I've been reading a great book recently: Jack Turner's Spice: The History of a Temptation, a delightfully human account of the spice trade that's packed with fascinating anecdotes. (For example, did you know that -- in a great unsolved mystery of Egyptology -- the pharaoh Ramses II was found to have been mummified with peppercorns in his nose, despite pepper being totally unknown in the Egypt of 1213 B.C.?) It's gripping stuff! My day job being in renewable energy rather than culinary history, however, I got to thinking about some of the parallels between these historical lessons and clean energy today.
One tale that struck me was the story of how the primary spice of civilization suddenly shifted from long pepper to black pepper. During Greek and early Roman times, long pepper was king. Grown on the southern tip of India, black pepper was far more expensive and relatively unknown. That changed when the Romans established a yearly sea convoy through the Indian Ocean to the Malabar coast of southern India. Previously to this, the quickest route to India was over land (or coastal), passing through the northwest of India, where long pepper was primarily cultivated. The Indian Ocean route suddenly made the southern coast of India more accessible than the north, and prices in the West adjusted immediately. Now, of course, black pepper is the most popular seasoning in the world after salt.
Another interesting historical fact: ultraconservatives through the ages have long denounced spice and the perceived decadence of importing expensive seasonings. Pliny the Elder wrote in his Natural Histories that "there is no year in which India does not drain the Roman Empire of fifty million sesterces," and that "pepper has nothing in it that can plead as a recommendation to either fruit or berry, its only desirable quality being a certain pungency; and yet it is for this that we import it all the way from India!" (Try telling any chef today that black pepper has no utility!)
Renewable energy is, I believe, facing the same sorts of opportunities and challenges that black pepper and almost all other civilization-changing developments have faced before. The cost curves are coming down and the will to change is there. But we're still burning coal because first, we're missing an Indian Ocean convoy to bring the cost down, and second, our Pliny-like institutions don't want to change.
There are two main groups in the renewable energy market today: institutions and startups. Institutions are the huge energy industry manufacturers and utilities of the world -- enormous organizations that lumber along, making the barest concessions to innovation, while spending most of their money on old tech, red tape and lobbying. Neither the client nor the supplier in this sort of relationship has any incentive to change. (Why change when you're the second-largest company by revenue in the world, or when you're the monopolist on power in a jurisdiction?) If they invest in renewable energy technology, it's not in game-changing stuff; it's in slightly more efficient versions of the same models of wind turbines or solar panels they've been building for decades. They're doomed to the same results as the change-resistant institutions of the past: the world will move along with or without them.
So who's going to build the crazy new inventions that bring the efficiency and performance improvements that really change the renewables market? The same sort of people that built the telecom and Web booms: startups.
Renewable energy is the new frontier in VC investment, with billions of dollars pouring into dozens of funds worldwide in hundreds of deals. Every major government and energy industry association agrees renewable energy is going to be the fastest-expanding sector of energy generation for at least the next 30 years, and investors have heeded the call. Nevertheless, results haven't been great; in fact, they haven't even been good. Almost no renewable energy companies have had successful exits, with not a single venture-backed IPO in this space from 2008-2009. (According to the 2011 National Venture Capital Association Yearbook, "in 2010, IPO and acquisition activity were both far below what is necessary to sustain the venture capital industry long term.")
Furthermore, even those companies which have been seen as most successful haven't been doing well. (I won't name names, but other industry writers are less circumspect than I.)
There are a number of potential reasons for this less-than-stellar record. One problem some industry analysts have identified is that in cleantech, startups face an unusually high hurdle in selling their inventions to entrenched institutions. This is a problem known as crossing the chasm (and I urge readers to check out that link, it's a great discussion). Other problems include a lack of access to government networks as well as a failure achieving revenue streams (and the excessively high burn rate and extreme dilution that comes with such failure).
So if VC isn't working, what else can be done? Well, one interesting model is that of the strategic investor, who typically brings something besides a straight cash-for-equity trade to the table. There are many possible ways a strategic investor can help a startup succeed: distribution relationships with large industry players, preferential supplier agreements, assisted market development and advisory assistance. (Even Vinod Khosla, a VC par excellence, prefers to focus on the non-VC aspects of what he provides, pointing to his sterling entrepreurial record.)
As I mentioned earlier, cleantech has an acknowledged problem with crossing the chasm, so there are a few investors focusing specifically on circumventing this issue. Notably, Google Ventures is up to some excitingly unusual things already. In the particular sector of electric vehicles, Google is building a vertically integrated investment and energy business. My company, Inerjys, is doing something similar. There are a number of other possible strategic investment models; if we're lucky, one of them might turn out to be the new Indian Ocean convoy that'll make green energy successful, cost-effective and abundant.
There are lots of new ideas on the horizon as to what the best way to help cleantech startups succeed might be. Will any one particular strategy work? It's far too early to tell, but it's thinking different about renewable energy funding, and I think that's just the thing to make green energy that much spicier.
Raphael Bouskila is an Associate at Inerjys Ventures. Send him questions or comments at firstname.lastname@example.org, or follow us @Inerjys.
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