Welcome Back! BSG Team Ventures is proud to once again host the 4th Annual Benefit: VC vs. Entrepreneur Tennis Tournament – Davis Cup Challenge, and we are thrilled to have you join us.
The VC/Entrepreneur tennis community has been growing every year so please register now so we can build the teams early.
TENACITY – Transforming Youth and Building Community. Founded in 1999, Tenacity has served over 20,000 Boston students who otherwise would lack a safe, productive, and healthy after-school and summer environment. Our high-quality literacy and tennis programming not only build academic skills and improve fitness, they also foster the development of strong bonds between our students and caring staff, which instills the resilience needed to succeed in school and life.
The UK’s sustainable energy program is a public-private partnership at work. And thus far, working well.
I recently had the opportunity to participate in what has become an annual “Cleantech Trade Mission” of Boston and New York cleantechers to the United Kingdom. Our hosts? The UK Trade & Investment team based here in the Northeast, part of the large mandate of the British Consulate here in the U.S. to continue to put planks in the bridge between our two countries, especially when it comes to cleantech and sustainable energy solutions.
Although I joined midweek as was over there for a European-based executive search we were interviewing on, the group moved from North to South, starting on Monday up in Edinburgh, Scotland, then down through Newcastle, Cambridge, and ending with two days in London.
It was a comprehensive gathering of the UK cleantech ecosystem for an exchange of ideas and “show-and-tell” around the UK of their commitment to sustainability and cleantech thought leadership. Our US band of cleantech brethren among others included investors from Rockport Capital and Kleiner Perkins.
There were three notable differences between the UK and US surrounding renewable energy & cleantech:
1) Government superstructure like the Carbon Trust (keep in mind, the UK has cap-and-trade and the U.S. doesn’t) Cap & trade drives a true dynamic market in the UK while the US version is still mired in politics on Capitol Hill. The UK succeeded in passing sweeping energy-related legislation in 2008 (http://www.carbontrust.co.uk/about-carbon-trust/pages/default.aspx ), and the result has been a fueling of the entrepreneurial engine in Britain to come up with new technologies, sciences, and Internet-driven efficiency and monitoring solutions to help drive adoption and integration of the new laws.
2) Landfills and methane is another interesting difference again brought about by the UK’s progressive legislation. Britain is an island, and a small one at that compared to the U.S. (60+ million citizens, one fifth the size of the U.S.) There is limited real estate for landfills, and one of the big offenders from landfill is methane gas. A host of science-driven entrepreneurs have tackled what is referred to as anaerobic digesters (http://www.foe.co.uk/resource/briefings/anaerobic_digestion.pdf )
3) Massive investment in offshore wind generation capacity is the third area. It was truly remarkable the detail behind Britain’s likely ascendance to global leadership in offshore wind generation. Historically, Scandinavia has held that claim. However, with Britain’s aggressive 2020 goals, they’re going to no doubt lead in offshore wind expertise and GW installed base.
Some quick numbers related to the 2020 initiative:
* Capital expenditures: £14 billion already spent in the last 5 years.
* £5.6 billion more in cap-ex planned for the next 5 years (keep in mind, this is a country with a population of ~ 62 million, about one fifth the size of the United States)
* Closure of 25% of traditional power stations (coal or other non-renewable sources)
* 25% of natural gas generated from UK sources
* Addition of 44GW of offshore wind power at distances up to 200km from shore, and in water depths down to 80m
Something like 40% of energy capacity is going to be wind, with a vast majority of that coming from offshore wind. However, UK power generators like NationalGrid recognize that there needs to be a large redundancy due to the intermittent nature of wind as a resource. NationalGrid is planning primary failover in the form of LNG and CCS capacity to power conventional generation, replacing virtually 100% of existing coal-fired plants with carbon-capture versions. The best hope to reduce this reliance on traditional energy sources is to innovate a wind power storage solution that can be commercialized between now and the completion of the 2020 UK offshore wind initiative.
Britain is pioneering a number of other innovations, including a CO2 transportation network that transports CO2 for storage (think CO2 “pipeline”), taking a chunk of the industrial complex’s CO2 emissions and capturing, storing and or repurposing it.
After all that cleantech knowledge transfer, what did the UK serve for dessert? A cocktail party with London-based cleantech entrepreneurs and investors at Taylor Wessing’s offices on the top floor wrap-around patio on a gorgeous London summer evening (below was the mis en scene).
