Innovation and Entrepreneurship in Renewable Energy

Transcription

1 Innovation and Entrepreneurship in Renewable Energy Ramana Nanda Harvard Business School Ken Younge Purdue University Lee Fleming University of California, Berkeley College of Engineering University of California, Berkeley Fung Technical Report No July 18, Blum Hall #5580 Berkeley, CA (510)

2 The Coleman Fung Institute for Engineering Leadership, launched in January 2010, prepares engineers and scientists from students to seasoned professionals with the multidisciplinary skills to lead enterprises of all scales, in industry, government and the nonprofit sector. Headquartered in UC Berkeley s College of Engineering and built on the foundation laid by the College s Center for Entrepreneurship & Technology, the Fung Institute combines leadership coursework in technology innovation and management with intensive study in an area of industry specialization. This integrated knowledge cultivates leaders who can make insightful decisions with the confidence that comes from a synthesized understanding of technological, marketplace and operational implications. Lee Fleming, Faculty Director, Fung Institute Advisory Board Coleman Fung Founder and Chairman, OpenLink Financial Charles Giancarlo Managing Director, Silver Lake Partners Donald R. Proctor Senior Vice President, Office of the Chairman and CEO, Cisco In Sik Rhee General Partner, Rembrandt Venture Partners Fung Management Lee Fleming Faculty Director Ikhlaq Sidhu Chief Scientist and CET Faculty Director Robert Gleeson Executive Director Ken Singer Managing Director, CET Copyright 2013, by the author(s). All rights reserved. Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. To copy otherwise, to republish, to post on servers or to redistribute to lists, requires prior specific permission. 130 Blum Hall #5580 Berkeley, CA (510)

3 InnovationandEntrepreneurshipinRenewableEnergy RamanaNanda(HBS),KenYounge(Purdue) andleefleming(ucberkeley) 1 July2013 Abstract Wedocumentthreefactsrelatedtoinnovationandentrepreneurshipinrenewableenergy.First,we comparepatentingbyventurebackedstartupsandincumbentfirms,usingdatafromtheuspatentand TrademarkOffice.Usingavarietyofmeasures,wefindthatVCbackedstartupsareengagedinmore novelandmorehighlycitedinnovations,comparedtoincumbentfirms.incumbentfirmsalsohavea highershareofpatentsthatarecompletelyuncitedorselfcited,suggestingthatincumbentsaremore likelytoengageinincrementalinnovationcomparedtovcbackedstartups.second,wedocumenta rising share of patenting by startups that coincided with the surge in venture capital finance for renewableenergytechnologiesintheearly2000s.wealsoshowthattheavailabilityofventurecapital financeforrenewableenergyhasfallendramaticallyinrecentyears,withimplicationsfortherateand trajectory of innovation in this sector.finally, we highlight a number of structural factors about renewableenergythatmakeithardtoattractsustainedfinancingfromventurecapitalinvestorsand suggestpoliciesthatmightfacilitateinnovationandentrepreneurshipinrenewableenergy. 1 WethankGuidoBuenstorf,RonnieChaterji,JasonDavis,ChuckEesley,MazharIslam,MattMarxandthe participantsatthenberpreconferenceandstanfordsocialscienceandtechnologyseminarforhelpful comments.dandipaoloprovidedexcellentresearchassistanceandguanchengliprogrammedthegeographical visualizations.forsupportwethankthedivisionoffacultyresearchandfundingatharvardbusinessschool,the FungInstituteforEngineeringLeadershipatUCBerkeley,andtheNationalScienceFoundation( ).

4 1. Introduction Theglobaldemandforenergyisprojectedtoalmosttripleoverthenextseveraldecades.Estimates suggestthatagrowingworldpopulation,combinedwithrisinglivingstandardswillleadglobalenergy consumptiontoreachabout350,000twhin2050fromthe2010levelof130,000twh.toputthis increaseinperspective,itwillrequiretheequivalentofsettingup750largecoalburningpowerplants peryearfor40yearsinordertomeettotheincreaseddemandforenergyinthecomingdecades. Figure1providesabreakdownofthesourcesthatproducedtheenergyconsumedin2010basedon datafromthebpstatisticalreviewofworldenergy,2012.ithighlightsthat87%oftheenergywas producedfrom conventionalenergy,namelycoal,oilandnaturalgas.ontheotherhand,solar, Wind,Biomass,Hydroandotherrenewablesaccountedforamere8%ofglobalenergyproducedin Inadditiontothechallengesofmeetingthegrowingenergyneedsoftheworld spopulationwith conventionalsourcesofenergy,theimplicationsofcontinueddependenceonfossilfuelsarebelievedto beparticularlystarkforclimatechange.theshalegasrevolutionintheusinrecentyearshasimplieda reduceddependenceoncoal.nevertheless,thebenchmarkoftryingtoachieve zeroemissions has ledtheusandseveraleuropeancountriestofocusmoreintenselyonpromotinginnovationin renewableenergytechnologiesinrecentyears.whilethereisnoclearwinningalternativeatpresent, thereisalsoagrowingbeliefthatprogresswillcomefromradicalinnovationsthatwillallowustomake thejumpfromthestatusquo,whetheritisinrenewableenergyorothermoreconventionalsourcesof energyproduction.weexaminethetechnologicalandorganizationalsourcesofsuchinnovationin renewableenergy,withaneyetowardsunderstandingthefactorsthathavepromotedprogressinthe past. VenturecapitalhasbeenakeysourceoffinanceforcommercializingradicalinnovationsintheUnited States,particularlyoverthelastthreedecades(KortumandLerner,2000;GompersandLerner,2002; SamilaandSorenson,2011).Theemergenceofnewindustriessuchassemiconductors,biotechnology andtheinternet,aswellastheintroductionofseveralinnovationsacrossaspectrumofsectorssuchas healthcare,itandnewmaterials,havebeendriveninlargepartbytheavailabilityofventurecapitalfor newstartups.akeyattributeofventurebackedinnovationintheushasbeentheabilityofprivate capitalmarketstofinanceawidevarietyofapproachesinaspecificarea,asopposedtochoosinga specificwinner.sinceitishardtoknow,exante,whichtechnologicaltrajectorywillbesuccessfulex post,itseemsvitalthatinordertomakerapidtechnologicalprogress,weneedtoproceedby conductingnumerous economicexperiments intheenergysector(rosenberg,1994;stern2003;kerr, 2 TheBPstudyonlyreportsdataoncommerciallytradedfuels,includingrenewableenergythatiscommercially traded.theinternationalenergyagency(iea)estimatesaslightlyhighershareofrenewablesbasedonestimates oftheuseofwoodchips,peatandotherbiomassusedindevelopingcountriesthatisnotcommerciallytraded. Evenso,theirestimateofrenewablesincludinghydroelectricityis13%,comparedtothe8%estimatedbyBP.

