Five tips from a budding green-tech cluster

Entrepreneurs at five early-stage, clean-energy companies in Massachusetts say creating a network of like-minded businesses goes a long way to cultivating green start-ups.

WALTHAM, Mass.--Most of the action in consumer Internet technology is firmly rooted in Silicon Valley. But when it comes to green technologies, it's much more dispersed, with pockets of activity in different regions.

Massachusetts is one area that has run with clean-energy technologies with some success . A number of companies from the state received grants from the Department of Energy's ARPA-E agency to pursue promising research, including 1366 Technologies , Sun Catalytix , FloDesign Wind Turbines , and Agrivida . Battery maker A123 Systems and efficiency company EnerNoc are among the few energy start-ups of the past decade to become public companies. Research company Clean Edge ranked Massachusetts third behind California and Oregon in its clean-energy leadership index, which measured policies, technology, and financing.

So what does it take to create an active cluster of clean-energy outfits? Business association the Mass Technology Leadership Council last month organized a panel to discuss how entrepreneurs can navigate their small companies and move their business ideas forward. Every entrepreneur said there were real economic and technical challenges, but they offered some ideas on overcoming them.

Latch onto a cluster

Marcie Black worked on the technology behind the start-up she co-founded, Bandgap Engineering, while working at Los Alamos National Laboratories in New Mexico. But she didn't find the support she needed to move the idea forward. So she moved to New England to be closer to an innovation cluster where she felt there were better opportunities. The company, which has a technology to improve the efficiency of silicon solar cells, raised money from venture firms based in Boston and Silicon Valley as well as Japanese conglomerate Sumitomo.

Having a pool of talent to hire from, of course, can help quite a bit, which is where the area universities can help. Also, a number of Massachusetts-area companies are working in energy efficiency, where a workforce skilled in IT can play a big role. Nexamp, which installs solar power systems and provides energy efficiency services to corporations, is spinning off a separate efficiency company because it has a different business model than the solar part of its business, said Nexamp CEO Stuart Patterson. An efficiency company that relies a lot on software can be more akin to a typical software business in that there is less money needed to build and sell a product, compared to solar or energy storage, for example.

Get money where you can

Raising money for early-stage green-tech companies over the past few years from venture capitalists has been challenging, the panelists said. Part of it is better understanding among investors of how much capital energy-related products require to bring a product to market--far more than Internet companies and more similar to biotech . Another issue is that the venture capital industry overall has changed, as angel investors do bigger deals and some general tech venture funds are losing enthusiasm for the clean-tech category .

That means fledgling green-tech companies need to find different sources, including family foundations, large corporations, and government agencies, which can provide capital and a potential channel to market. Generally, the panel viewed East Coast venture capitalists as more conservative and risk-averse compared to their West Coast counterparts.

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"Clean tech has only been a venture capital industry for a handful of years, and many (venture capital) firms have not had an exit yet so they're still trying to figure out the business model . So you think about keeping long-term relationships," said Peter Rothstein, the president of the New England Clean Energy Council.

Martin Flusberg from Powerhouse Dynamics, which makes a home energy monitor , has raised $2.5 million mostly from his network of angel investors. But, he said, it's difficult being in "perpetual fundraising mode" because it diverts his attention from other tasks, such as product and business development.

Be flexible

Energy is an area of the economy that has been dominated by incumbent suppliers and has historically not attracted start-ups and entrepreneurs. That's changed now, but it's still tough introducing new products through old, established energy providers, be they oil and gas companies or utilities.

Utilities, the panelists said, are very conservative, and most are notoriously slow to try new technologies. Even if a new company has been vetted as a utility partner, some utilities will have a request for proposals once a year or even every two or three years, said Patterson. "That means just to become a candidate you have to wait two years, which is sort of crazy," he said. Flusberg at Powerhouse Dynamics decided to set up a network of retailers rather than try to sell products through utilities.

More fundamentally, introducing products into relatively new categories means companies have a hard time simply because it hasn't been done before. SustainX, which was spun out of Dartmouth College , is building grid storage systems that use tanks of compressed air to store energy. But the company is still working out what the business model will be, said CEO Tom Zarrella. "I'm finding I have to build the benchmarks...to establish a sales benchmark to talk to customers," said Zarrella said. "I have to educate potential customers on this industry."

Focus on early customers or distribution partners

More and more it seems, green-tech start-ups are getting investments from large corporations, such as General Electric or the venture arms of oil and gas companies. In addition to bringing money, these "strategic partners" can direct start-ups on how to develop a product or end up being a customer.

Bandgap Engineering is now seeking a partner willing to try out its technology and bring it to market since building a new solar production line itself is out of the question. Pepperdash Technology, which is doing control system software to improve efficiency in buildings, said it has a handful of customers who are helping the company refine its product. "Once you can demo the technology, then you get paying customers of prototypes, and then you can have a conversation from there," said Howard Nunes, the president and CEO of PepperDash.

Make friends in government

Panelists complained that U.S. policy is inconsistent and selling to utilities is very difficult because there are different regulations in every state. But government agencies, either state or federal, can play a big role in energy-related start-ups, either as a customer or by providing grants or loans. Nexamp, for example, is catering to military agencies which have to reduce energy consumption 15 percent by 2013.

But entrepreneurs need to be aware that there are strings attached to government grants and the primary focus of many government policies is employment. "[With] government grants, all they care about is job creation, but in the venture world it's whether the business model works and whether there is a return of five [times the initial investment]," said Nexamp's Patterson. "It's almost a handicap if you create too many jobs."

 

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