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How to save green tech from crashing

There's a real risk that innovation in green technologies will slow for lack of money and interest. Here's why we need a leaner, meaner green tech 2.0.

Entrepreneur Brad Hines' first solar company crashed and burned, but he's already started another venture, a story which offers cues on how the entire green-tech sector can reinvent itself in tough times.

In 2005, Hines left his work as a NASA engineer to build a radically new and powerful type of rooftop solar collector. But even after taking in tens of millions of dollars from top-shelf investors, the company, Soliant Energy, ultimately failed and its intellectual property was sold off, reportedly at bargain basement prices.

Now Hines is at work on another solar startup called Thermata with a whole new approach. Rather than try to reinvent the solar panel, he's using existing concentrating solar thermal technology to address a very specific business need--making steam for industrial boilers. Getting funding is a completely different game than it was in 2005, too.

"It was a time when a naive new entrepreneur could have a good idea and get funded. In this market, just a good idea won't get you funded. You need a lot more." said Hines. "And in solar, the days of quantum changes in cost and performance are over...It isn't like microprocessors where you can keep doubling the speed."

Welcome to green tech 2.0. In the first wave, venture capitalists threw billions of dollars at technologies with potential to disrupt the energy industry and stall climate change. Now, entrepreneurs need to be far more savvy about raising money and smarter about how to build a business. In short, people who want to do good by the planet and do well financially need a new playbook.

What's at stake isn't just whether the next Google will come out of the green-tech sector. It's not a cure-all, but innovation in clean-energy technologies can help perk up the U.S. economy while addressing environmental problems and cutting the country's fossil fuel use. If businesses--the engines of green-technology development--are starved of investment and public interest, the pace of innovation could slow down.

The good news is that entrepreneurs are still being attracted to clean-energy technologies, often motivated by a desire to work on something meaningful. But the realities of venture capital mean that science experiments most likely won't get funded by those sources anymore. Projected cuts in federal spending don't bode well for a big influx of research funding either.

Instead, funding could come from multiple sources, including VCs, and innovation may be as much about business models as technology. For example, some of the most successful startups in solar are installers which offersolar leases, a financial innovation that's helping make rooftop solar panels accessible. Even with a big technical advance, say in energy storage or fuel cells, people need to be very calculating about how to get a commercial foothold.

"The first wave of clean tech belonged to the material scientists. The next wave belongs to the entrepreneurs," said green-tech investor and industry observer Rob Day. "There's plenty of technology innovation that would make an improvement on the status quo...The biggest challenges are actually commercializing it."

Ambitious green companies should apply their technology to solve a specific problem and bundle it up in a way that's easy and low-risk for customers to adopt, said Rob Day. The computer industry learned that years ago: instead of selling a PC, IBM reinvented itself selling packaged solutions which include hardware, software, and services--a strategy many others have copied.

Breakthrough versus slow and steady
Revisting just a sampling of ambitious green-tech startups from last decade today shows that things haven't always worked out as planned. Venture-backed companies don't fully represent all innovation in green technologies, as large companies and research labs are known to innovate as well. But the wave--some would call it a bubble--of VC activity created high expectations and buzz around the idea of making money by being green.

The solar industry is seeing the dangers of competing in an industry where you're creating a commodity product--a flow of electrons. Dozens of Silicon Valley solar startups bet on thin-film solar cells, which remains viable technology. But the onrush of Chinese manufacturers in traditional silicon solar cells has lowered the cost per watt by over 50 percent in the last two years, making it difficult for companies without a technical edge and low-cost manufacturing to survive. Evergreen Solar filed for bankruptcy protection this month, but analysts say that there will be tough times and consolidation among the others.

Another popular investment target, biofuels have failed to scale beyond pilot stage or meet government mandates. A dismal example is Range Fuels which last year secured $162 million in local, state, and federal subsidies for a plant to make ethanol from locally harvested wood chips. But the plant shut down earlier this year after technical challenges couldn't be overcome.

