[FoRK] The Parable of Joe and the Looters

Joseph S. Barrera III joe-ml at barrera.org
Sat Jul 5 12:54:34 PDT 2008


Joseph S. Barrera III wrote:

 > Joe needs to move to Silicon Valley if he wants funding.

http://technology.newscientist.com/article.ns?id=mg19826581.600&print=true
(if you're not subscribed, why not?)

The greening of Silicon Valley

28 May 2008
Justin Mullins

"IF THE best way to create the future is to invent it, we say the 
second-best way is to finance it." John Doerr is only half joking. He is 
one of the most influential venture capitalists in Silicon Valley, and 
he knows a thing or two about financing the future. As a partner at 
Kleiner Perkins Caufield & Byers (KPCB), one of the Valley's best-known 
venture-capital firms, Doerr has enjoyed a phenomenal run of success, 
backing technology companies such as Sun Microsystems, Google and Amazon 
(as well as the odd failure, such as computing start-up GO Corporation, 
which famously burned through $75 million of venture funding). In the 
process, he has made himself a personal fortune in excess of $1 billion.

But ask him what he's focused on now and you won't hear venture-capital 
buzz-phrases such as "Web 2.0". These days, Doerr is firmly focused on 
clean technology - and in particular, energy technologies that can save 
the planet from global warming. This month his firm set up a $500 
million fund for investment in green technology, on top of the $200 
million it has already invested.

This doesn't mean Doerr has ditched capitalism for more worthy goals; 
his new direction is still driven by an instinct for profit. "Remember 
the internet? Green tech is bigger," he told TED, the annual technology 
entertainment design conference in Monterey on the southern fringes of 
Silicon Valley last year. "This could be the biggest economic 
opportunity of the 21st century." He tantalised his audience with the 
mouth-watering fact that the global energy business is worth $6 trillion 
per year. That puts in the shade anything measured in mere billions, 
such as the market for computers. "Energy is the mother of all markets," 
he said.

Even a tiny slice of such a market would keep a venture capitalist in 
beige chinos and blue shirts for life, but there is more to this story 
than the search for riches.

In 2000, a financial earthquake hit the area of green rolling hills just 
to the south of San Francisco known the world over as Silicon Valley. 
The Valley had enjoyed a decade of seemingly unstoppable growth - the 
greatest period of legal wealth creation in history, as Doerr famously 
put it at the height of the boom. The trick had been to finance and 
build the technology behind the dotcom revolution. In the space of 10 
years the internet changed the planet, bringing fantastic wealth to the 
small band of Silicon Valley venture capitalists who had financed the 
companies behind it.

In took only a few months, however, for billions to be wiped off the 
value of these companies. Many disappeared overnight. Within a year, the 
Valley's once-buzzing cafes, restaurants and networking bars were empty. 
Many companies and individuals faced ruin, and Silicon Valley changed 
from a hive of entrepreneurial activity to a ghost town of empty office 
blocks and internet has-beens.

Eight years on, though, the Valley is buzzing again. The people who 
funded the extraordinary success stories of the 1990s have taken on a 
bigger challenge: this time they want to save the planet. Venture 
capitalists are falling over themselves to invest in green energy. In 
2007, they invested $1.1 billion in clean-energy technology, according 
to CleanTech Group (see Chart). That's an increase of 94 per cent over 
2006, a rate of growth that is bringing back happy memories of the 
dotcom boom. Even the credit crunch has so far had little impact, 
according to a survey by BusinessGreen.com.

Silicon Valley's venture capitalists aren't the first investors to wake 
up to the fact that an energy technology able to compete with coal or 
gas is going to clean up in more ways than one. But their mindset is 
different. By applying the techniques they perfected in the dotcom era 
for rapidly turning ideas into money, the Valley venture capitalists 
believe they can reach the ultimate goal - energy that is cheaper and 
cleaner than coal or gas - in just a few years.

