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Green Capitalism and the Map of Grand Challenges

October 17, 2008


At the end of yesterday’s post [Good or Bad Time for a Green Economy?], I noted that Jon Gertner recommends that we map the grand energy and environmental challenges facing America and the world and that we use that map as the investment plan for the future [“Capitalism to the Rescue,” New York Times Magazine, 3 October 2008]. Gertner believes, as does New York Times’ columnist Thomas Friedman, that investment in a green economic sector could help bring the U.S. out of its current financial crisis. Gertner begins his lengthy article in Silicon Valley with a special delivery from Norway to a venture capitalist.

“One afternoon last May in Menlo Park, Calif., a venture capitalist named Ray Lane led me from his office to the parking lot, where an automobile had been delivered a few hours earlier by flatbed truck. The car, built in Norway, was powered by batteries and had a plug-in outlet hidden under a flip-top cover near the driver-side door. To my eye, the car resembled a generic European compact, but with some differences; the body, for instance, was made from a textured, plasticized material. In a lot full of gleaming new vehicles, some of them owned by the wealthiest venture capitalists in the United States, this car — branded the Think — seemed distinctive mainly for its lack of sparkle. … Inside, the dashboard was seemingly made of densely woven fabric, and the seat was covered in a material that felt decidedly un-Corinthian. ‘The Think is 95 percent recyclable,’ Lane said matter-of-factly, giving me the sense that we were about to drive a milk carton rather than a car.”

The Think has an advertised top speed of 65 miles per hour and limited range, but Ray Lane believes it represents the future.

“Lane told [Gertner] that if things went well — if the Think’s manufacturing process could be made more efficient, for instance — the car would go on sale in the United States in 2009. He said he hoped to sell several thousand in the first year and eventually reach annual sales in the tens of thousands, with a sticker price below $30,000. But then outcomes were hard to predict with precision, he admitted, even for venture capitalists who spend their working hours imagining the future.”

Gertner began researching his article last winter and his research lasted until mid-September, “just as the financial turmoil on Wall Street was leading to bank failures and jagged movements in the stock indexes.” It was a good time to gauge the optimism of venture capitalists. His research focused on Land and his colleagues at the venture capital firm of Kleiner Perkins Caulfield Byers.

“The firm wasn’t unconcerned about the crisis — problems with the markets could potentially slow down the development of some of the companies it backed. Still, most of its ventures were long-term investments. And entrepreneurs were still bringing new ideas through the door at a steady pace. ‘I don’t expect the credit crunch will change that,’ John Denniston, a Kleiner partner, said. Indeed, throughout the summer the partnership was raising hundreds of millions of dollars to pour into clean or green technologies — in V.C.-speak, ‘clean tech’ or ‘green tech’ investments. By the beginning of autumn, Kleiner had financed 40 different green-tech companies and raised a total of about $1 billion to that end. Some of the firm’s fledging green ventures were evolutionary improvements on current technologies that would soon hit the market, like the electric Think car. Others I heard about promised to revolutionize various aspects of the energy economy — in, say, solar power or biofuels — much as Netscape or Google remade the Web or Genentech (another Kleiner Perkins venture) ushered in the biotechnology era several decades earlier. In many parts of Silicon Valley, it seemed misguided to regard the U.S. economy as reliant solely on Wall Street. The future still depended on entrepreneurs and innovations and green-tech businesses getting ‘traction,’ as the V.C.’s at Kleiner liked to say.”

As I noted in my post entitled Innovation Economics, entrepreneurs are an optimistic bunch and innovators don’t stop generating ideas just because the economy is suffering through tough times. Venture capitalists thrive on creative ideas complemented by a good business plan. Today when they peer into their crystal balls, Gertner reports, they are seeing green.

“Kleiner was not the only venture firm that had suddenly seen the future and decided it was green. But Kleiner’s past success tended to legitimize the prospects of business ideas that in many cases had spent decades on the economic fringe. California this past summer seemed like a fantasia of alternative-energy start-ups, where legions of garage tinkerers were taking a break from writing software code so they could help solve the climate problem. At Kleiner, which might have fielded perhaps a dozen business plans a year for new green-tech companies earlier this decade, at least 100 ideas were filtering in every month. The smooth-talking serial entrepreneurs, the university physicists toiling in obscurity, the great throngs of unshaven engineering grad students — every day they were pitching low-carbon devices that utilized cow dung or nanofilm or supersecret ceramic compounds that had so much transformative potential they could be discussed only in the strictest confidence. John Doerr, one of Kleiner’s managing partners and arguably the world’s most influential venture capitalist, made the case to [Gertner] in his office one morning in July that these were signs that the multitrillion-dollar energy market would inevitably, and imminently, undergo a wholesale eco-transformation. In the view of Doerr and his partners, Kleiner’s efforts to seed this prospective renewable economy with its investments and the help of its new partner, Al Gore, would help address some of the most vexing problems of the modern era — namely, climate change, fuel costs and energy independence. Amid economic hardship and the turmoil within the financial-services industry, such efforts could also contribute to a profusion of green jobs in technology as well as in manufacturing. On a different morning, another Kleiner partner, Randy Komisar, told [Gertner] that the firm’s green-tech investments didn’t seem terribly risky to him because the energy market was so large and outdated. ‘I’m so dead certain that we’re solving the next huge problem for the planet,’ he said. ‘I’m not very good at hitting the bull’s-eye. I need a big target. And this is the biggest target I’ve ever seen in my life.'”

