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Endeavor is proud to make public the following transcript and video from a presentation at the 2011 Endeavor Entrepreneur Summit in San Francisco. The event, which assembled over 450 entrepreneurs and global business leaders, featured dozens of entrepreneurship-related presentations by top CEOs and industry experts.
Overview:The cleantech revolution has unleashed what some have called the largest market opportunity in the history of the planet. As experts in the cleantech space, Mike Ahearn (Chairman, First Solar) and George Bilicic (Head of Energy, Power, and Infrastructure, Lazard) discuss the magnitude of this opportunity, what it means for entrepreneurs (particularly those in emerging markets), and what entrepreneurs should keep in mind when starting cleantech businesses.
Managing Partner, True North Venture Partners, L.P.
Michael J. Ahearn currently serves as Managing Partner of True North Venture Partners, L.P., a venture capital company that invests in early stage innovative businesses addressing some of the world’s most challenging problems in areas such as energy, water, agriculture and waste. Mr. Ahearn also serves as Chairman of the Board, First Solar, Inc. (NASDAQ: FSLR); Member, Board of Trustees, Thunderbird School of Global Management; Member, Board of Trustees, The German Marshall Fund; Member, Board of Directors, Endeavor; Member, Global Advisory Board, Beijing Climate Policy Initiative; and Member, Advisory Board, BDT Capital Partners. Mr. Ahearn lives in Phoenix, Arizona. He holds B.S. and J.D. degrees from Arizona State University.
Managing Partner, Omidyar Network
George Bilicic heads the Firm’s global efforts in power, energy and infrastructure and also works with companies in other industries. In addition, he serves as a member of the Firm’s Fairness Committee and Investment Banking Committee. Mr. Bilicic earlier completed a term as Head of Lazard’s Midwest Advisory business serving the needs of companies and governmental entities based in that region of the U.S. across all industries. Other than his time at KKR (see below), Mr. Bilicic has been at Laz ard since March 2002.
Most recently, Mr. Bilicic has advised on the following matters (client in parentheses): proposed merger of Progress Energy and Duke Energy (Progress Energy), proposed merger of Northeast Utilities and NSTAR (Northeast Utilities), resolution of joint venture and related matters between EDF and Constellation Energy (EDF), proposed sale of RBS/Sempra Trading Business (RBS and Sempra), proposed sale of Autopista Central toll road (Skanska), potential privatization or municipalization of the Long Island electric transmission and distribution system (LIPA), proposed exchange offer by Exelon for NRG (Exelon), leveraged buy-out of TXU led by KKR and TPG (TXU), Duke Energy spin-off transaction (Duke), National Grid acquisition of KeySpan (KeySpan), PlaNYC (City of New York), Duke Energy merger with Cinergy (Duke), various alternative energy financings and others.
From May 2008 to October 2008, Mr. Bilicic served as a Managing Director and Head of Infrastructure at KKR. At KKR, Mr. Bilicic was responsible for initiating and leading KKR’s global infrastructure investing efforts and contributing to other areas, especially alternative energy and power. During his time at KKR, Mr. Bilicic served on the Infrastructure Investment Committee and led teams that considered investments in airports, ports, surface transportation, utilities and power, alternative energy, midstream infrastructure, social infrastructure, and infrastructure conglomerates.
What is Alternative Energy?
It could mean Solar, Photovoltaic, Wind, Traditional Clean Generation like Hydro Power, Geothermal, Biomass, and some people include Nuclear power.
And then the misunderstood and ill-defined area of the smart grid: Energy Efficiency, Smart meters, Smart transmission, and Storage. Storage, by the way, is one of the holy grails of the alternative energy area. People have not figured out a way to efficiently store electricity, which is very much the key to the next area.
Alternatively-fueled vehicles. Natural gas vehicles are a very attractive proposition in this country at the moment. Electric vehicles and the related infrastructure.
