Many software entrepreneurs and investors are looking to replicate their successes in cleantech. They are in for a surprise. While investors often have enjoyed quick returns in software, many of the opportunities in cleantech require longer-term commitments and overcoming some of the challenges outlined below.

Long Development Cycles. There is a reason it’s called hardware. Perfecting cleantech products takes longer than developing software. Bloom Energy took eight years to launch the Bloom Box, a solid oxide fuel cell that generates electricity at the site of use. Several years might well be required for prototyping, testing, monitoring beta products, and developing showcase projects. By comparison, the founders of YouTube raised $11.5 million and sold the company for $1.65 billion within 18 months.

High Capital Requirements. Cleantech start-ups require significant capital outlays to prototype and manufacture products. While engineering talent is the major cost for software startups, cleantech startups must also pay for materials, equipment, and fabrication. These costs can be substantial for the first run of a product that might require the development of proprietary manufacturing tools and cannot immediately benefit from volume discounts available to mass manufacturers. In 2008, venture capitalists invested $4.9 billion into 800 software companies and $4.1 billion into only 250 cleantech companies.

Ambiguous Policy Environments. Government policy can affect the software sector. But government policy can dictate the development of the cleantech sector, which remains plagued by ambiguity and uncertainty about the long-term availability of incentives. The development of a multibillion-dollar solar industry in not-so-sunny Germany demonstrates that steady government commitment can help to build the industry. The issue is further complicated by the fragmentation of incentives across different levels of government. While it’s beyond the scope of this article to argue for or against policies that favor certain technologies over others, it’s clear that incentives can create a window of opportunity for the development of new industries, while policy uncertainty can stall the development of new technologies as entrepreneurs and investors wait to see which technologies will receive favorable treatment.

Distorted Economic Incentives. A study by the Environmental Law Institute found that between 2002 and 2008, the U.S. federal government subsidized fossil fuels by about $72 billion and renewable energy by about $12 billion. Even with recent incentives and rebates for green energy, large and ingrained subsidies for fossil fuels distort the cost difference between non-renewable and renewable energy sources.

Certification Requirements and Building Codes. In January 2009, Greentech Media listed 150 solar companies. By May, the list had grown to 219. The proliferation of green technologies has led to waiting lists for certifications and confusion about technologies approved by building codes. Processing could be accelerated for system components that are equivalent to products already available on the market. For example, a product manufactured from a material rated safe by fire codes might get expedited approval.

Challenges to Growth. There are many challenges to ramping up production. Despite the discussions about green-collar job training, there aren’t enough workers trained in the business, manufacturing, and technical aspects of cleantech. In addition, it can often be time consuming and expensive to estimate project costs in cases in which the projects are not standardized. For example, installers must evaluate each site for a potential solar project to ensure that the conditions allow for the installation. In other words, just qualifying prospects is an expensive process.

Lack of Easily Scalable Channels of Distribution. Unlike software, which can be distributed relatively easily, cleantech products face geographically fragmented markets, distribution channels that have many layers, and the challenges of dealing with physical products, such as transportation and storage. This increases the costs and time required for new technologies to penetrate the market on a large scale. Power purchase agreements (PPAs) decrease the up-front costs of adoption for photovoltaic technologies, but the sales process is still significantly more involved than enticing potential customers to exchange videos of kittens riding a vacuum cleaner.

These challenges may lead you to conclude that the cleantech landscape is bleak, but I would like to argue otherwise. The renewable energy market alone is expected to grow to $254 billion by 2017, presenting an immense opportunity for entrepreneurs and investors. Patient ones.

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Entrepreneurs in Michigan can reinvigorate the economy by doing what innovators do best: using existing resources to create new value. Here are three resources Michiganders can leverage:

1. Michigan’s world-class universities—After the collapse of the steel industry in Pittsburgh, universities filled the void with new technology start-ups. The University of Michigan is one of the top 10 universities in the nation for commercializing cleantech research. Two university start-ups, T/J Technologies and Sensicore, were recently acquired, despite the economic environment. Michigan’s dozens of universities provide partnership opportunities and a well-educated workforce.

2. Michigan’s existing manufacturing base—Manufacturing overseas poses expensive new problems, including intellectual property theft, environmental costs, unreliable delivery schedules, and poorly trained workers. Companies from Caterpillar to General Electric are moving manufacturing back to the U.S.. Many factories in the Northeast have spare capacity that entrepreneurs might be able to buy for short production runs at a substantial discount.