5 NandaandRhodesKropf,2013).Thismakesventurecapitalanidealcandidatetoplayarolein financingradicalinnovationinrenewableenergytechnologies. Infact,venturecapitalfinancingforrenewableenergystartupsrosedramaticallyinthemid2000safter beingconsistentlylowinthepreviousdecades.figure2adocumentsthatbetween2006and2008, severalbilliondollarswerechanneledintostartupsfocusedonsolar,windandbiofuels.inthelastfew years,however,venturecapitalinvestmentinrenewableenergytechnologieshasplummeted,fallingas ashareofoverallvcinvestmentandevenwithincleantech,shiftingawayfromrenewableenergy productiontoinvestmentsinenergyefficiency,software,andstorage(asseeninfigures2band2c). Inthischapter,weinvestigatetheroleofventurecapitalinrenewableenergyinnovationbycomparing thepatentingactivityofvcbackedstartupswithothertypesoforganizationsengagedinrenewable energyinnovation.wenotonlyexaminepatentingrates,butalsothecharacteristicsofthepatents beingfiledbythedifferenttypesoforganizations.understandingthesefactorswillhelpdeterminethe extenttowhichfallingvcinvestmentinrenewableenergyshouldbeseenasacauseforconcernas opposedtobeingeasilysubstitutablebyinnovationbyotherssuchaslargeincumbentfirms. WeaddressthesequestionsbyusingpatentdatafromtheU.S.PatentandTrademarkOffice(USPTO) overthethirtyyearperiodfrom1980through2009.wefindthatlargeincumbentfirmshave dominatedpatentinginrenewableenergyforseveraldecades.forexample,thetop20firmsaccounted for50%oftherenewableenergypatentsandthetop50firmsaccountfornearly70%ofsuchpatents filedattheusptointheearly1990s.innovationbecamemorewidespreadin2000swhenpatentingby VCbackedfirmsgrew,butthetop20firmsstillaccountedfor40%ofthepatentingactivityin2009. However,despiteaccountingforthelargestshareofpatents,wefindincumbentsaremorelikelytofile patentsthatareeithercompletelyuncitedorareselfcited,suggestingagreaterfocusonincremental orprocessinnovation.furthermore,theyarelesslikelytohaveextremelyinfluentialpatents,thatwe defineasbeinginthetop10percentilesofforwardcitationsinagiventechnologyareaandgivenyear. Finally,wecreateameasureofnoveltyusingtextualanalysisofthepatentdocumentsthatdoesnot dependoncitations.thisindependentmeasurealsosuggeststhatonaverage,incumbentsfirmshave beenengagedinlessnovelpatentingthanventurecapitalbackedstartups,evenmoresointheperiod whenvcfundingforstartupsincreaseddramatically. GiventheimportantrolethatVCbackedstartupsseemtoplayinrenewableenergyinnovationinthe lastdecade,thedramaticfallinfinancingavailableforsuchfirmssuggeststhatitwillhaveimplications forthenatureofinnovationwemayseegoingforwardinthissector.wehighlightthatatleastsomeof thedeclineinvcfinancingforrenewableenergyisrelatedtostructuralfactorsthatmakeitveryhard forvcstofundsuchstartups.wethereforeelaborateontheaspectsoftheinstitutionalenvironment thathavemadesustainedexperimentationbyvcsextremelydifficultinrenewableenergy,andsuggest policiesthatmaybeeffectiveinhelpingtochannelmoreriskcapitaltowardsinnovationand entrepreneurshipinrenewableenergytechnologies. Therestofthechapterisstructuredasfollows.InSection2,weoutlinethedatausedforouranalysis. Section3providesadetaileddescriptionofourmainresultsonthedifferencesininnovationacross

