"Disruption" is one of the favorite words among investors in Silicon Valley. Even Techcrunch uses "disruption" as a tag line in its events. The reason for this enthusiasm is that disruptive companies are often times responsible for outsized returns. According to Clay Christensen, the "guru" of disruption, there are two types of disruption: you either produce a good/service that is faster, cheaper or more convenient targeted towards less demanding customers (low-end disruption, ex: Amazon) or you create a new market (think of Zynga which caters to middle-aged women who did not play video games). 

Problems in the Solar Industry

As Solyndra, Evergreen, SpectraWatt, and Veeco found out, it is really hard to disrupt a commodity business. Energy generation companies  (solar, wind, biofuels, fuel cells, hydro, and geothermal) are competing directly with coal, natural gas, and crude oil. In the absence of subsidies or taxes to account for the externalities associated with the extraction of fossil fuels, renewable energy companies face long odds of winning this battle. Some companies claim that they can or plan to produce energy below current market rates, but this assumes that traditional energy companies would not lower their prices if these technologies achieve parity.

However, the demise of Solyndra was due to reasons other than low traditional-energy prices. Solyndra just could not compete with other solar manufacturers. Silicon prices plummeted and the presumed advantage of lower installation cost never realized. To add to the injury, Solyndra modules were at least twice as expensive as the chinese manufacturers ($2/watt versus $1/Watt) 

No Moore's Law

The hope of energy generation companies is that the cost of panels, fuel cells, and turbines will go down with scale. Although this is true to some extent, I find many of the cost reduction claims to be overly optimistic. Unfortunately, the energy business does not follow Moore's Law and proving out new technologies typically requires large amounts of capital. I cringe every time I hear someone mention Moore's Law in an industry like energy. Despite this seemingly grim scenario, the energy business is too large and too important to be left alone. Using worldwide oil consumption of 84M barrels/day as a proxy for energy market size, the addressable energy market is $2.5 trillion per annum!

In the past few years, Silicon Valley has learned that the traditional venture capital model is not well suited for energy generation investment. Development cycles take longer, traditional energy is extremely cheap, and commercialization is often hindered by regulatory approval. We may still have a big winner ala "First Solar," but the most likely scenario is industry consolidation and the end of multimillion dollar bets. Fortunately, Silicon Valley always reinvents itself.

Some areas such as efficiency, recycling, environmental remediation, and waste & water treatment are more VC friendly. Stay tuned to the new era of cleantech investing. I will call it "Cleantech 2.0."

I intend to share my learnings and adventures in the tech capital of the world. So, it begins!

Aspirin versus Vitamin

In VC speak, entrepreneurs should strive for a product or service that addresses a sharp pain. Nice to haves or vitamins are just not enough. Dave McClure, one of my favorite VCs in the Valley, expressed this clearly in a talk for SeedCamp <http://tinyurl.com/3ckthu6>.  For those of you who do not know much about Dave, he is part of the PayPal mafia and is known for being blunt and to the point. He fits the archetypical entrepreneur who is a rebel not very fond of norms or formalities. Dave emphasizes the need to describe the problem at a visceral level. If the VC is unable to connect with your problem you are doom! Worse yet, many entrepreneurs start with the solution. 

One member of the audience challenged Dave on his position about starting with the problem. He mentioned that Twitter, the IPad, Zynga, Facebook, and others have started without a well defined problem in mind. I will not repeat Dave's answer, but I would say that while this might be true these products/services had either traction or entrepreneurs with a solid track record. 

For first time entrepreneurs, the barriers are definitely higher. Facebook obvioulsy had unbelievable user engagement (Matt Cohler told me that he thought there was an issue with the query the first time he saw user engagement numbers) . Steve Jobs is... well... Steve Jobs (hard to argue with someone whose biography was at one point titled "The Book of Jobs"). Twitter had a really hard time raising capital even though they had Evan Williams (creator of Blogger) among its cofounders. Even Mark Pincus who had three fairly successful exits before Zynga did not have an easy road. The conventional belief was that games were not viral, and  to make matters worse Mark did not have a gaming background!

As an entrepreneur, I never thought that you could lose someone's attention in just 30 seconds, but  -believe me- Dave's words resonated with me this past weekend. I went to a networking event and as a first time "investor" (thank summer internship), I found myself listening to solutions again and again. After about 30 seconds, I either started asking questions (what's the problem) or looking away...