Innovation is easy, right?  

Software/Web innovation has their model nailed. The wham-bam-thank-you-Y-Combinator process combined with caffeine and electrons rapidly ramps companies, creates whole new sets of things consumers never knew they needed (but now simply can’t live without), and delivers market index +3 returns to LPs who continue pouring money into the space. It took a market crash and 15 years to get there, but hats off, it works. Software creates money.

But Cleantech creates jobs , and the kind of jobs American cities need most. It’s also species-survial-mission-critical, unless you think all the crazy weather (and mounting insurance and ancillary costs) are just a rogue anomaly.  But building stuff is hard work, and the Valley of Death is a lot longer and more treacherous.  We’re still figuring out the money part, but that’s progressing by leaps and bounds.

What is the right model for Cleantech innovation?

It’s one that fosters technological breakthroughs, efficiently grows companies, ensures investment returns commensurate with risk, and delivers deployment where most needed. The key lesson from the last 7 or 8 years is that the push model that Software/Web utilizes just doesn’t work very well in this sector. We aren’t dreaming up new wants. By and large, the problems Cleantech solves for are understood: use less energy, use less water, create less carbon, etc, and the conditions bounding these problems are pretty well understood too. Even the markets they encompass can be projected with relative accuracy. What is more difficult, however, is the time it takes to get the solutions developed and manufactured, the challenges of deploying against legacy systems and incumbents, and the unforeseen role regulations can play in market structure and economics. All doosies compared to apps that let you blow up smirking pigs.

Cleantech entrepreneurs have the same challenges as others:

The most common plea from our portfolio companies is for help raising early stage capital, so I spend a disproportionate amount of time working on this issue, which also means watching how the cleantech space generally is evolving and here at the Incubator, experimenting with new models that are sustainable, profitable and repeatable. Sourcing seed or Series A investment isn’t an easy request to deliver on in the current environment and the fallout from the missteps and enthusiasm of the last 5 years of cleantech investing has been well documented, but there is good news. A consensus is emerging that we’re at the turning point in getting smart about how you build cleantech companies, which will begin to return the sector to the interest of investors. What’s up? Rob Day makes a good case for how the industry is evolving and maturing, which I think is spot on. Investors are smarter (or wiser at least), the ecosystem is more cooperatively aware (it pays to play nice with others), entrepreneurs are more experienced (even if somewhat singed) and the rumor mill abounds with stories of 2013 exits imminent, though whether this will just finally flush out the bad news or actually substantiate the mark-to-market and provide LPs some upside still remains to be seen.

Why is the cleantech nut so hard to crack? What are the issues that make cleantech different from other sectors? First, cleantech isn’t software/web/mobile – there are carbon, iron and lots of other atoms involved, not just electrons, neurons and caffeine, hence, pivots take much longer and are much more expensive. Second, products have a much longer timeline for commercialization (trudging across the valley of death) and the risk of the fundamental market dynamics changing by the time a company finally launches is significantly greater (<<insert your favorite cleantech roadkill here>>). Third, regulations and government have a disproportionate affect on market evolution, adding uncertainty and high variability (ITC wind credit), and finally, industry relationships, especially with incumbents, are much more critical to scale up (have you ever tried to sell into a utility?). So the challenge is, how do you deal with these issues in a way that brings competitive investment returns to the sector? And more specifically, how do early stage companies raise capital?

Here’s what we’re seeing from the front lines  in Los Angeles that show early signs of success:

• Pull Versus Push: incumbent industry, utility and municipal players are becoming more proactive in seeking out solutions they need to address impending regulatory and sustainability issues and pulling them to market instead of relying on entrepreneurs to push products where they hope there’s a fit. This takes a whole bunch of inefficiencies out of the process: entrepreneurs have a much clearer view of real market economics, scope and sensitivities; industry gets the solution they’re looking for, instead of sifting through countless pitches from over the transom, and investors get innovation companies with built in technology validation and customer engagement. Much lower risk of failure. Much faster time to market. Much faster growth and exit. Everybody comes out ahead.

• All Of The Above Approach: Investors targeting early stage cleantech companies are coming from an increasingly broad range of perspectives: crowdsourced high net worth, professional angels, double and triple bottom line venture funds, foundations, government (Fed, State and local), industry, family offices, incubator attached funds, and traditional venture capital.  Because of the social and environmental benefits connected to sustainability innovation, a much broader swathe of players are attracted to the space. This means many more avenues of funding for entrepreneurs, but also much more complication and effort required to work through the options. It’s not as simple as friends/family/angel – VC – PE – IPO/Acquisition, and complicating things, many of these players are new entrants in the last couple years and still getting their legs under them with regard to deploying capital at scale. The important thing though, is that there is a lot of creative thinking and exploration going on to figure out how to put capital to work.

• Regional Coordination: However this occurs, whether by an incubator, an industry group, regional center, university or some other public/private partnership, an organization that smooths the interaction among all the players is essential. Entrepreneurs are always short on time, and new entrepreneurs in particular are short on experience and connections. A regional player that brings a virtual support team to get behind companies can vastly improve the odds of success. Think about how much time you spend searching for the right personal connection, think about how much effort it is to understand shifting market dynamics for your product or service, or early stage investment structures, or IP process, or HR issues, or design/branding/marketing on social media, etc. A well staffed and designed regional support center can save entrepreneurs untold hours and missteps by making the learning curve on all of the issues above much flatter. And time saved is money saved.

I’ll be diving into each of the topics above in greater detail over the next few weeks, but the take home message is this. There’s hope, things are improving, we’re probably past the worst of it, and those left standing and still focused on the space will likely see their efforts well rewarded over the next handful of years. Stay tuned and keep the faith, the rebirth is imminent….