In addition, we had an opportunity to take a sneak peek from “The View, ” an official viewing site of the 2012 Summer Olympic Park, at the top of an adjacent apartment building in East London that has impressively grown from a former area challenged by urban decay. And the London Olympics stand to be the greenest one yet from what we were told, with prolific and cool sustainable innovation even built right into the very steps of the stadiums that use spectator energy expended in climbing up and down the stadium to power an LED lighting system. One of their sustainability goals is to try to construct the Olympic venue with a net-zero carbon footprint.
Footnote: Rob Dietel, Vice Consul, who heads the cleantech vertical for the British Consulate’s UK Trade & Investment New England office, is a terrific resource along with his colleague, Kevin McCarthy, also out of the Boston office. Rebecca Lewis is Rob’s New York-region counterpart. All three are bringing a select group of UK cleantech entrepreneurs to Boston and New York this Fall. In addition, they’re planning on putting on a one-day “master class” of sorts showcasing UK offshore wind expertise here in the U.S. Invitation-only, and for those who are lucky enough to get the invite, it should prove to be great content. For more detail, Rob is at rob.dietel@fco.gov.uk.
I have it on good authority that June has been declared New England Innovation Month, per Scott Kirsner who has been tireless tender of the innovation flame here in New England for years now (http://www.boston.com/innovation). See the growing list of June events at http://neinnovation.com.
In honor, a few thoughts follow on Innovation in New England. First, a pointer to a related concept, called National Entrepreneurs’ Day to recognize what entrepreneurs do for this country. It’s an idea sparked by a fellow New Englander, David Hauser, founder & CEO of successful tech start-up Grasshopper. The date being requested of the Obama administration happens to be the first day of spring each year. [Coincidence that the French word for “start up” also references the spring season–“jeune pousse,” loosely translated as “young sprout” or seedling).
See the video clip below for serious entrepreneurial inspiration, and the other link to add your John Hancock (yes, yet another famous New England innovator) to the virtual petition.
Now, back to June’s month-long celebration of innovation. Indeed, New England has a storied innovation past. However, what may begin as a strength in our region can at times turn to weakness, the metaphorical double-edged sword. I’ve penned a wish list of five ideas for innovation here in New England along that thematic refrain, akin to “innovation on innovation”:
#1 “Coopetition” in New England to foster national visibility
New Englanders are known for their fierce independence and self-reliance. We needed this when we came over as settlers 300+ years ago and put our MacGyver-esque skills to the test to survive (note, MacGyver was no doubt was an Irish immigrant from good New England pioneering stock). It’s been said that unless you can trace your lineage to the Mayflower, you’re still considered an outsider. New England has never been known for leaving fresh-baked pies for the neighbor who just moved in next door. In fact, at times, neighbors live next to neighbors for years without getting to know each other, all in the name of “independence” and a desire to not meddle in others’ affairs. However, New England could benefit a great deal if we pulled together and collaborated just a wee bit more. Example, Peter Rothstein, recently named Director of the New England Clean Energy Council, has been driving for both State and Federal government resources (Department of Energy and other), to fund the concept of a “Regional Consortium” that would bring together all the components of the cleantech ecosystem in New England in a thoughtful, harnessed approach. The only way New England can achieve this national recognition (and funding) is via collaboration. OK, just to prove to hardy New England stock, we’ll call it “coopetition” just to retain a bit the independence streak that runs so deep up here.
#2 Greater sense for openness for new ideas/ways of doing things
New England also has a wonderful sense of tradition—Mayflower, Plymouth Rock, the Boston Marathon, Red Sox, clam chowder… we’ve pioneered our fair share of “we were first to….” And “we have the oldest of….” I’d like to see us bring back a bit more of the revolution versus evolution. A bit more General George Washington and Lexington/Concord derring-do, rather than what has grown to be our reputation as conservative in all things “blue sky”-oriented. Wouldn’t it be great if we didn’t have to wait for the imprimatur from an MIT lab or a Harvard Business School professor before we tried something new? New Englanders are possessed with pedigree. And until something has been anointed with pedigree pixie dust, an innovation often languishes in ignominy.
