Cleantech Payday: An Expensive Lesson in Patience

7/19/10Follow @anneswift

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.

Anne Swift is the Head of Marketing (a.k.a. Chief Marketing Nut) at Nuts.com and a Director of the Fields Institute for Research in Mathematical Sciences. She is also the founder of Young Inventors International, which has helped thousands of university innovators around the world through online and offline events. Follow @anneswift

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  • http://www.takadu.com Guy Horowitz

    Anne, great piece. Oddly enough, it is almost an inverse image of what we did in TaKaDu – a cleantech startup – to refrain from falling into these pitfalls. Our founder and CEO, Amir Peleg, is also a seasoned software entrepreneur who undertook a cleantech mission, but his lessons-learned have lead him back to a model that scales – Software-as-a-Service.

    You can read more about how to dodge these issues in this recent BlueTech post, titled “Water PLUS – Keys to Building a Scalable Water Business”.

    http://bluetechblog.com/2010/07/13/water-plus-%E2%80%93-keys-to-building-a-scalable-water-business

    (and yes, it could apply to Solar energy as well).

    We basically took each and every cleantech-con and did the exact opposite. Software (in SaaS model) rather than hardware, distribution partnership rather than direct sales, leveraging existing infrastructure and data rather than requiring a network revamp, and making usability a design goal.

    Not trivial when you make hardware, but then again most opportunities are off the beaten track anyway.

    A year and several happy customers later, we can attest that investors – our own and many others – acknowledge and cherish the difference…

  • http://www.paradigmhacker.com Zebediah T.

    This is a great post.

    The view that each industry is different and can require very different strategies is sometimes overlooked by the Silicon Valley community. I remember trying to decide the “bast business planning method” only to find a great verity of opinions. The software approach favored brevity and agility while manufacturing requires operational specificity.

    On a different note, the software market is in the billions while energy is well into the trillions. It stands to reason that the entry barriers would scale accordingly.