In support of this ambitious, perhaps even arrogant, claim, the venture 
capitalists point out that they've done it before. Half a century ago, 
this part of California was a small farming community known for its 
apricots rather than its Apples. Then in 1956, William Shockley, 
co-discoverer of the transistor, set up a company in Mountain View to 
commercialise the invention. The move triggered the birth of an entirely 
new industry based on the silicon chip, and spawned household names such 
as Intel and Apple.

Behind the scenes, an extraordinary support network emerged to help set 
up, finance and staff the new companies. The ideas and minds came from 
nearby universities such as Stanford and Berkeley, the administrative 
know-how from a web of legal and accountancy firms and the money from 
venture capitalists - wealthy individuals prepared to stake money on 
high-risk start-up companies in exchange for shares. Silicon Valley 
became a melting pot of innovation, entrepreneurship and risk-taking 
unrivalled anywhere on the planet.

Such was its unique ethos that the Valley coped well with the economic 
downturns of the 70s, 80s and 90s. If anything it thrived on them, 
turning the hard times to good use by sniffing out ideas that would help 
it bounce back when the wind changed. In this way the Valley found 
itself well placed to finance and build the internet revolution that 
produced the Amazons, Googles and Yahoos that now dominate the online 
world. And when the dotcom bubble burst in 2000, the Valley did what it 
had done before: it bided its time until the next big opportunity came 
along.

A hint of what that opportunity would be came in 2003 as the price of 
oil began to rise, and when it rocketed to more than $100 a barrel last 
year the Valley financiers were galvanised into action. The energy 
business needed reinventing and they were ready for the challenge.

Vinod Khosla, one of the Valley's most successful venture capitalists, 
explains how the skills it gained from the high-tech industry now put it 
in pole position. "They're about managing technology risk," he says, 
pointing out that whether you're dealing with computers or energy, those 
risks are the same. Khosla is no stranger to managing risk. He 
co-founded Sun Microsystems in 1982 (with funding from Doerr), making a 
small fortune in the process. In 1986, with the PC revolution getting 
into its stride, he left to join Doerr at KPCB and by 2004 a series of 
entrepreneurial hits had put him in a position to start his own 
investment firm, Khosla Ventures.
It has to be fast

Khosla is now one of the Valley's biggest investors - and believers - in 
new energy technologies. Improving energy efficiency or changing laws 
can only produce small, incremental gains, he told New Scientist. "A new 
technology, on the other hand, can make a 200 per cent or a 400 per cent 
or a 1000 per cent difference. Technology is a sure-shot solution."

The hard part is picking the right technologies to invest in. To make 
that call, Khosla applies a number of tests learned from his years 
investing in computing and internet ventures. One key factor is whether 
the rate of innovation is fast enough. A rapid innovation cycle - the 
time it takes to turn promising ideas into goods that can be sold - is 
crucial to progress, he says, because it allows new ideas to hit the 
market quickly and gives investors the prospect of a quick return.

To illustrate the role of innovation cycles, Khosla cites two 
contrasting ways of generating electricity: nuclear energy and solar 
thermal technology. "It takes 15 years to build a nuclear power plant," 
he points out. So while there may be exciting ideas that could have a 
big impact, the rate of innovation is too slow to make it an attractive 
investment.

Solar thermal technology, which uses the sun's heat to generate steam to 
drive a turbine, is at the opposite end of the spectrum. It takes just 
two years to build a solar thermal plant and in that time the technology 
will have improved further still. "With solar thermal, I can fit several 
cycles of innovation into the time it takes to build a nuclear plant," 
Khosla says.

Last year, Khosla Ventures and KPCB invested a total of $40 million in 
Ausra, a Palo Alto solar thermal company which claims to be already 
generating electricity at market competitive rates. Advocates of solar 
thermal energy, Khosla among them, say the US could eliminate half its 
greenhouse emissions by installing solar thermal technology on an area 
less than 150 kilometres square. Solar thermal power is not suitable for 
every climate, but in places where the sun shines regularly and 
predictably it is gaining in popularity as successive innovation cycles 
improve efficiency and drive down costs.

