Sunday, August 22, 2010

Can Cleantech companies achieve escape velocities?

Many investors in the Cleantech space have been soured by lackluster industry returns in the past few years. Startup companies in solar, wind, batteries and electric cars, even when successful, are not known to generate 10x returns that sustain the VC industry. To compound the problem, too many companies and investment themes appear to have low survival rates – witness the micro-bubbles in fuel cells, corn ethanol, and algae.

I do believe in the promise of the Cleantech industry, but clearly the current practices are not working very well. To understand why, let us define a logical framework that adequately captures the industry's unique challenges and opportunities. One such framework is offered by the elementary principles of space flight.

The launching of a startup company can be compared to the process of launching a rocket. The startup attains success when it achieves enough velocity to escape the earth's gravity. Now, the principles of Physics state that a spacecraft’s ability to achieve escape velocity and reach its destination depends on four important factors:
1. The force of gravity
2. The quantity of fuel and rate of burn
3. The weight and design of the spacecraft
4. Careful alignment and timing between launch and destination sites

There are additional design issues (multi-stage rockets, control systems etc.) and people issues (preparedness, team work, continuous course correction, etc.) that we can ignore for this discussion. Even this simplified model can be instructive in understanding factors that impede or promote success of a startup company. When you apply this framework to compare IT and Cleantech startup, the latter appear disadvantaged on all of dimensions – begging the question, “Can Cleantech companies achieve escape velocities?”

(1) Force of gravity (market, regulation and competition): The IT companies are, by and large, addressing white spaces. In contrast, Cleantech companies are building applications for a hundred year old industries that are sluggish, regulated, and commoditized. That’s tremendous amount of gravity to overcome.

(2) Quantity of fuel (financing and burn rate): In order to overcome all that gravity, the Cleantech companies will burn more fuel over longer durations. The irony is, adding more fuel weighs down the spacecraft even more which, in turn, requires even more fuel. This is a common predicament faced by the startup companies – the more investors they add, the more conflicted and complex their management becomes.

(3) Weight and design of the spacecraft (the innovative product): In the IT space, the spacecraft, or the ‘solution’, is a software product which is relatively light, nimble, and adaptable. On the other hand, the Cleantech solutions are big and heavy, requiring physical manufacturing plants and big projects. Moreover, these vehicles are expected to be perfect at launch so they are bankable, and can produce guaranteed performance in commodity markets.

(4) Careful alignment and timing (product launch): Most IT companies launch their solutions in deep skies where destination is evolving with time and experience. Hence, their voyage is more like space adventure. In contrast, the Cleantech companies are expected to provide superior solutions to very well understood problems relating to clean energy, clean water and clean environment. At times, they appear to be providing shuttle services to well identified destinations rather than an adventure, albeit more cheaply and speedily. This means that all conditions have to be perfect at the launch – any slippage anywhere will lead to mission failure.

What we find is that the IT startup companies are nimble and light (no factories), consume less fuel, contend with less gravity, launch quickly and take their crew on an adventurous ride. On the other hand, the Cleantech startups are more like heavy crafts that fight immense gravity by burning a great deal of fuel, but are expected to launch perfectly to well known destinations – cheaply and efficiently.

It is not a surprise, therefore, that the Cleantech startups rarely achieve escape velocities. There are just too many factors working against them.

I hope the readers find this rocket metaphor useful to understand what impedes the Cleantech startups. Next, we will see how we can apply this metaphor to the industry dynamics to see if there we can develop a more successful launch program.

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