Green-tech companies look overseas for foothold

CAMBRIDGE, Mass.--Rather than follow a well understood game plan, energy technology entrepreneurs need to think more like chess players on the fast-changing global stage.

A panel of clean-tech entrepreneurs and financiers here at the MIT Venture Capital conference yesterday discussed ways to navigate the regulatory and commercial landscape. Their strategies reflect how energy innovators and their financial backers have had to adjust over the past few years to have a shot at succeeding.

One persistent challenge for energy technology entrepreneurs is getting the money and permits to build either an initial production facility to make goods, such as solar panels or biofuels, or test a product at large scale.

In many cases, young companies are looking outside the U.S., where the regulatory environment is simpler and governments are more welcoming, panelists said. Introducing products for use on the U.S. electric grid, in particular, is very complex because each state can have separate rules.

"If somehow the regulations in the U.S. don't start to be more amenable to the clean technologies we're starting to develop, then I'm already looking to China to move products because I know I will have a lot fewer regulatory issues getting products online there," said Tom Zarella, the CEO of a Dartmouth University spin-off called SustainX, which is making a novel storage system that uses compressed air.

Zarella was previously the CEO of GT Solar, which makes solar manufacturing equipment and made 85 percent of its revenue in China. Even as it looks overseas, SustainX hopes to get a toehold in the U.S., too. It received funding from the Department of Energy to test out its storage device, which Zarella said will be ready next year.

James Kim, a partner at Khosla Ventures, shared a similar story. He had invested in a small-scale nuclear power company in the U.S., where it will take 10 years to get the permits to test to see how well the product works. Now having invested in a second nuclear company, he expects to have the product operating in five years in China.

State-level incentives are significant as well, he added. For example, Khosla Ventures-backed Kior committed to building a biofuels facility because of incentives from Mississippi. Absent those, the company may have looked at Canada, which has similar wood resources, he said.

Dealing with policy
Among green-tech investors and entrepreneurs, there's a better understanding of the amount of money required to launch an energy venture than there was at the beginning of the decade, when many green-tech companies launched.

Out of necessity, green-tech companies are now trying to find cheaper ways to build their first products. Rather than manufacture themselves, for example, start-ups can license technology to another company, a money-saving approach.

Solar panel maker Solyndra raised more than a billion dollars in venture money and a government loan program to do the soup-to-nuts approach where it not only built its own factories but built the machines for manufacturing its unique rooftop solar collectors. Even though it has some great technology, Solyndra's under pressure to rapidly lower its costs, said James Kim, a partner at Khosla Ventures.

By contrast, another solar investment he's involved in will license first-generation technology to a manufacturer in Asia, which will give it revenue to develop the second and third generations, he said.

"It's the biotech model where you get the technology to a point and then you partner for scaling up without giving away the crown jewels," Kim said.

The bar for entry has gotten tougher as well. Panelists here said companies that have a product to make power for the grid need to make those products as cheap as natural gas-generated electricity. Subsidies for solar and wind are in place now, but there is uncertainty about whether they will be extended, with the new Congress coming into power after the mid-term elections.

There wasn't a lot of optimism that additional laws that are favorable to clean energy would be passed. With its coordinated policies, China is better positioned than the U.S. to take the lead on emerging clean-energy industries, panelists said.

"We're punting technology leadership in energy to the Chinese," said Kim.

To deal with the lack of consistency in U.S. federal energy policy and utility regulations, investors are looking for products that produce power at the same cost as natural gas plants, panelists said. "If you can't compete on cost of production with a natural gas peaker plant, you won't get on the grid," said Alan Dash, vice president of late-stage private equity energy company Starwood Energy Group.

But even with the formidable financial and policy challenges, entrepreneurs and investors said there are many areas in the economy where efficiency can be improved--everything from how concrete is made to lighting.

Unlike the IT industry, though, there isn't the same infrastructure for a start-up to plug into, said Tom Pincince, CEO of Digital Lumens, which makes LED lighting systems for industrial companies. Because of open APIs in software, an IT start-up company knows it can rely on a network of other online services, but that doesn't exist in energy and efficiency.

"We're back really in the foundation stage of creating these new markets and so in some cases you're going to have more highly vertically integrated companies because the infrastructure is not laid out for you," said Pincince. "Relearning patience becomes really important."