Blue-Chip VC’s Give 4 Lessons on Startup Success During DOE Showdown

In a field of nascent startups that included ideas for better bearings, better landfills, and a company that makes glue from pig poop, judges at the Department of Energy’s 2013 Clean Energy Business Plan Competition kept their eyes on the biggest prize of them all, awarding first place and $100,000 to a team of entrepreneurs that has developed a cheap, durable fast-charging lithium ion battery.  (Last year’s winner, NuMat Technologies, just closed a $2 million seed funding round for its gas storage and separation technology.)

SiNode Systems, created by a group of researchers at Northwestern University, beat hundreds of contestants with its plan to build batteries that the company says can store 10 times more electricity than those currently on the market. That helps chop the charge time of a Tesla Model S from five hours to 35 minutes, with lower production costs and fewer toxic materials.

This week’s announcement continues SiNode’s winning streak. The company also placed first in the 2013 business plan competition at Rice University, taking home more than $800,000 in prize money.

“Our patented technology enables us to offer a dual value proposition of higher capacity and faster charging,” according to the company’s competition video.

The importance of tackling such notoriously big, capital-intensive challenges as battery storage was a consistent theme throughout the DOE’s national gathering. While the venture firms represented on the panel make various investments in capital-light companies focused on internet opportunities, cleanweb and mobile apps, the event’s focus on sustainable energy focused the conversation on bigger, more capital-intensive investments that carry more risk and longer exit horizons but also the potential of significantly greater profits if they do succeed.

Venrock venture capital partner Matt Nordan, one of the competition’s judges, described the challenge best when he said that clean energy startups cannot live on “programmer’s pizza.”

Investors and entrepreneurs looking to build companies that revolutionize energy markets with more efficient batteries, solar cells, and heat transfer systems cannot rely on programmers locking themselves in a room for two months, writing software that either succeeds or dies on the App Store in a matter of weeks.

Instead, patience is required. Nordan, who found incredibly fast success as an early investor in smart thermostat maker Nest Labs, says the average clean energy idea needs 14.5 years to succeed, and two-and-a-half times more money than the average startup.

The risk, and potential rewards, grow apace.

“You’ve got to spend a lot more money before you know if you’ve won,” Nordan said during a panel discussion. “Because this is not the internet, all right? In an industry like this one that has these long timeframes and pretty high capital requirements, you really need to have some breakthrough inventions and not be satisfied until you’ve got one.”

The energy department clearly took the same approach in selecting finalists for the event. They included:

– Bioadhesive Alliance. Winner of the competition’s people’s choice award, possibly because the company repeatedly mentioned “pig poop” in its video. The startup from North Carolina A&T State University created a process to break swine manure into simple molecules that can be used as adhesives that deliver a 75-percent cost savings on energy-intensive petroleum-based products used in carpeting, book binding and asphalt pavement. In May the company won $25,000 and the Charlotte Venture Challenge.

– The runner-up in online voting was Bearing Analytics, a team from Purdue that has developed sensors to monitor bearing performance. The company’s presentation included some jaw-dropping numbers on the market opportunity, noting that industry currently loses $50 billion in equipment damage and downtime due to broken bearings, plus prematurely replacing bearings that are working fine.

With such a diffuse potential market, the company has chosen to focus its efforts on developing sensors for the U.S. wind and railroad industries. That sat well with the competition’s judges, since both industries absolutely rely on heavy, expensive, spinning machinery. Bearing Analytics won $100,000 in April at the latest Clean Energy Trust Clean Energy Challenge.

To increase chances of success, especially in capital-intensive plays that require R&D and the manufacture of new physical products, it’s important to find potential clients whose need for your invention is acute.

“When looking for potential corporates to partner with, you want to look for companies that are bleeding from the neck not the hand,” says Michael Ahearn, founder of True North Venture Partners, an event judge whose investments include $110 million in organic soil, fertilizer and energy company Harvest Power.

– Invironment. How to save precious landfill space? By helping bulky plastics biodegrade faster, and giving landfill operators more revenue-producing methane gas in the process. The Brigham Young University team created PlasTek, a patent-pending liquid that it will spray on plastics to cut large plastic molecules and speed bacterial breakdown from hundreds of years to three.

The company has an agreement to start its first pilot project, and plans to be market ready by 2014, according to its presentation.

Pyro-E. Created by students and researchers at University of California Berkley, Pyro-E has developed technology to spray water mist on hot metal and capture the resulting heat as energy. It plans to go from concept to product launch in 24 months, its founders say, starting with systems that convert vehicular heat.

– Picosoloar. Everybody knows what a solar panel looks like, a blue-ish expanse crisscrossed by silver lines. This group from the University of Arkansas, fresh off winning $150,000 at the MIT Clean Energy Prize, has figured out how to reduce the number of those silver lines, cutting silver use by 22 percent and freeing up enough surface area to boost panel efficiency by 15 percent, according to the company’s video.

Production costs also go down. The most efficient solar panels right now take about four hours each to manufacture; Picosolar says it can achieve the same electricity conversion rates in seven minutes.

After winning recognition for beating hundreds of teams in regional competitions to qualify as one of the DOE’s top six clean energy picks, the entrepreneurs involved in the business plan competition also got to hear advice from some of the top investors in the clean energy space.

Those VC’s largely agreed on a few key points, which are as relevant to venture capitalists as they are to budding entrepreneurs:

1) Inventing actual stuff is harder than writing software. Venture capitalists obviously like cleanweb companies because the upfront capital requirements are low, R & D costs are negligible, and success or failure comes quickly. For those VC’s interested in the big bets and potentially enormous rewards of clean energy, however, the risk proposition changes significantly.

“I think there was a lot of that venture capital enthusiasm that this is the next big thing—we’re gonna tale it to infinity, we’re going to make billions of dollars just like we did with internet and software,” said David Danielson, the DOE’s assistant Secretary for Energy Efficiency and Renewable Energy. “And I think we’ve reached a point where everyone’s learned that energy is not easy. Physical innovation is not easy.”

2) Since you have to go big anyway, go really big. There’s no sense in investing millions of dollars and a decade of one’s life on anything less than revolutionary technology, said Andrew Chung, a partner at Khosla Ventures, which has invested in cleantech companies including EcoMotors, and waste-gas-to-fuel company LanzaTech.

“If you have something that isn’t very well-differentiated now, it will be less and less differentiated over those ten years,” said Chung. In an ideal world, he says he’d find opportunities by “bumming around university labs wondering what is the craziest, coolest technology that has the greatest chance of having an impact.”

3) Forget the government. If your startup depends on tax subsidies or government-created markets to survive, the blue chip VC’s on this panel don’t like that risk.

“We’re not willing to bet on regulation,” said Matt Nordan, a partner at Venrock. “We tend to bet on advances that are extraordinary and disruptive.”

4) Be open to all opportunities. Why focus on starting a company in the U.S. when China may offer a better regulatory framework? Why focus on building a large $50-million company when selling a small company for $5 million might generate the same profit in the end? Why shun corporates when their early involvement may give instant market access?

Chung pointed to LightSail, a company that started out trying to use its compressed air engine technology to crack the high-performance vehicle market but followed Chung’s advice to tackle the much larger world of energy storage.

“It was a complete shift based on a technology that had many applications,” Chung says. “It requires flexibility to figure out that if you can build it at these economics, someone will pay for it.”

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