#3 Be more “what you know” versus “who you know”:
As an outgrowth of #1 and #2 above, New Englanders often suffer from an acute case of “who you know.” This to some extent is a derivative of the circular logic involving #2 above on pedigree. Despite our reputation as the nexus of sophistication and erudition, New England seems to grow more and more insular in letting outsiders into board rooms as well as bar rooms. New England, despite being the original crucible of diverse cultures, has homogenized. Amazing ideas and innovations come from equally surprising and diverse sources. One of the best examples of “what you know” is exemplified in one of my favorite recent Malcolm Gladwell articles in the New Yorker Magazine (dare we say also a New England masthead), chronicling a Silicon Valley entrepreneur from India who heretofore knew nothing about the sport of basketball, who—when tasked with coaching his daughter’s middle school basketball team—innovated game strategy to turn a weakness into a strength and a last place team into a near division winner (see http://www.bostonsearchgroup.com/blog/type-leaders-required-to-outpace-competitors-in-recovering-economy/ )
#4 “Hold” vs. “Fold” or “Sold”
OK, so I’m not pioneering this idea, but if imitation is the highest form of flattery, I’m a big fan of this growing mantra in the innovation community here in New England that goes like this. Massachusetts used to have an incredible set of tech & science crown jewels: in biotech, Genzyme, Biogen & Millennium Pharma. In tech, companies in hardware and systems like Data General, Digital, Wang, 3COM, and Banyan Systems. In software & Internet the likes of Lotus & Lycos. However, over the years, these companies have either been sold or forced to fold. One of the few remaining companies embracing the “hold” mentality is EMC, preferring to buy others than sell themselves out. However, just one EMC, or even a handful more doesn’t make for a robust, sustainable innovation ecosystem. Innovation can metaphorically be cast in the same light as combustion– that combination of spark, oxygen and fuel that powers innovation and drives creativity. Spark is the new idea, fuel is the money provided from investors in the idea. And oxygen is the people who take the idea and the money, the business-saavy entrepreneurs who partner as the steel to the innovator’s flint to spark the novel idea, tech innovation, or scientific breakthrough. I wish we were making more oxygen in New England. This type of oxygen only comes from the talent that grows up and makes small companies into big companies. These bigger companies serve as a training ground for the next generation of entrepreneurs to cut their teeth, get their training, build their network. These larger companies offer entrepreneurial training wheels. When we sell companies too early, they never get the chance to develop a critical mass of next generation talent who can apprentice at the knee of others and with greater security to make mistakes without having each decision be a bet-the company-one that risks putting the company in mortal peril. When there is no larger company safety net, fewer young talents practice jumping into the uncertainty of innovation acrobatics, often key experiences required to be able to drive younger companies to success later in their innovation careers.
#5 Create a “Celebrate the student Week” I’ve always been in awe of many of the Asian countries who celebrate things that we in the U.S. might find odd. I believe they have a day that celebrates children. And a day that celebrates the elderly wise ones in their communities and cultures. There is likely no region in the U.S. that has more undergraduate and graduate students than New England. And these students are the equivalent to our regional “innovation fountain of youth.” Undergrads, Masters students, PhDs, Post-docs, Fellows. I wish we could celebrate them. What better time to do it than during New England Innovation Month. Make them feel welcome. Give them social stature to counterbalance the grumblings around U-Haul vans that descend like locusts in late August, or parties that get a bit too raucous. New England students should be lauded. Perhaps a regional “student innovation awards” as capstone to this celebration. OK, at minimum, a free scoop from yet another New England innovation legend, Ben & Jerry’s. A scoop of a new flavor in their honor, “College Cram Crunch.”
One of the many challenges for early-stage technology and science-driven companies revolves around compensation for founders. When a start-up is created, how do those there at the beginning get compensated? When there isn’t any cash in the bank yet, and there may be a period of time where products are in development, do founders get compensated, and if so, how? When angel investors seed the company, what happens then? Founders usually will get cash compensation, but perhaps not at the same levels as when the company later gets venture capital funding.
We were asked by one of our clients to help determine appropriate compensation parameters for an angel-funded enterprise. From this, there were clear norms that emerged–
Looking at a half-dozen angel-funded companies in the New England region (Boston, Massachusetts, New Hampshire), we assembled some data that helped inform the above mentioned principles.
Note that there are rarely more than 2 founders. Therefore, two can initially split the equity 50/50, and even with significant dilution, still end up with a meaningful equity stake after either angel, venture capital rounds, or both. If a higher number of co-founders split the equity pool, fully diluted equity stakes can dwindle to amounts that make it hard for those founders to retain meaningful upside in their enterprises at later growth stages.
Just food for thought for those who are creating new companies in today’s market conditions.
The Q2 2010 CEO survey has logged more than 50 respondents, so although additional responses may roll in, we’re posting the results in order to make the feedback to those who participated as timely as possible. Additional responses are unlikely to skew the percentages significantly.
We at BSG Team Ventures periodically take the temperature of the markets we serve. Below are the results. This survey’s focus was on the economic recovery (is it indeed here, and if so, measured how?), and where CEOs are budgeting their spend in the 2010 recovery year.