6 incumbentandventurecapitalbackedfirms.insection4,wediscussthechallengesfacedbyventure capitalinvestorsinsustainingthefinancingofrenewableenergystartups.section5offerspoliciesthat maymakeiteasiertofinancesuchstartupsandsection6concludes. 2. Data 2.1. Sampleselectioncriteria Ourfocusinthischapterisonpatentinginsectorsrelatedtorenewableenergyproduction,namely solar,wind,biofuels,hydroelectricpowerandgeothermaltechnologies.beforemovingtoadescription ofthedata,however,wefirstoutlinethecriteriaforselectingoursample. Ourapproachwastodefineasetoftechnologiesthatwouldfirst,allowustobuildacomprehensiveand welldelineateddatasetofpatentingactivitywithinthechosentechnology,andsecond,enableusto comparethecharacteristicsofinnovationbetweenventurecapitalbackedstartupsandotherfirms engagedininnovation. Thisledustoleaveoutsometechnologiesthatareoftenassociatedwithcleanenergyproductionbut arenotrenewableenergy.forexample,althoughnaturalgashasalowercarbonfootprintthanoiland coal,itisdifficulttobreakoutinnovationsrelatedtoenergyproductioninthisarea,asopposedtoother businessespursuedbyoilandgascompanies. 3 Ontheotherhand,wehavealsoleftoutother clean tech sectorsthatreceivevcfinancebutarenotenergyproduction.forexample,venturecapitalhas beeninvolvedinfinancinganumberofinnovationsinsoftwarerelatedtosmartgridandenergy efficiency.theseinnovationsareextremelydifficulttoisolateinasystematicmannerfromother softwarepatentsthatstartupscouldbeworkingon(e.g.agpssoftwarethathelpsroutetrucksina mannerthatconservesfuelishardtodistinguishfromothergpspatents,evenwhenmanually classifyingpatents).ourfocus,therefore,isonrenewableenergyproductiontechnologies.although ourscopeisnarrowerthaneither energyproduction or cleantech,ourhopeisthatourtradeoff buysusgreaterconfidenceindefiningaclearandconsistentsetoftechnologieswithinwhichwecan characterizeboththetrendsinpatentingovertime,andthedifferencesinthenatureofpatenting acrossthevariousorganizationalforms Datausedtocreatethesample Wecreatedoursampleusingthreesteps.First,weworkedwithaprivateresearchfirm,IPCheckups,to defineasetofrenewableenergypatentsattheu.s.patentandtrademarkoffice(uspto)ineachofthe energyproductionsectors,ofsolar,wind,biofuels,hydroandgeothermal.ipcheckupshasparticular expertiseincleanenergy,includingadatabaseofcleantechnologypatentsfiledattheusandforeign 3 Similarly,althoughnuclearenergyisnot renewable,wehavecollecteddataonitgiventheeasewithwhichwe couldclassifypatentsinthistechnologyandthefactthatafewnuclearenergystartupshaverecentlybeenbacked byventurecapital(e.g.seesahlman,nanda,lassiterandmcquade,2012).however,thelevelofpatentingbyvc backedstartupsinnuclearisextremelylowinoursample,sowehavechosennottoreporttheresultsofnuclearin ourmainestimations.however,ourresultsareunaffectedbytheinclusionorexclusionofnuclearenergy.

7 patentoffices(weconsideronlypatentsfiledwiththeuspto).theyprovideduswithasampleof 17,090renewableenergypatentswhoseapplicationdateswerebetweenJanuary1980andDecember 2009acrossthe5subsectorslistedabove. 4 Second,wedevelopedaproceduretovalidateandextendthesamplefromIPcheckupsinorderto ensurethatthesamplewascomprehensive.specifically,weusedthepatentsfromipcheckupsasa trainingset,andappliedtheliblinearmachineclassifieralgorithm(fanetal.,2008),tosearchthrough everypatenttitleandabstractintheuniverseofapprovedutilitypatentsattheusptowithapplication datesbetweenjanuary1980anddecember2009.themachineclassifieralgorithmaimedtoidentify otherpatents(basedontheirtitlesandabstract)thatlooked similar tothoseinthetrainingset providedbyipcheckups.theassumptionbehindthisapproachisthatipcheckupsmayhavemissed patentsatrandom,butwouldnothaveasystematicbiasinthetypesofpatentstheydidnotprovideus. Inthiscase,thealgorithmwouldbeabletosearchefficientlyamongtheover4.3millionpatentsinthe universeofpatentsforotherswithsimilartitlesandabstractsthatmayhavebeenoverlookedbyip Checkups.Theclassifierreturnedanadditional31,712patentsforconsideration. Finally,wecontractedwithIPCheckupstohaveaPh.D.expertincleantechnologiesmanuallyreview eachofthecandidatepatentsidentifiedbythemachineclassifierandselectappropriateonesfor inclusionintothefinalsample.anadditional5,779patentswereselectedforinclusion,resultingina finalsamplesizeof22,869patents. Webelievethatthis3stepprocessoutlinedabovehasproducedoneofthemostcomprehensive samplesofpatentslookingspecificallyatrenewableenergy.giventhesystematic,andreplicable approachusedbythemachinelearningsample,webelievethismethodwillallowsubsequent researcherstoeasilyupdatethesample,aswellasapplysimilartechniquestoidentifypatentsinothers sectorsthatsharethepropertywithrenewableenergyofnoteasilydemarcatedbyspecifictechnology classesattheuspto. Havingthusidentifiedourfiveprimarycategoriesofcleantechpatentsbytechnologytype,wefurther categorizedeachpatentintooneoffourorganizationaltypes:academia&government,vcbacked startups,nonvcbackedfirmsandunassigned.unassignedpatentswerethosewithnoassignee providedinthepatentapplication.thesehavetypicallybeenassumedtobeindependentinventors,but mayalsobecorporatepatentswithjustamissingassigneefield.asweshowinthefollowingsection, unassignedpatentsseemsignificantlydifferentintermsoftheircharacteristics.whilewedoreport someanalysesthatincludeunassignedpatents,themajorityofouranalysesfocusoncomparisons betweenvcbackedstartups,nonvcbackedfirmsandinventorsinacademicinstitutionsor governmentlabs.weclassifiedfirmsasventurecapitalbacked,iftheassigneenameandlocation correspondedwithfirmsineitherthecleantechi3orthebloombergnewenergyfinancedatabaseof 4 AlthoughtheUSPTOdatagoesasfaras2012,wetruncatethesampleattheendof2009toallowforouranalysis offorwardcitations.

