Doriot taught what eventually became a famous second-year course, simply called Manufacturing. Unlike the classic Harvard Business School case method, that class was “all Doriot”—all lecture, on all aspects of running businesses. Given to aphorisms and oracular advice, Doriot would tell his students that the first thing that they should read each morning in the New York Times were the obituaries, in order to learn from the lives of “great men.” He even delivered a lecture to what were then all-male classes on how to properly pick a wife.
World War II turned Doriot into a pioneering venture capitalist—for the war effort. He became head of research and development for the Quartermaster Corp, charged “to identify the unmet needs of soldiers and oversee the development of new products to fill those needs.” Doriot directed the development of everything from rain-repellant garments and combat boots that soldiers needed to trudge across Europe, to K-ration compact food, to what became known as Doron (after Doriot)—bullet-resistant plastic armor that was developed just in time for Marines to use in the Pacific. He also played a key role in the development of synthetic rubber, which became an urgent need when the Japanese captured the rubber-producing lands of Southeast Asia. All this taught him a basic lesson: that modern warfare, as he put it, “is in reality applied science.”10 He would apply that same lesson later, after the war, to the private sector.
In 1945, with the war over, Doriot—now General Doriot—returned to Harvard. Drawing on his wartime experiences, Doriot launched the pioneering ARD—American Research and Development. Doriot, as a colleague of his later remarked, was “the first one to believe there was a future of financing entrepreneurs in an organized way.” Or as Doriot said, his job as a venture capitalist was to interface between, on the one side, large companies with resources but an inability to nurture innovation and, on the other, academics and inventors with creative ideas but no funds who were “trying desperately to become poor businessmen.”
Though Doriot himself was deeply embedded in Harvard, much of what ARD did under his aegis was to commercialize technologies nurtured down the Charles River at the Massachusetts Institute of Technology. MIT, unlike some other universities, was not shy about connecting its laboratories and classrooms directly to the marketplace. In fact, it was part of its mission, in contrast to most of the Ivy League universities, which were founded as divinity schools; MIT was established, in the words of its founding charter of 1861, to promote the “practical application of science in connection with. . . commerce.”
Though rather autocratic in his own management, Doriot attracted a number of talented colleagues, including a young MIT Ph.D., Samuel Bodman, who years later would serve as U.S. secretary of energy. “Georges Doriot was a man of very different personalities,” recalled Bodman. “On the one hand, he was engaging, gracious, and brilliant. On the other hand, he was dominating intellectually and had the capability to treat people in a less than positive fashion.”
This nascent enterprise of venture capital was not an easy business. “Never go into venture capital if you want a peaceful life!” was one of Doriot’s aphorisms. Every business, no matter how successful ultimately, seemed to go through at least one or two crises or disasters that involved, as Doriot put it, telephone calls “at two o’clock in the morning to tell you about a new human accident.”
By the 1960s the community around greater Cambridge, Massachusetts (yes, including Harvard), radiating out to the north and the west along Route 128, had become the nation’s first great incubator for new technology.
ARD strayed into energy only a couple of times, one of them in an oil production company called Zapata Off-Shore, founded by a recent Yale graduate named George H. W. Bush. But these were the exceptions. “Energy was too much money,” recalled Bodman. “That’s why it never happened. Energy was looked at as the province of big companies. The idea of a small company making its way was kind of preposterous.”11
GO WEST
But if Doriot’s ARD laid out the model, a still-greater center of venture capital was to grow up elsewhere. The place was Stanford University, and it was the doing of Frederick Terman, Stanford’s dean of engineering and later its provost. Having done his Ph.D. at MIT, Terman recognized the value of linking a research university to the marketplace, and he was determined to create a high-tech industry amid all those fruit orchards around Stanford’s 8,000-acre campus in the Santa Clara Valley. Thus did “Valley of Heart’s Delight” turn into Silicon Valley. Among other things, Terman established the Stanford Industrial Park to tie the university to business. It was through Terman that a couple of Stanford graduates got to know one another—one named William Hewlett and the other, David Packard. Out of which came Hewlett-Packard, eventually HP, the largest computer company in the world.12
From Terman’s vision emerged the distinctive and highly interconnected ecosystem of Silicon Valley that encompasses Stanford and the University of California at Berkeley; the venture capitalists of Sand Hill Road and University Avenue and San Francisco; and the scientists and engineers and entrepreneurs who surround them. One of the first venture capital firms that shaped the Silicon Valley system was Kleiner Perkins (later Kleiner Perkins Caufield & Byers), which was founded in 1972. The original partners were Eugene Kleiner, who had fled Vienna with his family to escape the Nazis and later joined an early Silicon Valley start-up, and Tom Perkins, an MIT engineering and Harvard Business School graduate and a Hewlett-Packard veteran, who had been a student in Georges Doriot’s Manufacturing class at the Harvard Business School.