Biofuels. A series of companies have gone public in the US capital markets in this area this year and they cross a wide span of technologies.
LED lighting – another big area of emerging growth. There is a large company in Germany that will be spun out of Siemens this year that is in this business.
Smart building products. A series of companies will go public in the next year in this area.
What Companies are Participating in this Alternative Area?
The area cuts across the entire economy. Companies that are defined as Alternative Energy-Focused Companies include First Solar, Itron, which is a smart meter company, Suntech, a Chinese solar tech company, BrightSourceEnergy, which is a solar thermal company that has filed to go public, Enernoc, which is an energy efficiency company, and Vestas, a Danish wind company.
Utilities are very active in this area and are very important. They are the end users of a lot of these products. One of the keys of success in Mike’s company has been their success in dealing with utilities. IBM – they do WATSON, they do things in the energy efficiency area. Oil companies – a company called Total, a French oil company that is taking a big equity stake in a California based solar company called Sun Power. Then there are various Asia based conglomerates that are very active in the area, particularly the Japanese companies and increasingly Chinese companies.
Investing in Alternative Energy
There has been a total of $167 billion invested out of the VC community. The pace of investment from the VCs has slowed because some aspects of the business are so capital-intensive that it doesn’t lend itself to the traditional VC model. So you see emerging efforts in this area from large cap industrial companies like General Electric, Toshiba, Google, and Total. An important investor in this area is government. Government investment across the globe is either through subsidies or through direct investment. The Department of Energy in the US has a series of programs designed to support the area.
What Does One Need to Understand to be Successful in Alternative Energy?
Energy prices are very important. We will meet with a company in the alternative energy area, and the most important thing they should understand is, depending on the region of the world, oil prices or natural gas, government incentives, project finance, the fact that this is a global business, not typically a regional business, you need to understand the end markets, particularly utilities. A lot of this stuff people want to sell cannot be sold except directly or indirectly through utilities.
Stakeholders are very important. One can’t be successful without supportive stakeholders because you are often relying on government regulation for your returns. You need to understand the electricity grid. You need to be sophisticated when it comes to technology and manufacturing. It’s a multidisciplinary area that requires a variety of skill sets. The very successful companies that we see will have a very good government relations person, a really good operator, manufacturer, someone who really understand IP and technology, someone who is good with the investors, and other skill sets.
Ten Suggestions for Success
Envision big – execute small
Thing global – act local
Work with, not around, the public sector
Favor fundamental value creation over up rounds and exits
Maximize throughput velocity over margin maximization
Think marketing, not sales
Compartmentalize the known vs. the unknown
Institutionalize uncertainty and flexibility
Institutionalize continuous improvement
Make your success vital to the stakeholders who matter
1. Envision big- execute small
I don’t think the risk return makes sense unless you have a really big idea and big aspiration. I think you have to start thematically. There are big pressing problems that have to be solved in this space. You have 2 billion people in the world who don’t have access to electricity and another billion that have intermittent access at best. In developed countries, you have electricity infrastructures under severe strains. In some places like China and India, they can’t keep up with the demand for electricity. Then there is this whole climate overlay. How do you move off of the world’s mainstay, which is coal, into things that are green and sustainable? And this says nothing of what’s happening in transportation. Water comes in to play here too. There are already regional shortages. There is a longer term trend over the next twenty years where supply demand imbalances for water are going to become very significant. From an agricultural point of view, you have massive demand growth for food, driven by class migration in developing countries, and specifically around high-protein content, which in turn drives beef production and certain types of farming that use water and energy extremely inefficiently. The waste streams present another piece of the puzzle. In a lot of the emerging markets, there are no centralized infrastructures for dealing with this pollution.
In a lot of areas outside of the US, a lot of entrepreneurs are thinking small. In the US you actually see the opposite sometimes. We’ve seen hundreds of millions of dollars go down the drain funding guys with big dreams that are going to go into the mass market and make big disruptive change. That’s the flipside of cleantech. You can’t move directly to the mainstream market, it’s not going to viral. There are too much entrenched, integrated, system level effects. There are politics and education of the consumer base.