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Similarly, algae companies offered the compelling idea of making diesel fuel from algae fed only sunlight and carbon dioxide from big polluters, such as power plants. Some companies, including GreenFuel Technologies, have failed or scaled back their plans, which were not helped by gyrating oil prices. Many researchers contend now that another 10 years of research and development are required before algae can realistically substitute for oil at scale.

For sure, there continue to be some real potential technology breakthroughs. Solar startup 1366 Technologies plans to build a demonstration plant of a solar technology that can substantially lower manufacturing costs. Another is Joule, which is using microorganisms to make diesel fuel, or PolyPlus Battery which is developing a battery capable of giving an electric car hundreds of miles of range.

But given some of the missteps, it's no surprise then that venture capitalists are reining in investment, particularly on early-stage ventures. Instead, they're putting money into their current companies or, in some cases, phasing out their activities in green tech.

Fat niches
Even though there have been disappointments--and perhaps more coming--it would be a mistake to write off green tech as a failed investment thesis.

For starters, a number of green-tech businesses have successfully grown and made an impact. It's too early to say whether Tesla Motors will become a sustainable, profitable business but its bet on electric vehicles has shaken up the auto industry status quo, from General Motors to Toyota. Less high-profile are algae company Solazyme, smart-grid networking specialist SilverSpring Networks, and solar-panel microinverter company EnPhase Energy. They are among the green-tech companies to build a substantial business and file to go public.

Also, investors have gotten smarter. Venture capitalists simply aren't equipped to fund a venture that will require five years of R&D and a billion dollars to build a factory. VCs are still placing bets in this area, but more funding will need to come from other investors willing to stick around for the long term. Depending on the need, sources can be family funds, government research programs, and potentially late-stage private equity funds. Large corporations, such as General Electric or Chevron, are particularly crucial for commercializing products at scale or, as Google does, acting as a customer.

Entrepreneurs, meanwhile, need to focus on solving one problem very well. That's not to say that people shouldn't be ambitious and shoot for the moon. But change comes slowly in energy--the laws of thermodynamics often apply more than Moore's Law. So don't expect to duplicate the valuation and impact of a Facebook or Groupon in a few short years.

Targeting specific niches may sound less exciting or ambitious. But in energy, a niche can be a huge market. A couple of examples: Amyris is one of many synthetic biotech companies targeting biofuels, but it is making industrial chemicals first because that's a quicker route to scale up. Digital Lumens has made a clever commercial LED light fixture targeted only at warehouses. That alone is a substantial market and success there could lead to a springboard to other commercial applications.

"We're going after one slice of the market and repurposing a couple of engineering inventions to address that market. And we'll be out in a year and a half. There's still money to be made in boring businesses."
--Brad Hines, CEO, Thermata

Make no doubt, environmental regulations and government industrial policies make a major difference, as seen in China's rapid advance in wind and solar. But prospects for bold legislation on clean energy seem dim and even investments in research and infrastructure, such as the power grid, could be scaled back. The most crucial programs for nurturing innovations are in research and development, such as ARPA-E, and the federal loan guarantee program, where the Department of Energy backs large-scale rollouts of new technology, such as a utility-scale renewable-energy project.

Green-tech innovators need to borrow heavily from the digital world as well. One approach that's not fully explored, called the Cleanweb by investor Sunil Paul, is using the power of social media and mobile technology to help consumers and businesses be more efficient and lead a greener lifestyle.

To be clear, technical breakthroughs in basic science are very much needed and could dramatically change how we use energy. But there are many ways to use IT and other existing technologies to use natural resources--water, energy, minerals, land--more efficiently.

That's exactly what Brad Hines is doing at his new company. Thermata is coupling off-the-shelf solar technology with clever software to help big industrial companies save money they'd otherwise spend on natural gas for steam. He doesn't plan to make the product himself but outsource manufacturing to keep down costs and rely on big corporate partners to help get initial customers.

"We're going after one slice of the market and repurposing a couple of engineering inventions to address that market. And we'll be out in a year and a half," Hines said. "There's still money to be made in boring businesses."