8 venturecapitalbackedfinancings. 5 Toclassifyassigneesasuniversityorgovernment,weusedatext matchingprocessfollowedbymanualreviewtoidentifyacademicinstitutions(assigneeswithwords suchas university, universitaet, ecole, regents, etc.)andgovernmentalorganizations(assignees withwordssuchas DepartmentofEnergy, UnitedStatesArmy, LawrenceLivermore, Bundesrepublik, etc.) Ourresidualcategory,therefore,isthecategoryofassigneesthatarenotVCbackedandnotfrom academicinstitutionsorthegovernment.theresidualcategorycanthereforebethoughtofas incumbentfirms(keepinginmindthequalificationsdescribedabove).asfaraspossible,wemanually matchedsubsidiariestotheirparent sname,sothatforexample,allknownsubsidiariesofgewere classifiedasge.whilethiscategorizationisimperfect,caseswherewemissedmatchingasubsidiaryto aparentwilltendtobiasustowardsfindinglessconcentrationinpatentingandourfindingsshouldbe seenasalowerboundtothetruelevelofconcentrationacrossorganizationsinvolvedinrenewable energypatenting. 3. Results 3.1. PatentingRatesinRenewableEnergy Webeginbyprovidinganoverviewofthepatentinglandscapeinrenewableenergytechnologies.Table 1aandTable1bprovideabreakdownofthetotalnumberofpatentsusedinoursample,brokendown byorganizationalformandtechnologyarea.table1areportsthebreakdownfortheentiresample, whiletable1breportstheresultsforinventorswhoarebasedintheus. 6 AscanbeseenfromTable1, about85%ofthepatentsinoursampleareaccountedforbysolar,windandbiofuels.incumbentfirms accountfornearlytwothirdsofthepatentsinthedatasetandabout55%ofthepatentsfiledbyus basedinventors.whiletable1providesasenseofthemostimportanttechnologiesandorganizational forms,itdoesnotgiveasenseofsharesovertimeorthequalityoftheinnovations.weturntothese next. 5 BothdatabaseshavemorecomprehensivecoverageofventurecapitalfinancingsincleanenergythanThompson VentureEconomicsandDowJonesVentureSource,thatarethetwodatabasestypicallyusedforstudieson venturecapitalbackedstartups. 6 SinceoursamplelooksonlyatpatentsattheUSPTO, foreigninventors arethosewholiveoutsidetheusand havechosentopatenttheirinventionsintheunitedstates.ofcourse,therearelikelytobesignificantnumberof renewableenergyinventionsbyforeigninventorsthatarenotpatentedattheuspto.forexample,anumberof patentsrelatedtosolaringermanyarenotpatentedintheus.however,giventhattheusissuchanimportant market,ourprioristhatimportantpatentswouldinfactbepatentedintheusinadditiontoothercountries. Anecdotalevidencesuggeststhatthisisindeedthecase.Nevertheless,thestructureofoursampledoesnotallow ustomakesubstantiveconclusionsaboutusvs.foreignpatents,orspeaktodifferingtrendsinpatentingbetween USandForeigninventorsinrenewableenergyovertime.

9 Figures3Aand3BreporttheabsoluteandrelativeamountofrenewableenergypatentingattheUSPTO. Theyshowthatrenewableenergypatentsfelloverthe1980s,bothinabsoluteandrelativeterms. Whilethepatentingrateincreasedslightlyinthe1990s,itroseconsiderablyinthe2000s,increasingata disproportionateraterelativetooverallpatentingactivityattheuspto.infact,boththenumberof patentsfiledperyearandtheshareofpatentsfiledintheusptoapproximatelydoubledoverthe10 yearperiodfrom Figure4showsthatthemaindriveroftheincreasewaspatentingbyUSbasedinventors.Infact,there wasasharpbreakinthetrendofpatentingbyusbasedinvestorsrelativetoforeigninventorsaround 2004.Figure5documentsthatVCbackedstartupsincreasedtheirproportionalshareofpatentingby USinventorsthemostoverthisperiod,increasingtheshareofpatentingfromunder5%in2000to about20%ofthepatentsfiledin2009. DespitethesharpincreaseinpatentingbyVCbackedstartups,however,patentinginrenewableenergy stillremainsconcentratedinarelativelysmallnumberoffirms.figure6documentstheshareoftotal patentsfiledbyusinventorsworkingateitherincumbentsorventurecapitalbackedfirmsthatare attributedtothe10,20and50mostactivelypatentingfirmsineachyear.ascanbeseeninfigure6, thetop20firmsaccountedforabouthalfofalltherenewableenergypatentsfiledbyfirmsintheearly late1980sandearly1990s.althoughtheconcentrationhasfallenfromthatpeak,itisstillover40%in Table2providesmoredetailbylistingthemostactiveUSbasedassigneespatentinginrenewable energyinrecentyearsandthenumberofpatentsassociatedwiththese.specifically,itfocusesonthe assigneeswithatleastfivepatentsbetween2005and2009,ineachofthetechnologies.ascanbeseen fromtable2,largeincumbentsaccountforthedisproportionateshareoftheoverallpatenting.firms suchasge,dupont,chevron,exxonmobil,appliedmaterialsareamongthemostactivefirmspatenting inrenewableenergy.however,anumberofvcbackedfirmsarealsoonthislist.forexample, Solopower,KonarkaTechnologies,Stion,Nanosolar,Solyndra,Miasole,TwinCreekTechnologiesand SolariaareallVCbackedfirms,sothat8ofthetop20assigneeswithUSbasedinventorspatentingin solarbetween2005and2009werevcbackedstartups.similarly,amyris,kiorandceresinbiofuels, ClipperWindPowerandFloDesignWindTurbinesinWind,OceanPowerTechnologiesandVerdantin Hydroareallventurecapitalbackedfirms.ThislisthighlightshowVCbackedstartupshavegrownto becomemajorcontributorstoinnovationinrenewableenergyinthelastfewyears. Appendix1providesamoredetailedlistofthetopassigneesfromVCbackedstartups,incumbentsand academia/government,includingbothusandforeigninventorspatentingattheusptoandoverthe period giventhatthelistincludesassigneeswithmanyforeigninventors,otherfamiliar namessuchasvestas,sanyo,sharp,gamesaandschottagarenowalsoamongtheleadingassignees involvedinrenewableenergyinnovation.

