What Investors And The Government Get Wrong About Clean Energy Innovation

Polish physicist and business woman Olga Malinkiewicz poses with a printed solar panel at her … [+] company Saule in Wroclaw on Jan...

Students of the sustainability market always agree: Innovators face a significant “Valley of Death”, when it comes to turning their inventions into commercialized solutions. That at some point, such innovation and commercialization efforts face a need for funding, at a moment when funding is also awkwardly scarce. These observers also agree that policymakers and investors should therefore address this Valley of Death with special efforts to provide capital and assistance during this challenging funding gap.

One problem: These smart people don’t actually agree on when exactly that Valley of Death is. Some describe it as really early in the innovation cycle. Others describe it as during early commercialization and adoption. I’ve even seen it described as FOUR different “Valleys of Death”. That’s quite a geological analogy!

With all of this focus on pre-commercialization challenges, investors into clean energy — and policymakers, for that matter — may be forgiven for assuming that delivering a finished energy, waste treatment, transportation, etc. product to the marketplace is the end of the challenges and the beginning of the growth story. This may explain in part why business journalists are always so quick to write about new inventions as if they are on the cusp of revolutionizing the clean energy market. Do you remember Solar Roadways, which got so much attention a few years back?

What they all fail to recognize, however, is that even after “successfully” introducing a potentially breakthrough product into the marketplace, widescale adoption is far from assured. In these markets, building a better mousetrap does not actually mean the world will beat a path to your door. And without widescale adoption, significant climate impact doesn’t happen, and investors don’t make compelling returns. One or two examples of “commercialization” do not make a success story. And many investors have been burned in the past, placing a bet on something that sounds exciting and is “proven”, but never actually takes off.

Indeed, even after bringing a new compelling sustainability solution to market, a startup will face three new challenges: Engineering for scale, convincing customers, and financing deployment.

In sixteen years as a sustainability investor, I’ve found that many entrepreneurs and investors fail to understand the complexity of the “engineering for scale” challenge. But as with any physical innovation, it has to fit into the messiness of the real world.

Doing it one time means figuring out a lot of little details to get that first project up and operating. “How large do these pipes need to be”; “what size motor needs to be used in this pump”; “how long will it take to get permits in place”; “how do we get these large boilers into place when the doors aren’t big enough”. These sound like little questions that will “just be figured out along the way”, but add them up and they are enough to significantly delay a project. And delays mean cost, which hurts profits, which makes investors wary.

Doing it many times means not only succeeding that first time, but figuring out how to reliably deploy future systems on time, at cost, and as standardized as possible. This is its own separate challenge, and requires completely different skillsets than the engineering knowledge used to develop the invention in the first place.

Beyond figuring out the engineering for scale, the startup must also learn how to reliably convince customers to adopt the solution. And bear in mind, these customers will either be institutionally slow adopters (think: utilities), or just naturally skeptical buyers from the corporate world — managers who don’t feel like risking their career to adopt some new widget, no matter how much sense it makes on paper. To accelerate adoption could mean offering it for no-money-down, or turning the solution into a service (”yes, we’ll use our own equipment, but sign here and we’ll just make sure you have power supply whenever your factory needs it, even if there are brownouts on the grid, without you ever having to worry about it”). Or it could mean using the core innovation to add on other problem-solving solutions as well (”It’s an energy saving light, but it’s also a security device!”). But either way, until the startup can develop a compelling sales proposition, build a deep sales pipeline, and show good predictability in turning that pipeline into timely revenues, they’re not off and running yet.

And to enable many of the above engineering and sales advancements, alternative financing must also be sorted out. Including deployment financing. For too long, investors and entrepreneurs alike have viewed venture capital as the only game in town for all startup financing needs. Fortunately, as I’ve written about before, now we are seeing the emergence of a new, more diverse, and more robust capital ecosystem for such innovative companies. And in particular, we are now seeing more project capital available for smaller, localized sustainability solutions. But as with the post-commercialization engineering and sales challenges, the reality of obtaining and utilizing such project capital effectively is complex and easier said than accomplished.

Too often, investors and policymakers alike forget about all of this post-commercialization complexity and the requisite need for capital and supportive policies even at this stage. They gear policies and investment strategies around “TRL stages”, without recognizing the companies will need more sophisticated help even after all those stages are completed. They see the promise of new technological innovations, and believe if they can get such innovations into the marketplace, then that alone will unlock the climate impact and the investment returns.

So to really see the impact, the scale, and the returns… Look beyond the innovation and commercialization stage challenges.

We can hope that in 2021 and beyond, policymakers will provide these revenue-stage sustainability companies with access to the engineering, sales and financing help they need to succeed longterm.

And we can hope that in 2021 and beyond, investors will look not for the coolest widget or the most hyped-up vision… but instead for those companies that know how to overcome that next phase of challenges and truly hit a fast-growth inflection point.

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Newsrust: What Investors And The Government Get Wrong About Clean Energy Innovation
What Investors And The Government Get Wrong About Clean Energy Innovation
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