3. Michigan’s incentives—Michigan’s government is providing $2 billion over 10 years through its 21st Century Jobs Fund to support university technology transfer and commercialization. In addition, there are generous tax breaks and incentives for job training. The State of Michigan supports a broad range of ventures that can benefit from an advanced manufacturing base, unlike other regions that focus on specific sectors.

[Editor's note: To help launch Xconomy Detroit, we've queried our network of Xconomists and other innovation leaders around the country for their list of the most important things that entrepreneurs and innovators in Michigan can do to reinvigorate their regional economy.]

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Commercialization is rarely a solitary pursuit; bringing an idea to the world requires a set of diverse skills and knowledge, a proverbial commercialization village. Or a crowd. Enter the power of crowdsourcing.

Crowdsourcing refers to aggregating a large number of people to express their opinions or ideas about specific topics—and the term first appeared in a 2006 Wired magazine article by Jeff Howe. But simply bringing together a large number of people is not enough to create new products. An integral part of engaging a large community to solve the world’s biggest problems is matching the right type of crowd to two stages of the commercialization process: a diverse crowd for brainstorming of breakthrough innovations, and a large crowd for refining the product for the market.

By its definition, innovation requires a break with the status quo. Research repeatedly shows that groups with diverse backgrounds propose the largest number of unique solutions to a problem. This has also been my experience with BrainBuzzes, brainstorming events that I organize for Young Inventors International. The simplest explanation for this phenomenon arises from research by James March and the late Nobel Laureate and Turing Award winner Herbert Simon, who suggest that our capacity to search for solutions is limited by what we know. Thus, we find solutions that are “locally” optimal to what we know, but which may not be “globally” optimal for innovation because we are restricted in our search space. By bringing together a diverse group of people, we end up expanding the search field for increasingly “global” solutions and drawing on expertise from unrelated fields. While a larger number of people can brainstorm more solutions, diversity is key when crowdsourcing new, breakthrough product ideas.

One of the most established Internet companies that uses crowdsourcing to assist with brainstorming is Innocentive. Innocentive brings together companies that post problems for scientists and engineers around the world; the winning solution receives a specified amount of prize money. Innocentive focuses on brainstorming new breakthrough solutions; its model allows the company to provide economic opportunities to a diverse group of researchers from outside of North America whose experiences may be different from those of their North American colleagues. Another web site, Innovation Exchange, works on a similar premise, although it also allows for collaboration among problem solvers.

However, the success of an innovation depends not only on its ingenuity but also on its appeal to and adoption by the market. The market is perilous and fickle, and the products that are most likely to succeed are those that are best able to anticipate and satisfy the needs of the largest number of customers. For many years, marketing experts have used focus groups of potential customers to assist with identifying issues of usefulness and usability of new products. Today, the Internet allows for relatively easy aggregation of large numbers of people who can provide feedback on a product or vote on the optimal solution. The number of participants matters more in this case. Indeed, the ideal crowd to source is one comprising of all potential customers.

Other companies in the space include Cambrian House, Kluster, IdeaScale, CrowdSpirit, FellowForce, and IdeaBlob. All of these companies incorporate elements of voting for the best ideas. But to arrive at the wisdom of the crowd, the sites require large amounts of traffic. As more of these sites arise, there is a battle for users and, unless there are incentives for participants to contribute, these communities may suffer. For product refinement and focus group crowdsourcing, the best model might be for companies to encourage feedback on their own web site, such as Dell does through its Idea Storm site and Salesforce does through its Idea Exchange. This model is likely to generate better results because the companies already receive large amounts of traffic interested in their products and participants can be rewarded with free products or product discounts relevant to their interests.

While giving away products, discounts, or flat fees might suffice as compensation for focus group participants, determining sufficient compensation for innovators who create truly disruptive ideas with breakthrough market potential is more difficult. If correct incentives do not exist to compensate participants for their contribution of intellectual property, those with the most promising ideas will choose to commercialize them on their own. Understanding the type of group that must be sourced for a specific purpose allows us to begin designing rewards that will attract the right crowd essential to the complex journey of commercialization.

