few green entrepreneurs is a visionary style. “His long term view is to change the world....he uses a wide portfolio strategy, investing in lots of businesses, and sharing learning across the ventures,” states Lassiter. That uncontrolled approach may allow a black swan to hatch.
But, above all, it’s Khosla’s belief in freedom that is radical – the freedom to take the plunge and innovate without the constraints of unnecessary government planning – and that is an issue under scrutiny in the class. Khosla himself has had a few strong words to say about government intervention and technology choice. Innovation, he suggested in his Black Swan thesis of energy transformation, published in August 2011, is a much better bet for government policy than subsidising clean energy sectors. The “noble” thoughts of the environmental movement, he asserts, “distract from our best ’broad’ hope: robust unsubsidised market competitiveness of ‘green’ technologies against their fossil competitors. This should be the mantra and goal of black swan technology development.”
There is a need, Khosla indicates, to review assumptions about clean energy. “’Green’ should be a feature that follows – rather than defies – the ’laws of economic gravity’, which in essence declare that economics trump everything when it comes to mass adoption of a technology. In fact, the mindset of clean energy always costing more can be turned completely on its head in many, even most, areas.”
Khosla’s approach worked, as students found out at the ECCI. After investing millions of dollars in competing cleantech companies a few years ago, his portfolio is performing nicely. But Khosla’s is an unusual case, since he had already reaped huge rewards from investing in computers and perhaps, too, because he works in one of the most innovative states in the world in the heart of the most innovative country, blessed with lots of space for experimentation and lots of ready money.
For if you are a start-up hoping to commercialise a new technology or idea, being in the right place helps. It is not about special finance or government support: nor is it about infrastructure. Start-ups are more likely to flourish if they are fostered by and contribute to an entrepreneurial culture – and cluster – that breeds innovation, according to Bill Aulet, managing director of the MIT Trust Center for Entrepreneurship in Cambridge, Massachusetts. Bill points out that culture is the single most important building block for creating an entrepreneurial ecosystem, according to research conducted at MIT. That, after all, is what Scotland, Ireland, parts of England and many countries in the rest of Europe are aiming to regenerate following the financial disasters of recent years, so it is something that concerns everyone.
Aulet is a tall, friendly, straight-talking basketball player (“If I haven’t offended you by the end of the day, please see me afterwards and I’ll make sure I do.”) who specialises in energy – in all senses. And as tutors at the ECCI were at pains to reiterate, energy investing – especially clean energy investing – is a whole different ball game. But culture helps a great deal – the culture of restlessness.
He draws attention to Romania, a country that emerged successfully from the shadow of a disturbed dictatorship in the 1990s but still suffers from balance of payments, corruption, debt and other problems. Yet according to Bill Aulet: “it has an entrepreneurial ecosystem but a lot of disadvantages.” Role models, he says, are the key, as is the right kind of challenging attitude – one that, he says, can also be found in Scotland. “The Scots are people who can see opportunities in all kinds of areas – not just traditional ones...the Scots are always trying to learn.” he argues.
Both Aulet and Joe Lassiter agree on another crucial factor – attitude to failure. Firing entrepreneurs for losing money, they indicate, kills the enterprising spirit. “Entrepreneurship is based on experimentation. If you don’t fail you’re not innovating enough”, says Bill Aulet. The awkward entrepreneur in a culture that respects new ideas stands a good chance of succeeding. If that is right, the rest follows, he contends: “If you have the culture, funding will follow. The enemy is people who fight innovation.”
Nations such as Switzerland, where failure often brings shame, are probably not creating the right conditions for innovation, as Lassiter explains, comparing different countries. There are other benefits. A realistic attitude to failure brings resource fluidity, which can help entrepreneurs find the right people: “In the US, there’s a culture where failure is OK – so it’s easy to redeploy staff,” he says.
Executives studying Vinod Khosla’s success could not fail to notice another significant factor: he was awash with funding from a previous business. Unusually, it was in a different sector – IT. But both Lassiter and Aulet suggest that, for small enterprises now, that could well be the way to go because many venture capital companies are not comfortable enough with cleantech. However, the adopting company may be more likely to be operating in the energy business already. It is these large, profitable companies – many of them OEMs – that could become the critical factor ensuring cleantech businesses commercialise their products.
The big challenge they are addressing, of course, is the resource crunch. But according to a November 2011 study by the McKinsey Global Institute, resource productivity improvements available could meet only around 30% of demand for resources in 2030, so a major increase in energy supply is also required. The study finds that “in just the past ten years, demand from emerging markets, particularly in Asia, has erased all the price declines of the previous 100”. It warns of major obstacles and encourages the use of carbon pricing. New challenges will arise, such as the impact of one resource on the other, which require a different way of approaching resource risk. For instance, water availability affects hydropower.
It will be the job of innovators and entrepreneurs to commercialise new ideas over the next 20 years that could either help improve productivity or raise energy supply, and to find the funding to do so. As Vinod Khosla has observed, “the most difficult area for capital in cleantech might be the demonstration plants to prove the technology is rock solid.”
That is one reason why Aulet believes the support of large energy companies and OEMs is crucial. “The big companies are playing a much larger role in clean energy than any field I know,” he states. Research on corporate venture capital indicates that 27% of deals with clean energy ventures are done with OEMs, compared to 13% overall. “It makes sense. They have big balance sheets and can capture value, have deeper pockets and are more patient.” In addition, they have the facilities to allow prototype testing. However, he adds that venture capital is improving. “People are beginning to adjust. People in VC at first didn’t understand the energy industry but they’re now getting much better at it,” he argues. They are learning.
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