A note on methodology. We send these surveys only to those who fit the category (in this case, sitting CEOs or board member/founders of technology/science-driven growth-stage companies). All responses were anonymous due to the web-based survey technology employed. The majority of respondents were in the United States, with the highest concentration on the East and West coasts (New York, Boston, and San Francisco/Silicon Valley areas).
The response to the first question clearly demonstrates that CEO sentiment versus our last survey has demonstrably shifted, with almost 75% of CEOs indicating that the economy has either bottomed out, or is recovering.
Similarly, for those growth-stage tech or sciences driven companies, when looking at revenues, more than 40% of CEOs reported that revenues were up from Q1 to Q2, with the largest percentage revenue increases in the 1-25% range. Approximately 10% of CEOs reported revenue increases of 25% or more.
We at BSG Team Ventures periodically take the temperature of the markets we serve. Below is a no more than 10-question multiple-choice survey for CEOs only.
We send these surveys only to those who fit the category (in this case, sitting CEOs or board member/founders of technology/science-driven growth-stage companies). [Note, if we've mistakenly sent this to you and you don't fit, please refrain from responding. Feel free to forward to the qualified CEOs in your sphere of influence. The more data generated, the more accurate the trend lines].
For the survey results from Q3 2009, titled “Strategy & Outpacing Your Competitors in the Recovery”, go to http://www.bostonsearchgroup.com/blog/3rd-quarter-innovation-ceo-survey-results-outpacing-competitors-recovery/
All responses are anonymous due to the web-based survey technology employed.
Second Wind’s (http://www.secondwind.com/) mission is to advance the use of wind data to make wind energy profitable for the businesses and investors who create wind energy plants, painless for the operators who work with wind energy equipment and practical for the businesses, consumers and utilities that benefit from wind energy as a low-cost and environmentally desirable source of power.
Second Wind prides itself on technology innovation with its in-house hardware development and software engineering talent. The company continues to develop ground breaking products related to wind data.
Thirty four employees staff Second Wind’s headquarters and manufacturing facility. The company has an industry-wide reputation for innovative, reliable technology and excellent customer support. Inc. magazine recently ranked Second Wind on its first-ever Inc. 5,000 list of the fastest-growing private companies in the country. The company’s ranking was based on its 27% revenue growth from 2003-2006 and was the only business-to-business wind organization in the energy industry category. In December 2007, Second Wind secured $4 million in second round financing from Good Energies, a leading global investor in the renewable energy and energy efficiency industry.
Second Wind has been growing steadily, with annual sales of about $7M in 2008. Their clients include the largest developers and operators in an industry with a 30% annual growth rate.
History
Second Wind was founded in 1980 by Walter Sass and Kenneth Cohn. Engineers who have been friends since grade school, they decided the emerging field of wind energy provided an opportunity to leverage their engineering skills to benefit the environment. They recognized that, to succeed, the industry needed more than wind turbines. Wind developers also needed software and hardware to measure wind accurately at prospective sites and to monitor turbine performance at established wind farms. The company’s first headquarters was the spare bedroom in Sass’s home.
Second Wind established a presence in wind resource assessment in 1981 by introducing the first data logger designed specifically for wind energy prospecting. In 1985, the company introduced their first wind farm monitoring system. In 2007, Second Wind launched the TritonTM sonic wind profiler, designed to re-invent sodar for wind profiling.
Market Opportunity
Wind energy is growing at 20-30% annually. The market is global, with 17 countries having attained over 1,000 MW via wind. Of the $37B invested in wind energy in 2007, 2% was for wind resource assessment instrumentation and services, or $735MM. 8,000 met towers were installed for prospecting, power performance and operations. Target markets for wind assessment include large, medium and small developers as well as services firms.
The pressing need for viable alternative energy sources that do more than just supplement coal fired power-stations is driving advances in the development of wind energy. A major hurdle in establishing successful wind farms is the difficulty of attaining accurate site evaluation data. The Triton Sonic Wind Profiler addresses this challenge. Designed to measure wind-speed at heights of up to 200m without the need for erecting costly and less effective masts, the wind profiler utilizes a technique known as Sodar (sound detection and ranging) that measures sound wave echoes in the atmosphere. The technique is not dissimilar to Sonar detection used by submarines underwater.
In evaluating a suitable site to establish a wind farm, measurements need to be taken over a period of at least a year. This has been achieved, until now, by using a meteorological mast or met mast – a tower equipped with anemometers and other weather instruments. These masts are limited to a height restriction of 60m; any taller tower requires aircraft warning lights, which complicates assessment of a site for a turbine 75-80m high. Another complicating issue is the masts’ high visibility, which can raise public concerns before the site has been properly evaluated.