10 3.2.CharacteristicsofPatentingbyIncumbentvs.VCbackedFirms Wenextcomparethecharacteristicsofthepatentsfiledbythedifferenttypesoforganizations.Our firststepistoexaminethecitationstothepatentsthattheyfile.sincecitationstendtohaveahighly skeweddistribution,wereporttheresultsfromcountmodels.table3reportstheresultsfromnegative binomialregressions,wherethedependentvariableisthecountofcitationsreceivedforeachpatent. Althoughweincludetechnologyandyearfixedeffectstoaccountforfixeddifferencesinpatenting propensitiesacrosstechnologiesandtoaccountforcohortdifferencesinthenumberofcitations,we neverthelessalsoaccountforthefactthatpatentsin1980wouldhavereceivedmorecitationsthan thosein1995bylookingatthecumulativecitationsreceivedbypatentsfiveyearsfromtheyearof application.ourmeasureofcitationsexcludesselfcitations,soweexaminetheinfluenceofthepatents onotherassignees. Columns13ofTable3reportresultsonbothUSandforeigninventors,whileColumns46restrictthe sampletousbasedinventors.weuseacademicandgovernmentpatentsasourreferencegroupas theyarelikelytohaveremainedthemoststableovertheentireperiod.table3showssomeinteresting patterns.first,asnotedaboveandconsistentwithpriorfindings(singhandfleming,2010),unassigned patentsseemtobefarlessinfluentialthanpatentswithassignees,bothinthefullsampleandforus basedinventors.wheninterpretedasincidencerateratios,column1intable3impliesthatunassigned patentsareassociatedwitha75%lowercitationratethanacademicandgovernmentpatents.second, patentsfiledbyincumbentfirmsareslightlymoreinfluentialthanacademicpatents,butonlymarginally so.theeconomicmagnitudeissmallanditisimpreciselyestimated.incumbentsareassociatedwitha citationratethatis1.1timesthatofuniversityandgovernmentpatents.ontheotherhand,patents filedbyvcbackedfirmsaremuchmorelikelytoreceivesubsequentcitations.theeconomic magnitudesarelarge.thecoefficientsimplythatvcbackedstartupsareassociatedwithacitationrate thatis1.9timesthatofuniversityandgovernmentpatents.inaddition,achi2testforthedifferencein thecoefficientbetweencitationstovcbackedfirmsandincumbentsshowsthatthedifferencesare statisticallysignificant.thepvaluesliewellbelow0.05andasidefromcolumn4,arelessthat0.01in eachcase. Thedifferenceintheoveralllevelofcitationscouldcomefromtwodifferentfronts.First,itispossible thatvcbackedfirmshavefewermarginal,oruncitedpatents,sothatthedifferencestemsfromthe lefttailofthecitationdistributionbeingbetter.second,itispossiblethatvcbackedfirmsaremore likelytohavehighlycitedpatents,sothatevenifthelefttailofthedistributionisnobetter,the intensivemarginofcitationsishigher,includingathickerrighttail.toprobethesepossible explanations,weexamineboththeshareofpatentswithatleastonecitationandtheshareofpatents thatarehighlycited. Table4reportstheresultsfromOLSregressionswherethedependentvariabletakesavalueofoneif thepatentreceivedatleastonecitation.again,unassignedpatentsarefarlesslikelytoreceiveasingle citation.thecoefficientsimplya3538percentagepointlowerchanceofbeingcitedrelativeto academicpatents,onabaselineofa50%citationprobability.bothvcbackedstartupsandincumbents havepatentsthataremorelikelytoreceivecitationsthanpatentsbyinventorsinuniversityand

11 governmentlabs.thisofcourse,couldbeduetothebasicnatureofacademicandgovernmentr&d. WhencomparingVCsandincumbents,however,wefindthatVCshavean1114percentagepoint higherlikelihoodofbeingcitedrelativetoacademiclabs,comparedtoa57percentagepointhigher probabilityforincumbents.thesedifferencesarestatisticallysignificant,suggestingthatonaverage, VCbackedpatentsarelesslikelytobemarginalandmorelikelytoinfluencefutureR&D. Table5reportstheresultsfromOLSregressionswherethedependentvariableisequaltooneifthe patentwashighlycited.specifically,wedefineapatentasbeinghighlycitedifthecitationsforthat patentareinthetop10percentof5yearforwardcitationsforpatentsinthattechnologyandyear. Table5showsthatunassignedpatentsaremuchlesslikelytohaveahighlycitedpatent.Sincethe baselineprobabilityisbydefinitionabout10%,thecoefficientsonunassignedpatentsincolumns1and 4ofTable5pointoutthatthechanceofansuchapatentbeinghighlyinfluentialisessentiallyzero.On theotherhand,vcbackedfirmsarealmosttwiceaslikelyasacademicpatentstobehighlycited. Incumbentfirmshavenostatisticallysignificantdifferenceinhighlycitedpatentsintheoverallsample, andaslightlyhigherchanceamongusbasedinventors.however,importantly,thedifferenceinthe chanceofbeinghighlycitedbetweenvcbackedfirmsandincumbentsisbothstatisticallyand economicallysignificant. Thusfarouranalysishassuggestedthatrenewableenergyinnovationbyincumbentfirmstendstobe lessinfluential.innovationbyincumbentsislesslikelytobecitedatallandwhenitis,itislesslikelyto behighlycited.theseresultsareconsistentwiththeliteraturethathasdocumentedthatincumbent firmshavedifferentgoals,searchprocess,competenciesandopportunitycoststhatleadthemtowards moreincrementalinnovation(tushmanandanderson,1986;hendersonandclark,1990;tripsasand Gavetti,2000;RosenkopfandNerkar,2001;AkcigitandKerr,2011),althoughthesepapershavenot directlycomparedinnovationbyincumbentswiththatbyvcbackedstartups. Toprobeourresultsfurther,weturnnexttodirectlyexaminetheextenttowhichincumbentspursue moreincrementalinnovation,byexaminingthedegreetowhichtheycitetheirownpriorworkrelative toothertypesoforganizations.followingsorensenandstuart(2000),wehypothesizethatiffirmsare citingtheirownpatentsatadisproportionaterate,thentheymaybeengagedinmore exploitation ratherthan exploration (March,1991).Wethereforestudytheextenttowhichinventorsinthe differentorganizationalsettingstendtocitethemselves. Table6reportstheresultsfromnegativebinomialregressionswherethedependentvariableisthe countoftheselfcitationsafocalpatentmakes,whereaselfcitationisdefinedascitingapatentfrom thesameassignee.theregressionscontrolforthetotalnumberofcitationsthepatentmade,and technologyandpatentapplicationyearfixedeffects.ascanbeseenfromtable6,vcbackedfirmsare nomorelikelytocitethemselvesthanacademiclabs.althoughthecoefficientisinfactnegative,itis impreciselyestimated.ontheotherhand,thecoefficientonincumbentfirmsimpliesthattheyare50% morelikelytocitethemselvescomparedtoacademiclabs.again,thedifferencebetweenvcbacked firmsandincumbentsisstatisticallysignificant,suggestingthatpartofthereasonthatincumbentshave lessinfluentialinnovationsisthattheyareengagedinmoreincrementalr&dthanvcbackedstartups.

