Into the Valley of Death…

The Valley of Death looms as the crucible through which start-ups must pass or perish. Many are attracted to such histrionics describing this challenging period in many a young firm’s development, but we’re still left with questions — what makes this period so difficult, why do clean tech start-ups apparently have an affinity for the place and what is anyone doing to help them through it, if not avoid it in the first place?

The Valley of Death is shorthand for that period of a young firm’s life when the early stage investments are running out but the firm has yet to secure sufficient additional funding to support it through product commercialization. It is of particular and growing concern for clean tech startups–and their financial backers — because of the increasing sophistication of the effort required to advance the industry’s state of the art.

Everyone likes the idea that anyone can still build the ‘Next Big Thing’ on a shoestring over the summer; yet in reality, few people have a cleanroom in their garage to help validate early assumptions that might take a team of PhDs two or three years to achieve. Exacerbating the struggle out of the Valley of Death is the sometimes high capital requirements for many clean tech firms for manufacturing facilities or full scale projects. Simply put, establishing commercial viability for many clean tech opportunities is big, complicated and expensive.

The U.S. Department of Energy (DOE) has long recognized the challenge of developing and commercializing new energy technologies. It has supported young firms along a number of avenues in a strategy to both help launch new clean tech firms and support their early development. With last year’s American Recovery and Reinvestment Act, the DOE has been able to broaden this mandate to later-stage support. Some examples of support include:

  • The DOE has for many years set aside roughly $100 million for Small Business Innovation Research (SBIR) grants to provide funding to stimulate technological innovation in small businesses. For many small firms, SBIR grants have made the difference when cash was scarce.
  • Attempting to help commercialize technology developed at the national laboratories, the DOE began an Entrepreneur in Residence program in early 2008. Under this program, venture capital firms sent entrepreneurs to different labs while the government provided funding, as it hopes to launch clean tech companies.
  • Expanding the focus outside the national labs, the DOE provided $151 million to 37 projects earlier this year under the Advanced Research Projects Agency–Energy (ARPA-E). This program’s goal is to support transformational technologies: high-risk/high-reward technological breakthroughs that, if they work, can fundamentally shift an industry’s technology base and the way it operates. A second round of $100 million was announced in late 2009, promising continued support for potentially game-changing technologies.
  • Supporting the actual development of a manufacturing base, the DOE recently announced $2.3 billion in manufacturing tax credits (so-called “48C program”) to help retool U.S. industry for the future.
  • And finally, a proposal for more support on the later stage financing stages. The Clean Energy Deployment Administration, or CEDA, would work to create an attractive investment environment for developing and deploying new clean energy technologies. Picking up where the Recovery Act left off, CEDA would provide developers with various types of credit for deploying clean tech technologies. Depending on the need, this could include loans, loan guarantees, other credit support and potentially clean energy-backed bonds to support lower cost debt for projects.

The DOE’s efforts to increase and bolster support to early stage clean tech companies are building a foundation for the industry going forward. However, as more ideas gain access to support to develop technology, it must be remembered that a good idea is not the same as a good company. Sheparding a new technological firm through its early growth phase is difficult. Technology maturity, product maturity, customer acceptance and corporate maturity all play a role. Therefore the Valley of Death will not go away, nor do we actually want it to. The struggle that these firms endure is important; stress testing new ideas and company management is key to their development, and in many instances, reveals a more appropriate avenue.

Getting clean tech companies to the commercialization stage is an achievement–and a struggle. Fiscal and human capital hurdles hold back many good ideas from tranforming into good companies. As the challenges — and hopes — for clean tech companies grow, DOE continues to evolve its role of providing a firm foundation from which the industry can build.

The views expressed in this article are those of the author and do not necessarily reflect the opinion of Charles River Associates or its Energy & Environment Practice.

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