Cleantech & Israel – The Quest for Smarts
Glen Schwaber is a Partner at Israel Cleantech Ventures and his investment interests are in crossover IT, solar, and power electronics and storage. He currently represents the firm on the boards of CellEra, Scodix and Brightview. Glen is a veteran venture capitalist, bringing with him 15 years of experience in Israeli technology finance.
Cleantech & Israel – The Quest for Smarts
Albert Einstein once said “only two things are infinite, the universe and human stupidity, and I’m not sure about the former.” He must have been talking about how we use energy. How can it be that we build dangerous coal mines, burn that coal in power plants while emitting NOx, SOx, mercury and other toxins into our air and water, and build vast networks of overhead transmission cables across hundreds of kilometers and into people’s homes, just so we can have the pleasure of turning on a light bulb in our living room? Not to mention that if too many people turn on their lights at the same time, we all suffer a blackout. As Jefferson Tester, Elisabeth Drake, and their MIT co-authors illustrate in their landmark textbook, Sustainable Energy, this most common of energy lifecycles – transformation of the chemical energy of a mineral fuel to visible light using an incandescent bulb – has an overall energy efficiency of 1.6%, when accounting for energy losses at the power plant, during transmission, and finally at the light source itself. In other words, we lose over 98% of the energy potential in a unit of coal during this process, to say nothing of the energy required to mine the coal in the first place and the externalities/pollutants generated throughout this (non) value chain. Somewhere between our energy generation, transmission, and consumption methods today on the one hand, and relying on candlelight on the other, there has to be a smarter way. And it is this – the quest to find a smarter way – that cleantech is all about.
Opportunities for Innovation
Scratching the surface of the above example reveals a glimpse into the myriad of markets and technologies that are emerging from the drive to build a more sustainable industrialized energy economy.
- The coal power plant — coal is the cheapest, most abundant, but also the most carbon intensive and pollution-emitting source of energy in our industrialized world. Hence the enormous sums of political and financial capital that have gone to (a) reducing emissions from coal fired power plants (b) efforts at carbon capture and sequestration (c) trials using algae to absorb CO2 alongside power plants during cultivation as a biofuel feedstock, and (d) technologies to convert coal into a cleaner, more efficient source of energy such as natural gas, through catalytic processes.
- Alternative energy generation — coal, gas, and oil account for about 85% of the world’s energy supply. Nuclear is about 6%. Wind and solar combined still account for only 1%. The long term market outlook for these alternatives, to say nothing of biofuels, is compelling and obvious. Migrating our societies off of fossil fuels and into renewables is one of the greatest challenges and economic opportunities of the 21st century.
- Smart Grid — According to the US Department of Energy (DOE), America’s electric system, “the supreme engineering achievement of the 20th century,” is aging, inefficient, and congested, and incapable of meeting the future energy needs of the Information Economy without operational changes and substantial capital investment over the next several decades. The DOE, in its position paper entitled “Grid 2030”, envisions a competitive marketplace for electricity, and one which connects everyone to abundant, affordable, clean, efficient, and reliable electric power anytime, anywhere. The paper points to several promising technologies on the horizon including advanced conductors made from new composite materials, electric storage systems such as flow batteries or flywheels, distributed intelligence and smart controls, power electronics devices for AC-DC conversion, and distributed energy resources including on-site generation and demand management. This past October, the DOE announced $3.4B in smart grid investment grants, with allocations for smart meters and consumer systems, transmission and distribution grid modernization and projects that include and integrate various smart grid components. In November, the DOE announced $620M in grants for regional, fully integrated smart grid demonstration projects in 21 states and energy storage projects, including advanced battery systems, flywheels, and compressed air energy storage. President Obama has a stated goal of doubling the amount of renewable energy the country uses in the next three years and is backing that up with significant cash infusions. Already, we see the rapid deployment of smart appliances, sensors, timers, thermostats, and advanced meters. These in turn enable diagnostics and real time monitoring, demand response, and more sophisticated provisioning and billing from utilities and newly emerging intermediaries.