12 Onepossiblereasonfornotbeingcitedatallandforcitingone sownworkcouldalsobethatfirmsare engagedinextremelynovelinnovationsthathavenotyetyieldedcitations.thiscouldbeparticularly trueinnascenttechnologiessuchasrenewableenergy.inaddition,sincepatentingactivityis concentratedinafewincumbentfirms,itispossiblethatsomeofthehigherselfcitationispurelydue tothefactthatthepriorarttobecitedismorelikelytobethatofincumbentsorthatvcbackedfirms donothavemanypriorpatentstocite. Inordertoaddresstheseconcerns,weuseanewmeasureofnoveltythatisnotbasedoncitation measure.instead,wedrawonatextualanalysisofpatentapplicationstolookatthesimilarityofpatent claimsanddescriptionsforpatentsinagiventechnologyarea.intuitively,ourdefinitionissuchthat patentswithgreatertextualsimilaritytoneighboringpatentsareconsideredtobelessnovel.our measureofnoveltyshouldbeparticularlyusefulinthecontextofsciencebasedpatenting,where technicaltermsaremoreuniqueandthereforemorelikelytosignaldifferencesinthecharacteristicsof innovation,andformorerecenttimeperiods,whereinitialforwardcitationsmaybeanoisypredictorof ultimateoutcomes.themeasurealsoavoidsproblemswithcitationbasedmeasures,wherecitation patternscansufferfromselectionbiases.amoredetaileddescriptionofthemeasureisoutlinedin Appendix2(seealsoYounge,forthcoming,andUllmanandRajaraman2011,pp.9293). AscanbeseenfromTable7,ournoveltymeasureisquiteconsistentwiththeothercitationbased measuresofpatenting.first,ithighlightsthatinadditiontounassignedpatentsnotreceivingmany citations,theyarealsolessnovelthanpatentsbeingdevelopedinacademicandgovernmentlabs.the regressionshighlightthatthenoveltyofthepatentsforvcbackedstartupsisnodifferentfromthatof academiclabs.however,incumbentfirmshaveasignificantlylowerlevelofnovelty.althoughthe differencebetweenthenoveltyofpatentingbyincumbentandvcbackedfirmsisnotsignificantforthe overallsample,itisclosetobeingsignificantatthe10%levelforusbasedinventors,particularlyinthe latterpartofoursample.ourresultsthereforesuggestthatincumbentfirmshavebeenengagedinless novelandexploratoryinnovationthanvcs,inparticularintheus. 4. VentureCapitalFinancingofRenewableEnergyStartups ThusfarwehavedocumentedthatVCbackedstartupshaveincreasedtheirshareofpatentingmost substantiallyoverthepastdecadeandthatthesestartupsseemtobeassociatedwithmoreradicaland novelinnovationthanthatbyincumbentfirms.thetimingofgrowthinrenewableenergypatentingby VCbackedfirmsiscloselyassociatedwithventurecapitaldollarsflowingintorenewableenergy startups.in2002,only43cleanenergystartupsreceivedvcfundingintheus,raisingacombinedtotal of$230m.in2008,over200cleanenergystartupsraised$4.1bninventurecapitalintheus. 7 Infact, cleanenergyinvestmentsaccountedforabout15%ofthetotaldollarsinvestedbyvcsintheusin 2008,ofwhichamajoritywenttorenewableenergytechnologies. 7 Source:ErnstandYoung,NationalVentureCapitalAssociationPressReleases.