Relying on precise measurements of frequency and time delay from sound pulses that are bounced back to the transmission unit by wind turbulence, Sodar technology provides a virtually invisible tool which measures wind speed and direction at heights up to 200 meters. The Triton system also overcomes some of the problems associated with existing Sodar technology by remaining effective even in poor weather and delivering easy to interpret wind data without an on-site presence.
Triton also boasts innovations such as a hexagonal transducer array and a tri-lobed acoustic enclosure that increase accuracy by improving signal-to-noise ratios and beam focus, rugged construction making the unit effective in all weather conditions and able to correct measurements when used on uneven ground.
The Products and Customers
TritonTM Sonic Wind Profiler re-invents sodar technology for wind assessment. It captures accurate wind data from any height, in any weather, at any location, without being attended. Readings look like anemometry results, with no expert analysis required.
SODAR (SOnic Detection And Ranging http://en.wikipedia.org/wiki/Sodar ), or sodar, is a meteorological instrument which measures the scattering of sound waves by atmospheric turbulence. SODAR systems are used to measure wind speed at various heights above the ground, and the thermodynamic structure of the lower layer of the atmosphere.
Sodar systems are like radar (radio detection and ranging) systems except that sound waves rather than radio waves are used for detection.
Sodar sends an audible “chirp” up through the air, and wind turbulence sends a portion of the sound back toward the ground. By precisely measuring the frequency and time delay of the chirp’s echo, the sodar device measures the wind speed and direction at various heights.
Sodar technology is commonly used for “site profiling” at the end of the prospecting process for potential wind farm locations. It measures above the 60-meter height of most meteorological masts, assessing wind at actual turbine heights. In addition, sodar is more portable than masts and can be moved to determine ideal turbine placement.
Current sodar products have multiple limitations for wind profiling. They require on-site support to
operate, and deliver wind data in formats that require expert interpretation. Readings must be carefully analyzed to filter out “side lobes,” or sound artifacts from nearby trees and buildings that can produce inaccurate results. Most current sodar products also must be covered in rain or snow to avoid damage to the sensitive microphones and speakers.
Benefits of the Triton Sonic Wind Profiler
Numerous Triton innovations address the shortcomings of existing sodar products for wind profi
•More accurate data. A hexagonal speaker array (patent applied for) focuses sound beams more
effectively than previous designs, which improves signal-to-noise ratio accuracy and decreases
disruption. The array is housed in a tri-lobed acoustic enclosure, which reduces the chance of
sound artifacts disrupting data.
•Unattended use in any location. A solar array and battery can provide adequate power for the
Triton unit to operate for prolonged periods of time, depending on available sunlight and amount
of use. Bundled with new Skyserve satellite wind data service, the Triton profiler delivers
accurate wind data to any computer from any location in North America.
•Ready-to-read data. Unlike other sodar products, the Second Wind sodar delivers easy-to-read
data that is similar to data read outs from conventional meteorological towers.
•Works in any weather. The unit is made of rugged plastic with stainless steel components and
sound absorbing material that functions when wet, unlike foam. Internal temperature sensors and
a propane heater also allow Triton to operate in icy conditions.
•More portable and less obtrusive. At six feet tall, Triton can easily be towed by a pick-up truck.
The unit has internal controls to compensate for uneven ground, and a built-in GPS and compass
identify the time and location of data as it’s captured. Because of better acoustics, it is also less noisy than other sodar products.
The Position
Reporting to the VP Global Sales Peter Gibson, the Director Eastern European Sales will be responsible for the planning and execution of sales activities for Second Wind in Eastern and Central Europe. The Sales Director be focused on direct sales of the company’s Triton SODAR device and services.
Senator Markey addresses the formal-wear only crowd at the JFK Library during Clean Energy Week in November.
An annual event in Boston punches up the fact that we have an incredible cleantech cluster-New England Clean Energy Council’s annual Green Tie Gala.
Although this event took place back during Clean Energy Week in November, I was reminded of it when out in Denver recently. Denver has some great stuff going for it. NREL (National Renewable Energy Lab), University of Colorado with multiple campuses in Denver and Boulder that have significant funding from both Federal and State agencies, and a history of technology oriented companies, albeit with a heavy emphasis on telecom (Qwest, Level 3).