Just as important as the innovation cycle is how well a technology 
"scales": does the product get cheaper as it is made in larger 
quantities, like the silicon chip?

Consider the biofuel ethanol. Today, this is most commonly made from 
crops such as corn (maize) and costs in the region of 65 cents a litre, 
significantly less than the 95 cents Americans are now paying for a 
litre of gasoline. But far from benefiting from economies of scale corn 
ethanol gets more expensive as you make more of it, not least because 
corn is also a food crop. Converting it into ethanol pushes up demand 
and triggers a spiralling increase in prices. And the more corn ethanol 
you make, the higher the cost of your feedstock.

There is, however, an alternative biofuel that scales well. Cellulosic 
ethanol can be made from almost any plant matter and so can exploit 
material such as corn stalks that would otherwise go to waste. Khosla 
says that companies such as Range Fuels in Broomfield, Colorado, and 
Macoma in Cambridge, Massachusetts, (both of which he funds) produce 
cellulosic ethanol at a cost of less than 55 cents a litre. With the 
supply of feedstock practically limitless, simple economies of scale 
mean that the more cellulosic ethanol you make the cheaper it becomes. 
Other technologies that pass Khosla's tests include synthetic biology 
for biofuels and thin-film solar photovoltaics (see "Ripe for 
exploitation").

Where Doerr and Khosla have led, other investors are now following. One 
of these is Lightspeed Venture Partners of Menlo Park. Principal 
investor Andrew Chung says investment decisions in clean technology are 
made more difficult by the complex economic environment in which energy 
companies operate. Solar power, for example, still relies on subsidies, 
which are dangerously dependent on the whims of public and political 
opinion. On top of that, solar-power companies have to sell their 
product into a market that is sensitive to regulatory changes. These 
unpredictable and unfamiliar factors add significantly to the risk. 
Nevertheless, Lightspeed now funds a range of companies developing 
everything from "clean coal" to bioengineered algae for biofuel manufacture.

Ira Ehrenpreis of Technology Partners, a venture capital firm in Palo 
Alto which has taken a similar plunge, says many of these worries have 
eased as public and political opinion has swung in favour of green 
energy. "We have come a long way, from a country that was divided over 
green energy to one that is essentially united," he told a meeting of 
Silicon Valley's legendary networking society, the Churchill Club, in 
January.

It's not just venture capitalists who are crowding into green tech. 
Google's philanthropic arm Google.org has made a series of investments, 
including $10 million in solar thermal company eSolar and another $10 
million in Makani, which hopes to launch a fleet of high-flying kites to 
extract energy from the wind (New Scientist, 17 May, p 38). Investors 
are also starting to look beyond energy-generating technologies to other 
aspects of the energy economy. Technology Partners has backed APX, which 
helps companies buy, use and trade energy more efficiently, and Tesla 
Motors, which makes an electric sports car that can do 0 to 60 miles per 
hour in 3.9 seconds.

So will Silicon Valley's ongoing investment in the evolution of green 
technology make an Earth-changing difference? "We need people who are 
looking at over-the-horizon technologies," says David Downie, director 
of the Global Roundtable on Climate Change, a group of influential 
academics, companies and government representatives brought together by 
the Earth Institute at Columbia University in New York. Yet while he 
acknowledges that the technologies being fostered by the venture 
capitalists will make a difference, they will never be the whole 
solution. "Silicon Valley can't negotiate with the Chinese and US 
governments; it can't mandate new policies on deforestation and zero 
emissions," he says.

It's a limitation the venture capitalists accept too. "Technology can't 
solve the problem of deforestation," says Khosla. The key will be a team 
effort that includes entrepreneurs, politicians and ordinary people. 
"Can Silicon Valley save the planet? Not on its own," says Downie. But 
ask him whether we can save the planet without the Valley and he pauses: 
"That's much more interesting. There's no question we need it."




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