Kleiner Perkins set out to further refine the VC business model into something different from traditional finance, and also different from traditional R&D. That meant direct engagement in everything, from management and strategy to honing technology to recruiting talent. This became a general business model for the venture capital business. In some cases it included conceptualizing needs and technologies to meet the needs, and then finding the technologists and entrepreneurs to implement the ideas. The whole process was characterized by an urgency about getting to market. The quickest way back then to shoot down a proposed venture capital investment for a new start-up was to describe it as “a science experiment.” It still is today. Venture capitalists will, as they say, “crawl university laboratories,” but they usually go to great lengths to avoid anything that smacks of science experiments. This stance is what so sharply differentiates venture capital from actual R&D. For R&D is all about the experiment.13
From Genetech, Apple Computer, and Adobe to Google, eBay, YouTube, and Facebook—all these are the progeny of this Silicon Valley ecosystem, along with many more whose names may not be so well known but whose technologies do much to make the modern world work.
“CAREER SUICIDE”
But for many years, energy was of little interest to venture capital. That was for Bell Labs and other large-scale laboratories in established companies, national labs, research institutes, and universities. But definitely not for venture capital.
One of the few exceptions among the venture capitalists was Nancy Floyd. She set out to start what became one of the very first VC firms focused on energy. The basic reason, she explained, was because of “my somewhat disjointed career.” She had been an electric-power regulator in Vermont and then an early wind developer in California, climbing up into the Altamont Pass wearing rattlesnake guards. After the breakup of the AT&T phone monopoly in the early 1980s, she helped start a telecommunications company that was later sold to IBM. “I had seen the role that technology could play in disrupting a previously regulated industry,” she recalled.
In the 1990s the deregulation of the electric power industry seemed to offer similar opportunities, and in 1994 she decided to set up a venture capital firm, Nth Power, to exploit those new opportunities. The world was definitely not waiting, either for her or for Nth Power. She spent the next three years on the road, visiting hundreds of investors around the world—as it turned out, highly uninterested investors. With her funds runnin
g low, Floyd started staying in $39-a-night hotels, which wasn’t easy for her. For, as she put it, “I’m not a $39-a-night-type gal.”
But she hung on with what she later called the “common trait of all successful entrepreneurs”—tenacity—and by 1997 she had raised her first fund from just a handful of investors. Things did not get much easier. The first few years were “like pushing a boulder up the hill.”14
Another early energy investor was Ira Ehrenpreis, a partner at Technology Partners. Ehrenpreis made his first investment in an energy technology company in the late 1990s. “I spent most of my time in the IT world, governed by Moore’s Law, where every 18 months products are leapfrogged by the next generation,” said Ehrenpreis. “Then, as chairman of this energy company, I’d interface with the utilities, and learned that the lens of innovation that they looked through was decades.”
Ehrenpreis also felt pretty lonely in the field. “My venture brethren thought I’d lost my sense of reason,” he recalled. “Closer friends worried that I was committing career suicide.”15
THE $6 TRILLION OPPORTUNITY
But now Nancy Floyd and Ira Ehrenpreis are seen as pioneers. For around 2003 and 2004, the VC community discovered energy and cleantech. Rising energy prices was one reason. But there were others. “It was a combination of energy independence for the United States, the priority to address global warming, and the fact that we had technology that we just didn’t have in 1979,” is how Ray Lane, a partner at Kleiner Perkins, explained his firm’s move into the industry. The sheer scale of the opportunity was very compelling. In its analysis, Kleiner Perkins estimated that the total annual information technology market was $1 trillion a year, while that for energy was $6 trillion.
The entry of venture capital into cleantech has gone from the trickle to the veritable flood. Investment in the U.S. cleantech industry went from $286 million in 2001 to $3.7 billion in 2010—a rise of more than ten times. In 2010 cleantech represented 17 percent of total VC investment in the United States.16
“MIT IS DOING ENERGY”
Robert Metcalfe is one the legends of the information technology business. He invented the Ethernet, which makes possible the LANs—local area networks—that link computers in offices and homes. He was also on the board of the company that developed PowerPoint, the inescapable tool of most presentations. He has been awarded the U.S. National Medal of Technology. An MIT graduate, he had returned from Silicon Valley to join Polaris, a Boston venture capital firm.
On May 6, 2005, Metcalfe attended the inauguration of Susan Hockfield, a neurobiologist, as the sixteenth president of MIT. At the ceremony, held in Killian Hall, which looks out toward the Charles River, he heard Hockfield declare that it was the university’s “institutional responsibility” to address energy issues across every department. To a venture capitalist who was highly attuned, Doriot-style, to the research trends on the MIT campus, that was about as clear a signal as you could get. He went back to his office that afternoon. “Susan Hockfield said MIT is doing energy,” he told his colleagues, “and we’re now doing energy.” Polaris subsequently became an early cleantech investor.
But will the bubbling of innovation activity produce those “disruptive technologies”? Or will it, at least, generate new companies that will have a substantial impact on the energy mix? Vinod Khosla, a prominent cleantech venture capitalist has said that venture capital will do to energy what it did to the old IBM-dominated computer industry and the old AT&T-dominated phone business: undermine the established companies, redefine the business model, and spawn a host of major new competitors. (To be sure, the U.S. Justice Department helped that “undermining” with its far-reaching antitrust cases against both companies.)
