Is Experience a Honey Trap for Energy Investors?
On the upside, cleantech has a near-perfect track record with VC investments in the early years of this century. The downside is that it's about a 100% failure rate. Specifically, as of 2016, VC startups in this sector had a 90% absolute failure rate, and 100% were considered "poor investments" — to the tune of about $25 billion. And much to the distress and dismay of the geniuses in Silicon Valley, almost all of the 150 cleantech startups that originated there since 2006 are among the losers — names like Solyndra, EVP, Evergreen, and Sterling Energy.
Lots of VC funds went under during this startup bloodbath, and even legends in the Silicon Valley lexicon like Vinod Khosla, who founded Sun Microsystems, had their VC funds seriously depleted. Khosla Ventures II and III were among the lucky 10% who did see a return on investment, a whopping 5%.
So this begs the question: Are these abysmal failures the result of money, management, or both? At first glance, you'd think the management teams for all these failed companies just weren't up to the task, or that the technologies simply failed, or that the founders couldn't sustain the fundraising they needed to keep the project alive. Maybe they even had the wrong types of investors.
There is a double-edged management sword component to any high-tech VC enterprise. The founder, engineers, and ground-level team have a fundamental understanding of the product that even the most seasoned cleantech VC can't hope to match. Conventional wisdom, and conventional VCs, want the management team to have at least a working knowledge of the industry so they can be of some use in bringing it to market.
The Honey Trap Theory
And then there's another theory of investing in cleantech companies: the "Honey Trap" theory. In old spy movies, or the CIA and MI5, come to think of it, there's always a honey trap — a Bond girl who's there to lure poor 007 right into Blofeld's lair. In cleantech investing, titans like Bill Gates and Peter Thiel have espoused the thesis that experience is the honey trap, and for an innovative startup to succeed, it needs a "naive perspective" to more or less shattering all the norms that non-dropouts learned in B school. This naive perspective should also provide some magical clarity of vision to allow them to be the disruptors who blaze new zero-emissions trails in clean energy faster than a speeding bullet.
Gates, Thiel, and Khosla were co-investors on a startup, Lightsail, where the honey trap theory was tested. Who was the naif in this scenario is a discussion for another day. Suffice to say that, had they lit a bonfire with their $70 million, they could at least have had hot dogs.
The Original Disruptors
There is some validity to the honey trap theory, especially when it comes to clean energy. The biggest disruptions in energy were from entrepreneurs who were not steeped in the energy sector. You could go all the way back to Ben Franklin, or bounce forward a century or so to Nikolai Tesla or Thomas Edison to find the originals — but since there was no real energy industry to disrupt, those aren't really fair examples.
Lets's look at some contemporary disruptors in the sector — the ones whose technologies are still changing the energy game, and figure out if they were novices in energy or had the experience that Thiel and Gates pooh-poohed.
That boxy little Prius in your driveway — the one that the US Energy Department funded for the nickel-metal hydride battery — is about 100 years behind the first electric cars. Ferdinand Porsche developed an electric car, the P1, in 1898. He also invented the first hybrid vehicle around the same time. Edison was a fan of electric cars. He thought they were better technology than the combustion engine and tried to develop a better electric battery — he and Henry Ford tried to build an economical electric car in 1914. Electric cars counted for about 30% of the cars on the road in the US until the oil rush in Texas, and then gas-powered engines made cars lots more affordable.
The DOE also loaned Elon Musk $465 million from their Loan Programs Office to develop his Tesla, the one that goes 200 miles on a single charge — a far distance from the original 10 miles or so Porsche got from his battery. The DOE loan stipulated Musk build Teslas in California, and Tesla is now the largest auto manufacturer in the state. Musk paid the loan off nine years early.
The humble LED bulb is an evolution of technology that all happened in a lab — from RCA to Texas Instruments and finally to GE, where the first LED (a red one) was developed in 1962. It took until the mid-70s for LEDs to be deployed at scale — they were originally about $200 each and limited to use in high-tech lab equipment. Fairchild Semiconductors figured out how to reduce the cost to a nickel, and LEDs in the commercial space exploded. Okay, the LEDs are not solving global warming — but they've replaced electricity-hogging incandescent and neon bulbs (lessening the carbon footprint a tad) and made your remote controls possible. Estimates are that this year, LEDs will save consumers $100 billion (with a B) and reduce US electricity demand by about 1% — or 30 baseload power plants.
Again, not a sexy aha!, just a bunch of people plugging away in labs for decades. Are we seeing a trend here — is experience in energy really a honey trap? Or is experience necessary to build the scaffolding for the Next Big Thing to rest on?
Any time you tried to burn a leaf (this is not a metaphor) using a magnifying glass when you were a kid, you were using solar energy. As it turns out, photovoltaic power has been around more or less forever. It's just constantly changing. The first known use of the sun to power something was in the 7th century BCE China. In the 19th century, scientists in France and the US tried to develop efficient solar cells, but Charles Fritts invented the first functioning solar cell using a selenium wafer in 1883. The next steps in solar technology happened at Bell Labs. After he patented the transistor, Russell Ohl got a patent for the first modern solar cell in 1941. In 1954, Daryl Chapin, Calvin Fuller, and Gerald Pearson came up with the first silicon photovoltaic (PV) panel — that could convert sunlight at a majestic 4% efficiency.
The University of Delaware built the first solar-powered building in 1973, using a hybrid supply of thermal and PV power, with integrated solar panels in the roof. Tesla has a similar construction for its new line of roofs.
In 2001, NASA flew a non-rocket aircraft to 96,000 feet with PV power. Swiss balloonist Bertrand Piccard flew around the world in the first zero-emissions flight in 2016 on the Solar Impulse 2. Solvay provided primary funding for the aircraft, and their board is experienced in cleantech, among other areas of expertise.
It Takes a Village, or at Least a Lab and Maybe Some Government Funding
The thing that all the above disruptors have in common is that, for the technologies to even begin to reach potential, the inventors relied on colleagues in the industry for good old fashioned brain-picking. Bell Labs, Texas Instruments, NASA and the like were stacked with not only the best brains in the business, but boards who understood the business and the commercial possibilities. Another common denominator is a collaboration with some government entity or other.
I don't believe that Thiel, Gates, and the rest of the theory's creators are completely off base with the honey trap theory. But clean energy investing may not be the environment for complete freelancing.
Gates may agree with my assessment. While he was lighting cash on fire with Lightsail, he was also was putting together a clean energy VC fund with some of the heaviest hitters on the planet, from Silicon Valley to Wall Street to Beijing. He announced Breakthrough Energy in 2016, with an initial $1 billion to invest. Breakthrough has the deep pockets to invest with entrepreneurs at all stages of development, and to stay with a company for the duration — unlike most VCs, they plan to invest with a 20 years horizon.
Khosla is partnering with Gates in Breakthrough — along with Jack Ma (Alibaba), Jeff Bezos, Richard Branson, Michael Bloomberg, and Tom Steyer. As of late last year, Breakthrough has invested in 14 ventures so far, ranging from battery and grid storage to geothermal to fusion energy storage. The management teams of these companies are some of the deepest resumes in cleantech. So Gates himself may be rethinking the honey trap theory since he's stacked his investors and ventures with some of the giants of the clean energy game.
No matter what theory you follow, failure isn't an option for your cleantech business. Stay on top of market trends and read up how VC rules are changing, especially in the clean energy markets.