EnergySpin

State of the Enterprise

The alternative energy scene has definitely gone through many changes. The early stages of the industry involved key pieces of technology being created, with a product being produced as a result of it. Much like new-media, these technologies will quickly become a commodity. If you want to create another MySpace or a Digg.com, all you need is $10,000 and developers in India or Eastern Europe to build the platform. As the technologies improve upon previous generations, their success relies solely on a differentiated and defendable execution strategy.

What VC’s Are Interested In

VC’s are interested in key pieces of unique/defensible/patentable technology/process. This past year saw a record number of VC investments due to the increase in IP-type of activity in the alt energy industry. That boat has sailed, and now the entrepreneurs who know how to really monetize on these technologies are appearing everywhere. Whether a technology is licensed or purchased outright, it is useless without a solid team and plan behind it. VC’s are foremost interested in the team. Regardless of how smart you are, or how great your technology is, if you don’t have a business savvy team that can take it to market and monetize it properly, you are out of luck. My guess is that there will be start-ups that will be able to monetize on those technologies better than the companies that created them. Software licensing meets alternative energy…

The Winning Team

Alternative energy products/services are all surrounded by an incestuous supply chain that everyone wants to and needs to be a part of. It seems that one person’s waste now is another person’s treasure. Securing the inputs of your supply chain is the first step a start-up should take. For the inputs of various energy technologies you have a couple of different input producers:

• Profitable Waste: the lumber industry creates a great deal of wood waste. The stumps, roots and random branches left over from logging are collected and sold to make downstream products such as mulch and construction material. Wood waste also has a lot of cellulose that can be transformed into cellulosic ethanol as well as methanol. Lumber companies already have buyers in place to purchase their waste.
• Expensive Waste Type 1: Chemical/power plants produce a great deal of pollution. One of the biggest waste products is CO2. It is an expensive proposition to produce these chemicals in today’s strict regulatory environment. Power plants also have to worry about the societal impact and future cost of their activities (Kyoto Protocol, etc…). Companies that require CO2 as an input such as algae producers can procure the rights to these gas streams at little or no cost. Power plants will be very willing to be part of this environmentally friendly solution.
• Expensive Waste Type 2: Other companies deal with waste as a normal part of their business environment. The food industry is a good example. There are 30 million tons of food waste a year that has to be discarded. They do not experience the back-lash that the Type 1 producers receive from their waste. While the trash expense is a normal line item of the P&L, biomass companies will soon create great demands for these goods and the food industry will become more profitable as a result.

Depending on your alternative energy production strategy, it is very important to align yourself with one of the above types of companies. Structuring a partnership or long-term supply agreement gives more solidity to your execution strategy. We will most likely see waste producers becoming more involved in the ownership of alternative energy companies. As the value of their waste becomes more visible and public, they will want to participate on any upside potential on the revenue and accordingly, the PR/social responsibility side.

Be the Romanian Gymnast

The same strategy applies to the outputs. Flexible alternative energy companies that are not tied to one input/feedstock or output will be the most successful. Currently there is a lot of hype around the “super” plants that will provide ethanol, etc…Whether or not these plants are great will be determined in the future, but it is not a good strategy to limit yourself to one input. Although that might seem like common sense from a business standpoint, we continue to see more companies that silo themselves within a very specific part of the industry. As commodity markets begin to evolve around these new inputs, be it plants (switchgrass), gas (CO2), garbage (food waste), companies that have the ability to hedge any pricing risk via a flexible production process will ultimately beat those who are one-track minded.

Banks Will Become the New Alternative Energy Partners (financially speaking)

Startups have this hard-headed attitude that the VC route is for them. As mentioned above, technology is becoming a commodity and the actual execution based on that technology will determine category winners. In the case of alternative energy producers (ethanol, methanol, biodiesel, electricity, etc…), the execution begins when the last brick is laid. I am seeing more of these alt. energy projects as construction projects.Does it make sense to bring on VCs in these instances? I would say not really, but it depends what VCs can bring beyond the money and what their long-term strategy is. I would say the majority of new startups should look into project financing. Align yourselves with partners that can source and issue the debt and equity necessary to finance the construction. I would hope the equity piece that companies give up in return for this type of financing would be considerably less than what a VC would require. Given the state of things, I think banks will become more involved in the evolution of alternative energy suppliers. The similarity between financing a condo project in NYC that will have years of fixed income in the future will be somewhat similar (not sure how fixed the income will be) to the construction and business operation of an energy supplier.

Bright Future For Entrepreneurs

I firmly believe you don’t have to be a scientist to excel in this industry. Making the production and distribution strategy more efficient and profitable will determine who wins here. Having all of these key points secured will create a compelling argument for future success, and as a result, financing today. I have seen too many bright technologists who don’t have a solid grounding in business to know there is a lot of opportunity to communicate and execute a competitive business strategy more effectively. The more partners that are committed on both the input and output side to a alt. energy production company, the more realistic future forecasts become. This reduces a lenders’ risk and gives the entrepreneur more leverage in sourcing financing.