However, what there isn’t as much of in Denver is what some call the “ecosystem.” Others call it the “cluster.” This is a body of people who hold different but overlapping responsibilities in the entrepreneurial ecosystem and whose fusion is its wellspring–
Academics: These are those most often with the new disruptive technology or science breakthrough that serves as the seed of a new company
Business entrepreneurs: those who have experience taking the seed of an idea, and building a company around it
Investors: The first friends & family, then angel investors, and often venture capitalists or corporate strategic investors who pour money into these new ideas to fund the business entrepreneurs scale the disruptive idea
Professional services providers: These are often the “connectors” in the ecosystem. They’re comprised of lawyers, accountants, executive search consultants, and start-up advisors. They act as the glue between the prior three categories, more often than not introducing one to another, supporting the growth of these companies with their area of specialty
[Footnote: If you compare Boston to Silicon Valley however, Boston is shallower in large technology and sciences companies that serve to spawn "runners" to new start-up companies. The biotech industry is perhaps better in Boston at doing this than the pure technology industry in the last decade, with a growing base of larger biotech and pharma companies including Genzyme, Cubist, Biogen and Sepracor. Medical devices companies also fair better in many ways to large tech, with Boston Scientific, ThermoFisher, and Perkin Elmer. In technology hardware and software, beyond EMC, there are precious few large technology companies left in Massachusetts. ]
Details on the Gala? This year’s Green Tie Gala was held at the JFK Memorial Library in Boston (last year was held at the Museum of Science). There are many organizations in the innovation sector here in Massachusetts that have done a good job at galvanizing a broad cross section of constituents, including the Mass Biotech Council, as well as MITX (formerly MIMC), and the Massachusetts Technology Leadership Council, or TiE Boston (Indus Entrepreneurs). However, we’ve had yet to participate in a gathering of any that approaches that of the cleantech cluster here in New England.
Senator Markey gave the opening address to punctuate the cocktail hour. To a person it seemed, everyone knew everyone. Yes there were a few outsiders (a small contingent from the UK had come over as part of a trade mission coordinated with Clean Energy Week in Massachusetts because of its target rich calendar), yet all of these were welcomed by the larger fold, and the gathering seemed to virtually breathe together as some sort of larger unified body, a cluster with so few degrees of separation that walking from group to group or table to table was akin to going back to your high school reunion…. You knew at least half those sitting at every table. For those who have experienced the annual Nantucket Conference, it is this atmosphere if intimacy and familiarity that presides.
To cap the night off, venture capitalist Chuck McDermott of Rockport Capital led his band in an after-hours session that continued the beat of familiarity both given its leader as well as in its musical selection (Chuck stating that the band only plays “songs popularized before 1960″).
Chuck McDermott, leading cleantech venture capitalist at Rockport, moonlighting as 50's music band leader
A weekday morning in late November. A brownstone residence on Beacon Hill in the shadow of the State House. A dozen of the foremost experts in technology transfer and intellectual property in the Boston innovation cluster. And a representative from the Department of Energy. We at BSG Team Ventures had the recent opportunity to host a salon-style meeting in a home of a friend of the firm during Clean Energy Week here in the Commonwealth (for more on Clean Energy week, see http://greenovationconference.com/conference-info/cew.html).
The purpose? Bringing the best minds in the Boston venture, entrepreneurship and innovation community together for a brainstorming session with the Department of Energy around best practices in technology transfer out of our national laboratories. Attending the meeting were Alan Gordon from Harvard University Technology Licensing Office, Chris Noble from MIT’s TLO, head of the Mintz Levin cleantech practice Tom Burton, Peter Rothstein from the New England Clean Energy Council, Director of the Massachusetts Technology Transfer Center Abi Barrow, Director of Partners CIMIT John Collins, General Partner at Flagship Ventures Jim Matheson, and CEOs Chris Hobson and Peter Vandermeulen each running cleantech start ups with technology licensed out of several of the national labs themselves.
The challenge the current Obama Administration is taking on under Secretary of Energy Chu is how to better mine the metaphorical gold created inside the U.S. Department of Energy-funded national laboratory network of some 15 that are spread across the country. Some of these labs are household names–Los Alamos and Sandia (New Mexico), and Lawrence Livermore (California). Others are less well known-Argonne (Illinois), Brookhaven (NY), and Ames (Iowa). Even the National Renewable energy Lab (Colorado, known more often as NREL), are not as well known as one would hope. The history of these national labs springs from energy research spurred by World War II. What the layperson may remember is that many of these labs were where secretive nuclear energy research was conducted. However, much of the mandate for these labs some 60 years later is focused on discoveries that will broadly contribute to advancing the United States’ understanding of energy, renewable energy, energy conservation, and all the various scientific disciplines that can contribute-physics, materials engineering, chemistry, and more. These labs are panning for a 21st century gold-energy discoveries and breakthroughs that will create new batteries using renewable resources, wean the U.S. dependence on oil and coal as primary energy sources, and break new barriers in energy efficiency.