13 AlthoughourworkcannotdistinguishwhetherVCsleadstartupstoengageinmoreradicalinnovation, orarejustabletoselectmoreradicalinnovationsthantheincumbentstendtofund,itdoeshighlight thatventurecapitalfinancingseemstohaveassociatedwithamorenovelandhighimpactinnovationin renewableenergy,particularlyinthelate2000s(conti,thursbyandthursby,2012). 8 Thisseems importantgiventheneedforthewidespreadexperimentationrequiredtomakeprogressinproviding lowcost,cleanenergythatwillsupportdevelopingwithoutincurringmassivecostsintermsofclimate change.totheextentthattheshiftinventurecapitalfinanceawayfromsuchtechnologiesisdueto structuralfactors,thissuggeststhatitwillhaveanoticeableimpactonthetypeofinnovationbeing undertakeninrenewableenergy(eitherthroughthetreatmentortheselectioneffectofventurecapital investment). Needlesstosay,anumberoffactorsarelikelyresponsiblefortherapiddeclineinVCfinancingfor renewableenergystartups.theeconomiccollapsein2009hadachillingeffectonallventurecapital investment,includingcleanenergy.inaddition,improvementsinhydrofrackingtechnologythat openeduplargereservesofnaturalgasloweredthecostofnaturalgasconsiderablyandchangedthe economicsofrenewableenergytechnologiesintermsofthembeingcloseto gridparity.nevertheless, ourdiscussionswithventurecapitalinvestorssuggestthatthereareinfactstructuralfactors,overand abovethesehistoricaldevelopments,thathaveledinvestorstobecomeunwillingtoexperimentwith renewableenergyproductiontechnologies.inthissection,weoutlinethesestructuralfactorsthatvcs seemtobefacing,makingsustainedfundingofentrepreneurshipinrenewableenergydifficult. 4.1 FinancingRiskandCapitalintensityofenergyproduction VCbackedinvestmentsareextremelyrisky,leadingtoanextremelyskeweddistributionofreturns.Hall andwoodward(2010)andsahlman(1990;2010)documentthatabout60%ofvcinvestmentsarelikely togobankruptandthevastmajorityofreturnsaretypicallygeneratedfromabout10%ofthe investmentsthatdoextremelywell.furthermore,kerr,nandaandrhodeskropf(2013)documenthow harditisforvcstopredictwhichstartupsarelikelytobeextremelysuccessfulandwhichwillfail.vcs thereforeinvestinstages,ineffectbuyingaseriesofrealoptions,wheretheinformationgainedfrom aninitialinvestmenteitherjustifiesfurtherfinancingortheexerciseofthevc sabandonmentoptionto shutdowntheinvestment(gompers,1995;bergemannandhege,2005;bergemann,hegeandpeng, 2008;Guler,2007).Hencepropertiesofstartupsthatmaximizetheoptionvalueoftheirinvestments maketheirportfoliomorevaluable.forexample,investmentsthatarecapitalefficient(costofbuying theoptionisless),wherestepupsinvaluewhenpositiveinformationisrevealedarelargerelativeto theinvestment(morediscriminating experiments beingrunwiththemoneythatisinvested)and wheretheinformationabouttheviabilityofaprojectisrevealedinashortperiodoftimeareall propertiesthatmakeinvestmentsmoreattractiveforvcs.sectorssuchasitandsoftware,thathave relativelylowlevelsofcapitalinvestment,andwhereinitialuncertaintyabouttheviabilityofthe technologyisrevealedquickly,areidealsectorsforvcs.thehighreturnsforseveralofthemost 8 Notethatsimplylookingatthetimingofthepatentsandtheinvestmentwillnothelpuntanglethecausalityas VCswillofteninvestinfirmsthathavepromisingtechnologiesintheanticipationthattheywillpatent.

14 successfulvcfirmsarebasedoninformationtechnologyinvestments.aclassicexampleisthatof Google,thathadamarketcapitalizationof$23billionatitsIPO5yearsafteritreceiveditsfirstroundof VCfunding,andhavingraisedabout$40Minventurecapitalalongtheway. Ontheotherhand,theuniteconomicsofenergyproductiontechnologiesneedtobedemonstratedat scale,becauseeveniftheyworkinalab,itishardtopredicthowtheywillworkatscale.thefactthat earlystageinvestorsneedtofinancenotjusttheinitialexplorationaroundthetechnology,butalsothe scaleupofthetechnologyleadstotwochallengesforrenewableenergystartups.first,itimpliesthat theresolutionofuncertaintytakesmuchlonger,asstartupsoftenneedtobuilddemonstrationandfirst commercialplantsbeforeitisclearthatthetechnologyistrulyviable.second,sincethese demonstrationplantsfacetechnology(ratherthanengineering)risk,theyaretooriskytobefinanced throughdebtfinance.vcswhobacksuchstartupsthereforeneedtofinancethecompaniesthrough extremelylongandcapitalintensiveinvestments.thefundsrequiredtoprovecommercialviabilityfor energyproductiontechnologiescanreachseveralhundredmilliondollarsovera510yearperiod, comparedtothetensofmillionsthatvcsaretypicallyusedtoinvestinginanygivenstartup. 9 Thislevelofinvestmentisnotfeasiblefromatypicalventurecapitalfundwithoutseverely compromisingthediversificationoftheventurefirm sportfolio.forexample,investingonly$815min aprojectthatistwiceascapitalintensivehalvesthedollarreturnifthestartupissuccessful.onthe otherhand,investingasufficientamounttoretainalargeshareinasuccessfulexitrequiresmakingfar fewerinvestmentsacrosstheportfolioandhencemakestheportfoliomuchmorerisky.such investmentsarethustypicallytoocapitalintensiveforvcs,giventhesizeandstructuresofmostvc fundstoday. Theinabilitytoraiseeitherdebtorventurecapitalatthedemonstrationandfirstcommercialstagehas ledthisstageofthestartup slifetobeknownasthe valleyofdeath (seefigure6).thefactthat investorsarenowacutelyawareofthisfundinggapbeforethefirmgetstocashflowpositiveleadstoan unravelingoftheentirefinancingchain.thatis,sinceinvestorsforecastthatevenpromisingstartups mayhaveahardtimegettingfinancingwhentheyreachthestageofneedingtobuildademonstration plant,thebenefitsofsinkingcapitalinastartupatthestagebeforemaynotbeworthwhile.thislogic, thatvcsrefertoasfinancingrisk,worksthroughbackwardinductiontothefirstinvestor.thus,a forecastoflimitedfuturefundingmayleadpromisingprojectstonotbefunded,evenifwhenfully funded,theywouldbeviableandnpvpositiveinvestments(e.g.,seenandaandrhodeskropf,2013). Thischallengeisexacerbatedbythefactthatpotentialentrepreneurswhoknowtheenergyspaceoften tendtobefromlargeoilcompaniesorfromutilities.hence,theymakegoodceosforthestagewhen thestartupismoreestablished,buttheytendtoberelativelypoorentrepreneursattheearlystageof thebusinesswherecashislimitedandneedstoberaisedfrequently,thebusinessmodelisnotclear, 9 Forexample,Solyndra,acompanythatmanufacturersphotovoltaicsystemsusingthinfilmtechnology,hashad toraise$970minequityfinanceinadditiontoa$535mloanguaranteefromthedepartmentofenergy,priorto itsplannedipoinmid2010.thisamountofcapitaltoprovecommercialviabilityisanorderofmagnitudegreater thanthe$40$50mthatvcsaretypicallyusedtoinvestingineachcompanytogetthemtoasuccessfulexit.