Others have a different perspective. Robert Metcalfe sees the possibility of a green tech and global-warming bubble that will end with a crash. But from a big-picture perspective, that will accelerate the development of new technologies. “Bubbles accelerate innovation,” said Metcalfe. And one spin-off from innovation is “surprises.”17
Actual experience has been mixed. There have been some strategic sales and some high-profile IPOs that rival Internet or information-technology start-ups. But the general learning for members of the venture community is that energy is a harder road than they had thought from their experience in other sectors. It is a learning in which the entrepreneurs have shared.
Energy, at least energy production, is different in terms of time, money, and scale. “I see few similarities between the digital world and the energy world,” said Ray Lane. “There is no Moore’s Law. In fact, there are different laws like thermodynamics, physical relationships, chemical reactions, and biological systems. It is a policy-influenced, low-cost, mature, capital-intensive industry, which investors must understand. I recommend leaving most of the digital lessons learned at home.” Energy has much longer lead times; it needs much more capital than the typical IT or software start-up, and then requires several subsequent rounds of big capital injections, and its scale is much bigger. Projects need to proved and then proved again at every stage. They may have to cope with unanticipated delays and substantial cost increases. And then the products have to be sold to industries that are often very cautious about new technologies because of the costs and risks of something going wrong in energy production or distribution in a complex system. Moreover, energy-production facilities tend to have long lives and are not going to be quickly turned over. Consumers may change their computers every three years or their cell phones every two years; electric utilities will continue to operate power plants for 50 or 60 years.
In short, everything seems to take longer. Significant changes in energy do not necessarily happen in the three- to five-year time span that suits the metabolism of venture capital. As Steven Koonin, undersecretary of energy for science and the former provost of Caltech, observed, “Even accelerated energy transformation will take decades.” Adding to the challenge is the complexity of systems integration. Combining three or four dozen different technologies for a smart grid system is far more difficult—and time consuming—than coming up with a new iPhone app.
Because energy involves the distribution of vital necessities, it is enmeshed in a great network of regulation, and the issues around it are often contentious. As a result, it generates a high degree of “political interest,” observed Professor Ernest Moniz, head of the Energy Initiative at MIT and a former undersecretary of energy. “This has enormous significance for what it takes to innovate and then introduce and scale new technologies.”18
Of course, a Google of energy may happen. It may even be happening right now but might not be recognized for five years. After all, how many people had heard of Google in 1998? But energy is different, very different. Google was helping to create a new industry—search—but not to take away market share from incumbent commodity suppliers, on which the entire economy depends.
“THE ONLY WAY TO BREAK OUT”
In 2009 the Obama administration came in determined to take energy R&D spending to levels that had never before been seen. Barack Obama underlined the emphasis on innovation when he appointed Steven Chu, then heading the Lawrence Berkeley national lab, as energy secretary. Chu had received his Nobel Prize in physics for work he had done on lasers.
The Obama administration’s emergency stimulus package put tens of billions of dollars into energy and efficiency. The stimulus was further bolstered by tax incentives meant to encourage investment in clean energy. This also meant a big, if temporary, step-up in R&D spending.
Much of the spending was directed toward climate change, but Chu has called attention to the difficulties of moving beyond the current energy system. The answer was not merely to develop low-carbon energy sources but such sources that met the test of the competitive marketplace. That required more rapid development of new technologies. And “a theory of the innovation chain” governed the whole enterprise. It proceeds along a path, from knowledge creation—basic science to the lab bench and exper
imentation—to prototypes and demonstrations to commercialization and finally into the marketplace. The cast of characters in this enterprise ranges from theoretical physicists to entrepreneurs and venture capitalists to large companies and, of course, the final arbiters, consumers.
But as the President’s Council of Advisors on Science and Technology has emphasized, this in not a linear process; it is not that something gets invented and then pushed out the door. Rather it is highly interactive among the stages, with the essential feedback generated by the “learning by doing” and the “learning by using.” The government’s role was, in the words of Matthew Rogers, DOE’s point person for the stimulus program, to “accelerate the rate at which ideas move from one end of the chain to the other. People think of clean energy as high-cost energy. The only way to break out of that is to innovate our way out of it.” That would mean, as General Doriot said during World War II, putting “applied science” to work.
This new innovation agenda ended up being organized around ten priorities, ranging from vehicle batteries and solar energy to biofuels, carbon capture and storage, and grid-scale storage of electricity. In each area, the objective was to achieve, eventually, much-improved performance and lower cost. And in each area support went to five or ten different projects, with the idea that they would be competing against one another, which would lead to higher probability of success. It was just not possible to know in advance which would succeed and which would not. That is the nature of R&D and innovation. “Investing in R&D is rolling the dice,” said Chu. “We expect failures, but we expect home runs.”19
There were three specific initiatives. First, about 50 Energy Frontier Research Centers were established at universities and national labs to tackle grand challenges in energy. Second and larger are new research hubs, which are meant to take on basic questions and encompass most of the innovation chain, from the basic research to the point when the know-how can be passed to the marketplace.
The Quest: Energy, Security, and the Remaking of the Modern World Page 64