Certainly Tom Friedman agrees with Komisar as do Barack Obama and John McCain. Gertner, however, was not intrigued by the prospect of venture capitalists reaping big financial rewards but by the possibility that America’s private sector “could start to change the way the U.S. and the world use energy.”

“In many respects, the solutions to global warming and fuel prices have been defined over the past year almost exclusively in terms of government action — the policies of a Barack Obama or a John McCain administration, in other words, that could effect a new energy infrastructure or help forge international treaties to reduce global carbon emissions. One shortcoming of this view is that while government has a longstanding role in underwriting scientific research and regulating or (with less positive results) deregulating industries, government doesn’t really innovate, at least not in the sense of readying technologies for the marketplace and integrating those technologies into mainstream companies. That’s left to firms like Kleiner, which happened to be financing precisely those kinds of businesses, but largely out of the public eye. If they were succeeding in green tech — an uncertain prospect — then conceivably big profits would follow, not to mention a social and environmental dividend for the rest of us.”

Gertner reports that this is not the first time that Kleiner has demonstrated an interest in green technology. The firm invested money in Dean Kamen’s Segway back in 2001, predicting it “would be the fastest company in history to hit $1 billion in sales.” Although the Segway has found a niche market, it has achieved nowhere near the success that Kleiner executives forecast. Then in 2002, Kleiner invested in Bloom Energy, the brainchild of a professor at the University of Arizona.

“K. R. Sridhar, a former NASA scientist, … was working on a solid-oxide fuel cell in his garage in Tucson. Fuel cells are an old technology, dating back more than 150 years; they convert a fuel, like natural gas, into electricity through chemical reaction rather than combustion. Sridhar’s pitch had some novel technological aspects, and his business plan called for making energy generators — essentially, large box-shaped units for a home basement, or an office building — for buyers who either had no access to an electrical grid or wanted to disconnect themselves from one. ‘You could put natural gas into it and get electricity out,’ Aileen Lee, the partner at Kleiner who researched Sridhar’s proposal, told me. ‘Or it could be fuel-flexible’ — meaning the boxes could run on, say, ethanol. At least in theory, the units, which Sridhar called Bloom boxes, would be reliable, quiet and very low in carbon emissions.”

The Bloom Energy website shows a pretty Adobe Flash movie but provides little other information about how it is progressing. A blog entitled Peak Energy reports:

“Another company that has received a lot of attention in the fuel cell market is US company Bloom Energy, who are also developing solid oxide fuel cells (though there is some legal argument underway about who actually developed the technology in this case). … The company is investigating using natural gas and ethanol as fuel for the cells, and most reports speculate the cells will be able to generate 100 kw of power. … One report from Business 2.0 claims the company is aiming to sell units for around US$10,000. Bloom is backed by a number of high profile investors, including the omnipresent Kleiner Perkins Caulfield Byers, and has raised US$100 million in funding. According to Vinod Khosla, the company is currently building a ‘massive’ facility in Mumbai, India. One possible application for Bloom’s fuel cells is in data centres, with the cells used to eliminate the need for uninterruptible power supplies (UPS’s) and thus (in some cases) the need for additional disaster recovery (DR) facilities.”

Gertner provides a much more promising update on the company:

“Bloom Energy is a good example of a venture where the chips are now piled high. Though you wouldn’t know it from appearances. Located in a modest, unmarked one-story building with large plate-glass windows off the highway in Sunnyvale, Calif., Bloom is one of the companies in the Kleiner portfolio closest to unveiling a commercial product. Over the past two and a half years, engineers at the University of Tennessee in Chattanooga have been testing a five-kilowatt Bloom box, which looks like a squat refrigerator and produces about as much electricity as a typical home requires. And at this point there seems little doubt that the idea K. R. Sridhar pitched to Kleiner in 2001 has become a high-functioning machine. ‘We installed one of his first units here to assess its durability and performance, to see if it matched the claims,’ Henry McDonald, a professor at Tennessee who is overseeing the Bloom box, says. McDonald ran the box nonstop on natural gas for 6,000 hours, and its performance beat expectations. In everyday terms, the box was twice as efficient as a boiler burning natural gas, and its carbon emissions were 60 percent lower. Kleiner didn’t invest in Bloom for precisely these reasons. Rather, the firm’s partners say that Bloom could eventually sell hundreds of thousands of boxes, either at the 5-kilowatt size or as larger, 100-kilowatt machines that power buildings or neighborhoods. The company’s ambitions are indeed breathtaking in scope. As Sridhar told me, referring to the world’s population: ‘Two billion people have no access to electricity. And of the other four billion people with access, probably two billion are actually getting below their demands.’ That makes for a lot of potential users of his product. Sridhar also contended that even here, in the developed world, where the grid is reliable and electricity comparatively cheap, Bloom could find willing customers under the right circumstances. He showed me his first Bloom fuel cell, the one he made eight years ago in his garage in Arizona with some colleagues; it resembled a flat, rectangular metal plate, about the size of a pack of Chiclets. Etched across its face was a geometric pattern of tiny equilateral triangles. The prototype produced a couple of watts of electricity, he said, not even enough to power a light bulb. ‘This is what I showed Kleiner as the proof of concept,’ Sridhar recalled. ‘I said, “This is what we can use to power the world and change the world.”‘”

Gertner reports that Kleiner’s portfolio in green technologies took a long pause following the investment in Bloom Energy because investors were unsure whether the green economic sector really represented a viable path.