What you have to do if you have a big vision is then come back and say, where is a market segment that I can enter with what I can do today and get some traction, some cash flow, and some learning, and then I can continue my mission, but from a base that’s real. What we look for from an investing point of view is that combination of that pragmatic reasonable market opportunity and that big idea and a will to migrate through these market segments to get to that big change.
There are two big mistakes that are commonly made. People have not thought about how big the market is and have not defined the market. The second thing is, a lot of this area will be driven by the cost effective solution and people will come with a great idea, but their idea is not cost-effective.
2. Think global, act local
Mike: We came up with a good low cost thin film semiconductor technology to dramatically reduce the cost of making solar panels. We found customers in the US that would buy it, but the regulatory structures would not allow market access. We really pounded on politicians in Washington to try to get programs changed. In the meantime we were burning 15-20 million dollars a year and we couldn’t get any traction. It finally dawned on us that we have to be globally agnostic as to where we build our business. Absolutely critically in any of these areas is a regulatory and political structure that will allow you to enter the market. Seven years later, we have 90% of our people, assets, and operations outside of the US.
3. Work with, not around, the public sector
This is particularly important because a lot of what is being done in this area depends on a governmental structure, governmental mandate, or governmental support or is at risk at intervention from stakeholders. A relevant company must figure out a way to be almost in partnership with the relevant government entity.
4. Favor fundamental value creation over up rounds and exits
5. Maximize throughput velocity over margin maximization
6. Think marketing, not sales
5 & 6 are related. What you see a lot is that you have an innovative approach and you start pitching this stuff to a utility or municipality or a large industrial customer and they’re interested and you start setting up deals, but sales cycle becomes drawn out. It becomes months, it wouldn’t be unusual to have this take several years. Because of the sales cycle length you really have a high price to create margin to cover all of your overhead. But paradoxically, the price being too constrains some of the sales. You get caught in this cycle. I think part of the answer here is that from the marketing perspective you have to segment in terms of a set of customers that have a top of mind need (something where if you come to them and tell them that you can help them, they say we have to talk, I have to solve this). If you please one of them, they tell the others. You should try to get into the right place before you concentrate on sales.
7. Compartmentalize the known vs. the unknown
8. Institutionalize uncertainty and flexibility
7 & 8 are also related. If you are trying to bring innovation and technology to create new markets that haven’t existed, then you are really dealing with experiments. You can take all the polls you want but until you put something in front of them, you don’t know what their reaction is going to be. At any given point in time, an early stage company will have a market segment where they have traction and they have a theory as to why it’s working and they have high confidence level that they can drive more sales. That’s what I call execution mode. On the other hand, if you are trying to enter a new market with a new idea, that shouldn’t get lumped into the forecast and the business plan with the stuff that’s known. That second part is not probabilistic. You can compartmentalize it at any given time by saying we are in execution mode on a set of things and we are in experimental mode on a set of things and then we have our big vision on where we want to get.
9. Institutionalize continuous improvement
If you think about how much you learned from when you started to when you got in the business. The question is, can you accelerate those learning cycles? What I find is that everybody acknowledges that, but you don’t find too often is a systematic effort to improve the capacity to learn. There are two ways. There’s external, that’s like benchmarking, networking, and collecting data and bringing it back to the team in a structured way to translate it into action. Then there’s internal where you take all these things that work and don’t work and feed them back into a process that repeats itself frequently. How did we benefit from what works and doesn’t work? And finally creating metrics. We created metrics specifically around rate of improvement.
10.Make your success vital to the stakeholders
This last point is about working with the stakeholders and having them aligned with and invested in the proposition that you’re offering to your customers and investors. It’s been particularly important in the renewables area as new markets are defined and the regulatory structure is established.
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