Why green-tech start-ups depend on big business
Corporate partners are vital to nurturing innovations from green-tech start-ups and giving them the gravitas they need to scale beyond niche products.
Luke Fishback believed the energy monitoring company he started had some potential. But when General Electric handed him a $100,000 check from its Ecomagination competition earlier this summer and touted his company Plotwatt in the media, he found himself with an express pass to the big leagues.
"We were flying under the radar and then afterall of sudden the phones were ringing off the hook--we got a huge influx of customers," said Fishback. "It just put us on the map."
More important than the money is the marketing muscle and technology depth GE could bring to a tiny company like Plotwatt, which has relied largely on word of mouth to find customers.
"GE is one of those companies that could make our service available to a massive number of homes really quickly," said Fishback. "And it's opened lots of doors for scaling in different ways, including raising funds. Investors look at GE as a smart discriminator in this space."
For the thousands of green-tech start-ups out there, big brothers like GE have never been more important. Corporations, once the nemesis of environmentalists, have emerged as vital partners in getting new energy products to market. Whether businesses continue making bets on smaller players will determine how quickly many green technologies, from solar power to plug-in vehicles, become mass-market or remain niche products.
The role of big companies is poised to grow as money from the federal stimulus act draws to an end and the Department of Energy and EPA prepare for cuts in the years ahead following this week's budget deal in Washington. Although details still haven't been decided, tax breaks for renewable energy or funding for research and development are targets for being pared back, according to reports.
"I don't think people in these industries will be looking to the government to fund many new programs--it's all downward pressure from here," said Sheeraz Haji, the CEO of the Cleantech Group, which does market research on venture capital. "That just increases the importance of corporates."
Opening wallets and doors
The pace of venture capital investing in green businesses has cooled, with investment levels this year. But industrial concerns which work in energy, transportation, or water have never been more active making friends with entrepreneurs and outside start-ups.
French company Schneider Electric spent over $3 billion so far this year to purchase five smart-grid companies, giving it a broader portfolio ofto make the grid more efficient and reliable. Competitors ABB and GE each made two acquisitions in the grid area in the second quarter as well, according to the Cleantech Group.
Big global trends, such as fast-growing countries and higher energy prices, point toward the need for products that use natural resources more efficiently. In an Ernst & Young survey of companies worldwide, 57 percent of companies said green tech has become a corporate-wide initiative with backing of senior management and 88 percent said it is a priority.
That's a sign that big businesses will be investing more around the theme of environmental sustainability, said Jay Spencer, Ernst & Young's Americas cleantech director. "The market drivers are saying that we are at the starting stages of a transformation in the way we consume, the way we distribute, the way we store, and the way we manage energy," he said. "Given that the transformation has left the gate, corporations are saying they need to focus on that opportunity."
A recent example is DuPont, which last week, which makes a coating to improve the efficiency of solar cells. The chemicals giant made the move to get access to cutting-edge technology and profit from the rapid growth projected for solar panels, said Rob Cockerill, the business manager of DuPont Innovalight.
Green initiatives at businesses not directly tied to energy create demand for products from start-ups. Google hashundreds of millions of dollars in renewable-energy projects and is installing a from Silicon Valley company Coulomb Technologies on its campus, moves that spiff up Google's green image with the outside world and employees.
Making green mainstream
For smaller green-tech start-ups themselves, big companies can be a ticket to seeing their products get beyond the prototype or demonstration stage, something that's been happening for years in small biotech and pharmaceutical companies. The little guys simply lack the money or clout to see through projects that can go on for years before they turn a profit.
For VCs in green tech, it's time for Plan B
Do new water technologies stand a chance?
Venture capital funds don't typically have the large amounts of capital needed for building a factory or large-scale energy project, which has led to a joint investment model where VCs invest next to large corporations. When the Austin, Texas, battery company Xtreme Power raised a series C round last year, it brought in Dow Chemical, BP, utility Dominion Power, and an energy project developer. The deal gave it capital, expertise in building, and a utility to provide guidance on product requirements.
Successful green-tech companies have tapped heavyweight investors to get them through the long gestation period needed for energy technologies. BrightSource Energy, which develops large solar thermal power projects, has several corporate investors, including Chevron Ventures, Google, and French power plant company Alstom. Similarly, Tesla Motors signed deals toto Daimler and Toyota, both of which invested in Tesla.
When large companies acquire green-tech start-ups, it creates a financial incentive for early-stage investors to stay in the field. Most importantly, though, corporate investors bring green-tech companies more legitimacy and brand recognition.
"In the energy and water markets, the end customers are utilities and they are very conservative--they aren't going to take big risks," said Cleantech Group's Haji. "If you think about them buying from a start-up they've never heard of, it's a difficult thing to get done."
There's a limit to the role businesses can have. Governments have historically invested in research and infrastructure. And there are alternative sources of funding for growing green-tech companies, such as family foundations or state incentives, which are part of the mix that energy companies need to draw on.
Whether young green-technology companies in the U.S. can find the right combination of public and private sources is something being tested now. But for innovations in energy and water to take hold, big businesses will need to lead.