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Universities offer a thriving ecosystem that lends itself particularly well to entrepreneurship among students, faculty, and staff. My belief in the ability of the institution of higher education to foster entrepreneurship comes first hand from my experiences as a student entrepreneur at the University of Toronto, as well as my work with Young Inventors International, a non-profit organization that has taught hundreds of student entrepreneurs at universities across North America about innovation and bringing new products to market. Regardless of how directly supportive universities are of the commercialization of research, they offer access to a number of unique resources particularly helpful to budding entrepreneurs.

First, universities provide access to a large body of talented and skilled individuals gathered in one location, so building a team within the university ecosystem is much easier than anywhere else. Despite the romanticized view of the brilliant lone inventor, diversity of talent is very important for start-ups. Bringing new ideas to market requires a large number of skills, including a mix of business and technical expertise, so teams with members who possess a number of different skills are very valuable. Engineers who are wondering how to properly structure a business plan can always visit a management faculty member during office hours and ask for assistance. Entrepreneurship club meetings, classes, or lectures by well-known entrepreneurs offer a way of broadening knowledge about entrepreneurship—and connecting with others who are interested in the subject. Those who don’t yet have an idea for a venture can spend some time with engineering students or talk to faculty members about ideas that they think are worth commercializing—there are many students and faculty members who are looking for others to bring an idea to market. The key concept to bringing new ideas to market is collaboration. An excellent example of such cross-disciplinary collaboration is Akamai, an MIT start-up that was founded by a graduate student, a professor, and two Sloan school management students.

Under the Bayh-Dole Act, universities control the intellectual property (IP) that results from research funded by the federal government, so it is a good idea to talk to the university’s technology transfer or licensing office to clarify who has ownership rights to the idea before proceeding with commercialization. In addition, some universities have specific rules regarding IP ownership by faculty and graduate students. Many great companies have been built on licensed technologies, so even if the university owns the IP, there is still often an opportunity to start a new venture with the technology. For example, Google’s PageRank patent was licensed from Stanford University, and Akamai licensed its technology from MIT. In addition, many technology transfer offices have experts knowledgeable about entrepreneurship and can connect entrepreneurs to the outside community, including external technical and management experts, industry leaders, investors, and potential mentors.

University resources can also help with access to valuable information for market research. While the Internet is a good first stop, market predictions and trends usually require access to additional reports focused on a target market and specific industry. Students and faculty members usually have access to several market research resources, including a variety of databases that provide an overview of funding trends and opportunities (although these resources vary by university). Management school libraries, in particular, offer market research databases on a wealth of topics. These databases usually cost tens of thousands of dollars, and are often inaccessible by the general public. Apart from market research resources, many universities offer access to technical resources and labs, including rapid prototyping machines and information about recent developments in materials and advances in production techniques. Members of the university community can usually access some of these resources free of charge or for a small fee.

After building and testing the prototype, talking to the technology transfer office about IP, building a team of students and faculty members, and evaluating the market, entering a business plan competition can help to test the viability of the venture, raise some start-up cash, and get feedback from experts, including seasoned entrepreneurs, investors, and other service providers. Most universities have at least one competition. Some of these competitions focus on early-stage ideas, some on social entrepreneurship ventures, and others on mature companies ready to go to the market. The exercise of preparing a business plan will help to get the idea and venture organized by planning the process of bringing the technology to market. In addition, many business plan competitions offer additional resources to students or faculty preparing their business plans, so participation helps to expand professional networks and knowledge throughout the process. A number of successful start-up ventures, including Akamai and Seahorse Power, which was founded by a team of students from Babson and Olin Colleges, have benefitted from funding, advice, and publicity offered by business plan competitions.

From building a team to winning start-up capital, universities offer many unique and valuable resources to those within their community. One way to understand the power of the entrepreneurship ecosystem in universities is to read about start-up companies that have successfully leveraged the resources available to them within the community, such as Akamai and Seahorse Power. Since each university is different, it can be helpful to “map” the ecosystem by making a list of resources that are available, including clubs, people interested in entrepreneurship, entrepreneurship centers, and technology transfer offices. Knowing which resources are available can be empowering and can offer insight into the next steps to take when building a new venture within the university network. And even if the venture is not successful, mobilizing the resources within the community provides professional relationships, friendships, knowledge, and skills that will last a lifetime—well beyond the ivy-covered walls.

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is coming soon.

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