“Then, in late 2006, at one of Kleiner’s corporate retreats, Bill Joy, a founder of Sun Microsystems and a new partner at the firm, displayed what later became known within Kleiner as ‘the map of grand challenges.’ This was a matrix of colored squares that itemized the firm’s progress in locating potential investments in about 40 different categories: water, transportation, energy efficiency, electricity generation, energy storage and the like. In the blank spots there were lists of ‘things that ought to be possible,’ in Doerr’s words — ideas, in short, that might produce huge changes and, if Kleiner bought a stake, huge profits. Thus the grand map was a rough, imaginary outline of a clean-energy economy that didn’t really exist and perhaps wouldn’t in any meaningful way for decades. But it helped Kleiner understand what to look for. That same year, Kleiner officially informed its investors that it would begin putting $100 million of its newest fund in green technology. Doerr, Joy, Ray Lane and John Denniston all joined the green-tech group.”

Kleiner didn’t just sit back and wait for entrepreneurs to knock on their doors (which did happen); they also went on innovation safaris looking for illusive technologies that fit within the map of grand challenges framework.

“They started scouring laboratories throughout the United States, as well as academic departments around the world, for energy ideas that could satisfy challenges on the grand map. It has become a kind of received wisdom that American and European laboratories have yet to come up with enough innovations to ease our dependence on fossil fuels, or that effective (and affordable) technological solutions to climate change are still many decades away. In truth, there have been scores of recent scientific developments in wind, solar, biofuels and energy efficiency that have not yet entered the market, in part because the private sector has deemed them risky investments in a world where gas, coal and electricity are cheap. As Andy Karsner, who recently stepped down as the Department of Energy assistant secretary in charge of renewables, told me, ‘Venture capital’s interest in the sector didn’t arise until price signals and climate change came into play a few years ago.’ Before that, he says, green technology ‘was in a state of suspended animation.’ Dan Arvizu, the head of the National Renewable Energy Laboratory in Golden, Colo., echoes this sentiment. Whenever Arvizu testifies in front of Congress on the state of renewables, he told me: ‘They always ask the same questions — “When is this going to be real?” And I say: “It’s real now.”‘”

Gertner reports that Kleiner eventually uncovered promising ideas in California, Massachusetts, Florida, Texas, Pennsylvania, New York, New Jersey and Georgia, as well as in Israel, Germany and China. Kleiner keeps its “map of grand challenges” a close-held secret, but the government could probably put together its own map to help guide policies and investments that could help make the potential benefits of a vigorous green sector a reality. Gertner asserts that venture capitalists are counting on partnering with the government to help ensure that a green economic sector emerges.

“At Kleiner, you rarely go a day without hearing how new federal laws that put a price on carbon emissions, for example, and that mandate levels of renewable electricity production could speed the adoption of green energy. The partners often made the case to me that if our national science budget for renewables and efficiency (about $1 billion annually) were brought in line with that of the National Institutes of Health (about $29 billion), a torrent of projects and jobs would be unleashed. … Jeffrey Sachs, an economist and the head of Columbia University’s Earth Institute, put it this way: ‘I think the private-sector investments that are being made are going to make a very big difference, but one can see where the bottlenecks will come if this is only left to private capital.’ Sachs notes that putting a price on carbon is a crucial action. But it’s not the only one. The electricity grid, he says, would almost surely need to be rebuilt as the country switched to renewables, a change requiring federal financing and policy action in land use, interstate law and liability.”

It is this kind of public/private partnership for which Google and General Electric are lobbying [see my post GE, Google, and Grids]. Gertner wonders, however, if the current enthusiasm for a green economy is not just another craze that will create a bubble that will eventually burst like all the bubbles before it. Executives at Kleiner admit that possibility exists but like Tom Friedman they note that such booms “often have a way of building up a useful infrastructure, even when they expand too far. Energy would be a far bigger market than the Internet, meaning a much bigger boom.” Gertner notes that not everyone believes that a green economy will emerge.

“‘Clean tech brings out a really emotional response in people in the valley,’ Paul Kedrosky says. ‘They react strongly to the idea that this has to succeed because it’s really important, because it’s too big to fail. Because that has nothing to do with whether or not you can make money on it.'”

Kleiner is betting that the “green” in a green economy will represent profits as much as environmental friendliness. Tom Friedman, Barack Obama and John McCain also believe that America’s future lies along the path that leads to a greener and more vigorous economy. Let’s hope they’re right.

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