However, the problem has been that these labs have explored a lot, and engaged in extensive primary research, but have punched below their weight class in bringing innovation from discovery through to successful commercialization. The DOE budget in FY 2009 topped $25 billion. The national labs budget made up approximately $10 billion of that. And with the Obama administration’s stimulus package, these numbers only look to be increasing. One example brought up in the conversation to punctuate the problem from one of the Boston-based attendees was that fact that Argonne National Laboratory in the last decade has created less than a dozen successful out licensing/royalty events that generated meaningful returns. Logic holds that in terms of return-on-investment, there remains much room for added improvement.
So, two hours later, what were the issues that were brought up by the braintrust, and potential solutions that were tendered to improve the return on investment the DOE makes in the national laboratory’s innovation mission?
Some of the key issues with the current structure that came out of the dialogue:
• Risk aversion of national labs researchers to leave the security of the lab to spearhead a risk-laden venture
• Innate interest of lab researchers is more geared toward research and “discovery” versus market-matching and commercialization
• Low/no financial incentive to take a discovery beyond research phase
• No business ecosystem or business-savvy catalysts to help focus lab research talent on “known problems,” or the sifting through lab breakthroughs to match-make with existing business problems
Suggestions for improvement focused around the three ingredients that are key to metaphorical “combustion” of the innovation commercialization engine: More…
I had the opportunity to be out in Denver for the 22nd Annual National Renewable Energy Lab’s (NREL) Growth Forum. As many know, the U.S. has more than half a dozen national labs, some of the best known being Los Alamos and Lawrence Livermore, and Sandia. These labs are scattered across the U.S., and each often has a specific focus (nuclear research for instance is what has kept the National Labs in the public eye most often).
Given the Obama Administration’s commitment to renewable energy and innovation, it was an upbeat gathering. The attendee list was well-balanced between entrepreneurs, venture capitalists, and academics. Geographically, the majority of attendees either hailed from the Colorado area (with Boulder as the epicenter for cleantech in CO despite the NREL lab being located in Golden, CO), the West Coast (Silicon Valley entrepreneurs and venture investors), and New England (Boston-skewed).
What was surprising is how small the renewable energy community truly is. It’s still a very close knit group. And the community tends to shift from one location to another to pursue the next opportunity to contribute to the national cleantech ecosystem. Two notable examples are Tod Perry, who now is the Program Manager of the Clean Energy Entrepreneurship Center for NREL. Tod had originally started as a cleantech entrepreneur 5 years ago in Boston, pioneering a water purification technology, and a contestant in the first Ignite Clean Energy Competition in 2005. Another Bostonian who’s moved out to Colorado recently is Trent Yang, formerly a principal at Globespan Venture Partners, now Director, Entrepreneurship and Business Development at RASEI in Boulder (Renewable and Sustainable energy institute), part of the University of Colorado commitment to innovation in the renewable energy sector in the Rocky Mountain region. Other notable Bostonians sited at the conference included Peter Rothstein of New England Clean Energy Council, Bob Metcalfe of Polaris, and Chris Hobson, CEO of BandGap Engineering.
While out there, stopped by the Finals for the Cleantech Open’s Rocky Mountain Finals. New Sky Energy, Rivertop Renewables, and SunTrac Solar were the winners, now headed to the Cleantech Open Finals for all 3 regions up in Silicon Valley.
We’re often asked how to establish fair market compensation when it comes to CEOs of privately held companies, often with venture capital or private equity backing.
Below is one method that can be employed as a jumping off point for this calculus:
1) “De-risked,” how much is a CEO worth? Is $500 -$1M a year too much? For our purposes here, we’re talking about a talented CEO. Not someone below average, but above the average, one that a retained executive search firm, venture or private equity investor, or board of directors would be proud to put in the role. Rather than pick some arbitrary number, this should be ”market set,” by looking at what someone working for any global 2000 company (i.e. General Electric or other similar) earns annually. From our executive search experience and database of compensation comparables in these companies, base salary is usually between 250K and 400K, depending upon how big the divisional P&L responsibility is, there is usually a bonus that is between 50-100% of base, and an LTIP (long term incentive plan) that-once partial vesting begins-can generate from 100K up to 250K or more a year in cash.
2) So, the cash component of a comparable, including average base, annual average bonus, and yearly LTIP pay-out looks something like this:
Base ~ 300K
Bonus ~250K
LTIP (cash only) ~ 200K
TOTAL: 750K
* This does not include any meaningful RSUs (restricted stock units) that are usually also part of that package, which could add another 200K or more per year in value to a general manager’s package with true P&L responsibility for their division, group, or sector/segment.
