Cleantech vs IT
How Renewable Energy Is Different From Information Technology – And What That Means For Entrepreneurs
Fundamental Driver 1: In IT, the key is often finding or creating a market. In cleantech, the market is usually there; instead the key is cutting cost.
- Operational experience and ability to execute is going to be more important than creativity and the ability to anticipate demand.
- Long-term, there will be margin pressure. Since the final product is usually a commodity (electrons, or fuel), there is not as much ability for cleantech companies to achieve or sustain significant price premium.
- The market is already huge. This counters the margin pessimism in #2: while startups may not be able to increase prices, they should be able to sustain margins if they are able to dramatically reduce costs.
Fundamental Driver 2: Cleantech businesses are based on hard science, while many IT businesses are based on a concept or a customer pain
- There will be fewer garage-startups, and fewer mini-spinouts from large firms (a la employees leaving Oracle or IBM to start their own business).
- Labs, both academic and government, will be far more prominent in supplying technologies – and the ability to find & license IP will be critical for early-stage entrepreneurs.
- Landmarks are different: rather than getting customers early and iterating product & features, cleantech companies must hit laboratory technology milestones, pilot projects, and extended-life stress testing.
Fundamental Driver 3: Cleantech business require longer lead times and more money than IT
- Bootstrapping becomes much more difficult – very few companies will go from concept to IPO without private funding.
- There will also be fewer mega-wealthy entrepreneurs, because maintaining equity will be more difficult.
- Given the longer time from concept to revenue to IPO, there will be fewer serial entrepreneurs.
- There may be an opportunity for entrepreneurs to specialize in companies that are in specific stages of development (e.g. proof of concept, sales ramp-up, or manufacturing scale-up).
Fundamental Driver 4: The “Cleantech” industry is not monolithic. There is electricity generation, electricity storage, water, transportation, and energy efficiency – and each of these has 5-10 very unique sub-sectors
- In some specific industries, experience from related fields is highly valuable. Semiconductor experience is valuable for solar PV; oil & gas and biotech experience is valuable for biofuels.
- It’s sometimes more difficult for VCs to add value. Certain things transfer well: the ability to bootstrap and manage cash during rapid growth, and the ability to navigate government/regulatory issues. However, technology expertise and market knowledge don’t necessarily translate across diverse sectors.
The GreenStalk 
nice blog paul. Perhaps it makes more sense to replace the word “Cleantech” with “energy production technologies” in the context of this article? I think Smart Grid and energy efficiency type technologies have a lot more in common with IT than this article might suggest. There’s a fair amount of web-based, data/analytics-based, software-based, capital efficient opportunities in the smart grid, especially after the initial infrastructure build-out.
Tim, great call. I considered exploring that theme, but omitted it for simplicity. I agree that many of these don’t apply to smart grid, particularly time-to-market and capital intensity. What do you think about the other ideas?
Almost everything I know in this arena I learned from you so it’s hard for me to add much here. Agreed the sectors are very different and VC attempts to equate them will lead to tears and lots of lost dollars.
One thing you don’t mention is that I think the market will be supply constrained for some time. So even if a firm doesn’t have the absolute lowest cost and a commodity product they may be able to sell anyway since the low cost firm is sold out.
So far this has all been dependent on serious government regulation that drives demand, and it will be interesting to see how that plays out. Momentum for cap and trade seems to have waned in the US, but there’s also new pessimism around oil supplies and gas prices.
You’re right that the supply constraint leads to some funky profit opportunities: mediocre profit margins maintained for longer than is deserved. Stay tuned for some calculations around LCOE – when we reach grid parity (albeit in small pockets of the market) that will really make things weird.
Great ideas and blog, Paul. I agree with your points. To expand on Driver 3 – because there is more money required, there is another risk in cleantech that is more prominent and problematic than in IT: follow-on financing risk. Many of these science experiments are proved out to discover a capital constraint at the next round of financing, or a Series C is done at such a high valuation that Series D can’t get done… causes a variety of new problems that investors must heed in cleantech. Again, thanks for the great thoughts!
Kelsey, very true, the financing risk is crazy. When you describe a Series C that prices out a Series D, that sounds like a $30MM investment that is really a proof-of-concept stage. Happens way more often than cleantech would like to admit, and is (I think) quite rare in the IT world.
As I was looking at the Solyndra S-1, it struck me that it was like a game of reverse hot potato… the goal was to be the last money in. With multiple down rounds, the new investors wipe out the old ones – and just hope that there isn’t another round required, because then they will get wiped out themselves!
Paul – great blog – I’m learning a lot reading your posts. It sounds like cleantech may actually parallel medtech/biopharma VC more closely than IT. Longer hold for investors, seed investors take companies through proof of concept and maybe Phase I trials. VCs, however, probably have expertise within either medical devices or biotech/pharma, and probably some sub-sector within those. The big difference may be that biotech startups can typically partner with established big pharma to reduce capex at a certain stage of development. I don’t know if that’s happening in cleantech or if it’s an opportunity down the road.
Yeah, the health care (med/pharma) sector is an interesting comp.
Pharma has the FDA testing sequence, which is pretty unique. While it looks similar from far away (lots of money for an uncertain result), the specific nature is very different (clinical trials vs. building a manufacturing plant).
Med devices is probably a good comp in terms of funding levels, and potential use of strategic parties to reduce risk. However, the differences end there: electricity is a commodity, health care is not; med devices are high-margin, low volume hardware, cleantech products (solar modules, wind turbines) are low-margin, high-volume products.
Paul– another good post, and nicely organized and concisely put.
I agree with pretty much everything you say here. One detail related to your first point is that while the market is there and cutting cost is what’s needed, new technology may be required to significantly cut cost. So I’d argue that yes, operational excellence is absolutely critical, but not necessarily in a Dell sort of way where the technology is fairly established and you need to streamline the supply chain and manufacturing– technical innovation is also needed.
It’s also possible to make an argument that while the demand for energy is clearly there and growing (and thus in theory not much work needs to be done to anticipate or create demand in the end users), there are some consumer-driven (at the individual choice level or through government action) desires for less environmentally damaging sources of energy. This doesn’t contradict your comments above, but maybe stretches the boundaries of 1.1 and 1.2 in some cases: being able to anticipate whether there will be demand for large-scale carbon sequestration, or whether countries that want to reduce emissions will institute new feed-in-tariffs (raising margins) are both the sort of predict-where-the-market-is-going-in-5-years challenges many other entrepreneurs face.
And as a follow-on to my comment– I did some musing about VCs and how they see cleantech startups after I went to an NREL cleantech investment event. The blog post I wrote up about my experience is here: http://blog.steelandsilicon.com/2010/02/27/vc-feedback-on-startup-pitches/