Part of the value SVB brings to its clients is access to experts, potential partners, customers and investors, increasing its clients’ probability of long-term success. On April 8-9, 2010, SVB hosted its first Cleantech Leadership Summit ¬ “Crossing the Cleantech Divide” ¬ at Stanford University, hosting more than 100 cleantech insiders. The Summit was designed to bring together a select group of leaders from the venture capital, entrepreneurial, public policy, energy, academic and NGO communities with the goal of focusing attention, insight, and energy on the question of how best to promote the development of high-growth, innovative technology companies in the energy generation, energy storage and energy efficiency sectors, over the course of the coming decade.
The program featured conversations with successful cleantech entrepreneurs, customers, and energy industry executives, and facilitated small group break-out sessions in which participants interacted directly with each other to explore and develop new ideas. One of the resulting conversations iscaptured here:
Cleantech is a new sector that lacks a history of serial entrepreneurship and experienced angel investors that can help coach and fund young companies. With insufficient private capital going to seed funding in the current market, young companies are seeking strategies to get them to the point of venture readiness. Challenges and opportunities for commercializing promising new energy technologies may be hiding in government, corporate and academic research labs. In addition, public sector may play an important role in innovation beyond funding of basic research — through ARPA-E and stimulus programs — and in filling the funding gap for cleantech start-ups at the earliest seed stage.
With private markets stymied and private investors sidelined by the economic downturn, early stage cleantech entrepreneurs are looking for alternatives to the traditional venture model. Angel and seed investors, who willingly accept substantial technology and execution risk in exchange for substantial returns, have become a force in early stage investing. Corporations, playing the role of strategic investors, often treat seed stage investing as a means of obtaining a first look at novel technologies and as a way to finance research and development off their balance sheet. The government, long viewed as inefficient and ineffective when it comes to allocating resources, has stepped in to provide massive infusions of capital to capital-intensive companies with long investment horizons. Although early stage investors, corporations and the government certainly play a critical role given the current economic environment, each source also presents certain risks and challenges. Angels and seed investors often invest before a company knows whether it will be capital efficient or capital intensive. For example, the founders of a company focused on developing an advanced drive-train technology for wind turbines might decide to be an original equipment manufacturer (“OEM”) — or they might decide to become a new wind turbine manufacturer. Further, angels might have a difficult time distilling and assessing “layered” risks — particularly in the case of materials sciences companies. Corporations in general, and utilities in particular, might lack the incentives necessary to invest in innovation. And most would agree that the process of “picking winners” should not be left to the government. So how should these different constituencies interact in order to bridge the seed stage funding gap?
This and several other questions arose during the “Seed Stage Funding Gap” breakout session at SVB’s Cleantech 2010 conference. The discussion centered on ways to incent corporations to increase their R&D spend and to identify the most beneficial mechanisms for government involvement. On the corporate side, one attendee noted that many of the legendary corporate R&D centers like Bell Labs, which reportedly spent approximately $1B annually on basic research, disappeared after R&D tax credits, prevalent in the 1970s and 80s, fell by the wayside. In the 1990s and 2000s, corporations migrated to a “buy vs. make” model, but often overpaid for perceived synergies that seldom materialized, faced sizeable integration costs, or ran the risk of a cultural mismatch that stifled the target company’s creative spirit. Without huge incentives, certain thin margin business models like those of utilities simply don’t lend themselves to large R&D budgets.
The notion of government involvement in early stage ventures was met with mixed reaction by conference attendees. Several attendees felt that some level of government participation in and funding of basic research was necessary, particularly since corporations have curtailed spending and venture investors generally prefer to invest after startups have mitigated some technological risk. However, others struggled to think of successful ventures that have come out of government labs in recent years. Should government-funded labs focus on developing, fostering, and incubating commercial technologies or should they more closely resemble academic research centers? In either case, most participants, including representatives from Washington, agreed that the task of identifying potential successes should be left to the private sector and that certain government initiatives, such as the SBIR program, were under-funded and not working efficiently.
After a thoughtful discussion, the attendees recommended five key areas for further consideration:
I. PROMOTE THE RIGHT CULTURE: Entrepreneurs need an environment where they have the ability to try and fail – and then try again. Many attempts to replicate Silicon Valley and create new global centers for innovation lack this key entrepreneurial ingredient.
II. SHIFT TO EFFICIENT MODELS: In the current environment, it is best for venture investors to fund areas with the highest leverage and least amount of bureaucracy. In the near term, this would mean shying away from energy generation companies and focusing on pure technology plays.
III. CREATE THE RIGHT INCENTIVES: It’s not enough to have incentives; it’s crucial to have the right incentives. Perhaps it would be beneficial to re-examine, restructure, and reinstitute incentives like the research and development tax credit of the 1970s and 1980s.
IV. EXPLORE NEW MODELS: Is there a role for non-profits to fund national labs — essentially amounting to privately-funded technology transfer? This would permit government labs to focus on innovation but would allow the private sector to “pick winners.” A few national labs including NREL, The National Renewable Energy Laboratory (NREL) Oak Ridge and others are examining a similar approach.
V. BUILD AN EARLY STAGE ECOSYSTEM: A critical missing link is a service infrastructure ecosystem. Having the ability to contract-out R&D could amount to substantial savings across the entire cleantech spectrum. For government involvement to be effective, it is necessary to target the appropriate government agency (DOE, Commerce, etc.) to tackle clustering, testing, etc.