* This is also not indexed to geography/cost of living. If the position is in New York City tri-state area (New York, northern New Jersey, southern Connecticut), San Francisco, Boston, London, Singapore, Hong Kong, or Tokyo, a multiplier factor needs to be used to level-set for cost of living increase required for those metropolitan areas.
3) Now, back out the cash portion of a CEO’s compensation for the company that they’re stepping into (say 250K a year in cash in smaller companies as all base, or combination of base + cash bonus). So you’re left with say 500K that needs to be made up in equity, on a per anum basis.
4) Over how many years is the liquidity horizon (and/or vesting rate, 3, 4 ,5 years)? Let’s say it’s 4 years, at net 500K, equals ~$2 million
5) Now, this is with ZERO beta risk factor. Add back the beta risk of an earlier stage company. Let’s assume a global 200 company equals “1.” A CEO role in a privately held, externally backed company is not “1″. It’s probably a multiplier of 1.5, or 2. For a pre-revenue, VC-backed company with high burn rate, it could be as much as in the 3 to 5 range. Note that any illiquid company is inherently risky in terms of cashing in any equity at a reasonable price. Let’s pick a beta risk multiplier of 2.5 times riskier than “average.” So, 2M * 2.5 = 5M. Note that when there are preferences for the investors that create an exit hurdle rate before any common shareholders get paid, beta risk goes up accordingly unless the CEO participates in any exit event via cash carve out or other instrument. As mentioned above, a recent IPO that represents a reasonable market comparable netted a CEO who joined the company 4 years ago $20M. Using this number, the CEO’s compensation was $5M a year, or a beta multiplier of approximately 5.
6) Then, are there any combat pay provisions you need to add in (warts that a CEO or executive team member is required to overcome and vanquish in their role that are above and beyond the normal call of duty)-reconstituting the executive team, or raising an outside round of capital because existing investors are tapped out, or starting up an Asia manufacturing capability that will require the CEO to take a dozen 15-hour flights one-way to get up and running.
7) Finally, you have to look at what likely dilution there is going to be to an initial options grant for the CEO. If you start with a 6% stake in an early stage company in a Series A funding, and you then raise a series B and C, depending upon valuation for those rounds, the CEO will likely end up below 3% as a “fully diluted” stakeholder. There is an argument to be made that any of the management team critical to the success of the company will be “topped off” at later funding events in order to keep them motivated. However, there is no guarantee that this happens. It’s only good business sense to do it. For the CEO, it is more important what s/he ends up with, not how much with which they start.
8) Add water, and stir…
Notes & disclaimers:
* This is not intended to be biased in any direction, to any party, neither CEO candidate, nor company and/or investor.
* This is only one way of calculating compensation, indeed there are many others.
* There is no way an earl- stage emerging/growth company will be able to compensate a CEO in all cash, nor truly be able to offset the risks inherent in this stage of venture. The CEO either accepts this, or is not truly capable of working successfully in this milieu.
* Other than the impact of cost of living adjustments to base compensation, each CEO candidate comes with what we refer to as their own subjective “keep the lights on” cash needs. We calculate this simply as the amount of cash required on a yearly basis to cover their living/family obligations without having to write checks out of savings to cover it. Some CEO candidates may have 3 children in private school or college, while others may have no children and no mortgage. Cash needs therefore may range widely, and need to be adjusted for using equity as a “leveler” (less cash-needy, higher the equity, and vice versa)
* Alternatives to paying bonuses in cash might be to pay bonuses in equity, upon achievement of key milestones for the company
* This same calculus can be applied to the Vice President level as well, subject to appropriate adjustments downward in cash and equity
* In a circumstance where there is a “turn-around” required, equity may not be enough of a certainly to attract a competent CEO for the challenge ahead. In these circumstances, a cash carve-out may be warranted in addition and/or in substitution for a stakeholder role. The cash carve-out may be just for the CEO, or for the key management team required to achieve the turn-around. Often, the cash-carve out structure is a percentage of total sale price over a certain amount, with the possibility for an accelerator depending upon exit/liquidity circumstances/outcome.
* Often the question of anti-dilution comes up in an effort to assure a CEO of a certain percentage of equity upon liquidity. Granting 5% equity to a CEO at a Series A financing with anti-dilution would ensure that the CEO retained his or her stake across the growth and additional funding needs of the company. However, this is rarely a good mechanism, as the CEO becomes less interested in new company valuations at subsequent funding events, and becomes misaligned with the company’s investors.