- Energy efficiency — According to the International Energy Agency, (IEA), energy consumption is expected to grow by 25 quadrillion Btu by 2030. This growth will cost $10 trillion for electricity generation, transmission and distribution assets alone. Providing enough energy for economic growth in the future will require co-generation — using waste heat from electricity production for environmental heating/cooling and water heating. It will also require entirely new approaches to energy efficiency and conservation within buildings. The IEA reports that existing commercial and nonresidential buildings account for nearly 40% of U.S. energy usage and contribute an almost equal percentage of the CO2. When viewed specifically for electricity, buildings account for 72% of U.S. consumption. Piper Jaffray analysts currently expect the ‘green’ construction market to reach $95B – $140B, and perhaps more over the next five years, through the introduction of green building components like energy efficient windows, walls, insulation, construction materials, building integrated PV technologies and other energy saving devices. Some governments have put in place tax incentives and rebates for conducting energy audits to catalyze the shift to energy efficiency within the business and home. The incandescent bulb in our example will become extinct through a combination of legislation and technology, as fluorescents and increasingly reliable and cost-effective solid state lighting (LED) alternatives capture market share. Opportunities abound within the enterprise setting as well, with the drive towards efficiency leading to new conceptions of how to build enterprise computing, data storage networks, and server farms.
The Israeli Entrepreneur’s Dilemma
Clearly, the energy markets today are varied, vast, and offer tremendous opportunity for aspiring technology entrepreneurs. And the above broad market categories still exclude entire swaths of the cleantech opportunity such as transportation, water desalination, water treatment and agritech, all of which tie into our energy economy as well. Little wonder that cleantech as an investment theme in Israel has gone from fringe to obvious in the span of a few years. Three dedicated cleantech VC funds have been raised successfully, nearly all generalist VCs have added cleantech to their portfolio mix, and the pace of new cleantech dealflow has grown to about 150 startups annually, up from just a trickle in 2005.
Nonetheless, VC markets are showing signs of stress. According to the IVC Research Center, Israeli high-tech companies raised $1.1B in 2009 compared with $2.1B the preceding year, a fall of 46%, and projections for 2010 are even worse. And based on NVCA data, 2009 was the worst year for VC fundraising in the US since 1993. True, cleantech as a percentage of total VC investments has increased substantially not only in Israel, but around the world. But with just $150M of dedicated early stage capital for cleantech under management by the most active local VCs, absolute dollar amounts allocated for cleantech in Israel are still quite limited.
So, here’s the problem. We know that our industrialized energy-intensive economies today are unsustainable. We know that the next decades will be largely devoted to bringing technology to bear on tackling these problems. We believe that this offers potential for massive wealth creation on the part of the best and brightest entrepreneurs and innovation-driven businesses. Yet, right now the VC industry in Israel is going through a tough period and accessing early stage capital for cleantech is not easy.
The key then, for the cleantech entrepreneur in Israel is to focus on bringing unique capabilities to bear on a real, immediate, pressing market need in an industry segment that offers a clear, capital efficient, and quick path to commercialization. The VC industry globally and locally will likely face continued consolidation. Financing startups will be more difficult than in the past. Yet, the best entrepreneurs with the best ideas will continue to get funded, which are in fact the only companies that should be getting funded in the first place.
Israel’s tech sector has flourished through the creation of core technology competencies that are world leading. These include, but are not limited to digital printing, semiconductors, power electronics, optics, and software. Over the last two decades multiple billions of VC dollars have poured into Israeli companies in these sectors, market leaders have emerged, and many of the world’s largest multinationals have bought companies and set up shop in Israel as a result. Israel’s ability to compete globally in cleantech markets will depend largely on our success in leveraging all this know-how. And we are already seeing it happen. Entrepreneurs who built their careers in the digital print industry are now taking that expertise to PV cell manufacturing. Israeli excellence in advanced optics and systems has spawned a number of very interesting utility scale solar companies. And local technology prowess in power electronics and chip design has found a home in companies doing energy efficient lighting and smarter PV energy harvesting. It is in these areas, where there is a critical mass of development and engineering talent available here in Israel, that local entrepreneurs should channel their ideas and efforts. No need to try to solve all the problems in the “light bulb” energy lifecycle. Many solutions within the energy marketplace do not make sense to build from Israel. Instead, local entrepreneurs should keep a laser focus on their own core competencies and concentrate solely on those segments where they can bring unique capabilities to bear. Companies in Israel that marry up world-class business and technology acumen, a deep understanding of the path to market, and capital efficient business models, will have little trouble raising VC financing.
Where We’re Headed
Human industrialized society may have stumbled into a pretty dumb way of turning on our lights, but we are no doubt going to innovate towards a more sustainable paradigm of energy creation and utilization. As JFK said in 1963, “our problems are man-made, therefore they may be solved by man. And man can be as big as he wants. No problem of human destiny is beyond human beings.” Israel with its well documented history of innovation is fast becoming one of the leading global centers for cleantech activity. And we are only just beginning.