15 anddecisionsneedtobemadequicklywithlimitedinformationathand.ontheotherhand,thosewith abackgroundofvcbackedentrepreneurshipmaybesuccessfulatrunningsmallitrelated,biotechor semiconductorstartups,butareillpositionedtomanageandgrowenergyproductioncompaniesthat havedifferentbusinessmodelsandchallenges.sincevcsrequireentrepreneurstoplayacentralrolein fundraisingforthelargeamountsofmoneyrequiredforcommercialtestingofthetechnology,in additiontomanaginglargeproductionfacilities,internationalcommoditypricingandanticipatingthe changinggovernmentpolicies,thecombinedskillsetrequiredofsuchceosisonethatisinshortsupply (Kaplan,SensoyandStromberg,2009).Thesefactorsgreatlyincreasetheoperationalriskofcompanies, andhencethiscreatesimportantchallengesforrunningandgrowingstandaloneenergyproduction companiesthatgobeyondtheircapitalintensity. 4.2 Exitopportunities VCshaveinvestedinsomeindustriessuchasbiotechnology,semiconductorsandIT/networksthatalso sharetheattributesofhugeinfrastructureandmanagementrequirementsthatareoutsidethescopeof astartup.however,intheseinstances,vcsbankonanestablishedexitmechanismtohandovertheir earlystageinvestmentsbeforetheyhitthevalleysofdeathincapitalandmanagerialtalent.for example,inthebiotechnologyindustry,thevcmodelhasevolvedsothatpharmaceuticalcompanies stepintobuypromisingstartupsatapointevenbeforecommercialviabilityhasbeenproven.thisisa keypartoftheinnovationecosystemasitbridgesthepotentialvalleyofdeathandtherebyfacilitates precommercialvcinvestmentsinbiotechnology.thepropensityofpharmaceuticalcompaniestobuy promisingstartupsalsofacilitatestheiriposatprecommercialstages,becausepublicinvestorsbelieve thereissufficientcompetitionamongpharmaceuticalfirmsforbiotechnologystartupswithinnovative solutionsthattheywillbeacquiredwellbeforetheyhitthevalleyofdeath.cisco,lucent,hpand JunipernetworksplayanequivalentroleintheIT/networkingindustry. Thusfar,however,energyproducingfirmsandutilitiesthatsupplyelectricitytocustomershavebeen farfromactiveinacquiringpromisingcleanenergystartups.thisbottleneckinthescalingupprocess hasaknockoneffectontheabilityforvcstofundprecommercialtechnologiesinthisspaceaswell.if earlystageventureinvestorsfacetheriskthattheymaybeunabletoraisefollowonfundingorto achieveanexit,evenforstartupswithotherwisegood(butasyetunproven)technologies,theyrunthe dangerofsinkingincreasingamountsofdollarsforlongerperiodsoftimetokeepthestartupalive. Withincumbentfirmsunwillingtobuythesestartupsatprecommercialstages,thetimetoexitforthe typicalstartupismuchlongerthanthethreetofiveyearhorizonthatvcstypicallytarget(thetimeto buildpowerplantsandfactoriesisinherentlylongerthanasoftwaresalescycleandcaneventake longerthanthelifeofavcfund).asshowninfigure6,thisleadsventurecapitaliststowithdrawfrom sectorswheretheycouldhavehelpedwiththeprecommercialfunding,butwheretheyarenotcertain thattheywillbeabletoeitherfundtheprojectthroughthefirstcommercialplant,ortheyarenotsure iftheycanexittheirinvestmentatthatstage(nandaandrhodeskropf2013). Inthecaseofbiotechnologyindustry,aclearexitmechanismwasfacilitatedbythefactthattheFDA developedwellunderstoodandtransparentmetricsforsuccessateachstage.becausethesetof buyersisuniformandthecriteriaforasuccessfulexitateachstagehavebeendevelopedandwell

16 understood,vcscanworkbackwardsandsettheirowninvestmentmilestones.inthisway,the downstreamexitprocesshasimportantconsequencesforthedirectionofupstreaminnovation.the factthatthereisawelldevelopedecosystemwherelargepharmaceuticalfirmsbuypromisingstartups impliesthatthereisgreaterearlystageventurecapitalfundingofsuchfirms.moreover,stockmarket investorsalsohaveanappetiteforsuchfirms,intheknowledgethatpharmaceuticalfirmswillbewilling toacquireapromisingtargetbeforeithitsthebottleneckofmarketinganddistribution.thisinturn createsanotherexitavenueforventureinvestors,fuellingfurtherearlystageactivity.infact,the historyofcapitalintensiveindustriessuchasbiotechnology,communicationsnetworkingand semiconductorssuggeststhatuntiltheincumbentsstartbuyingstartups,theinnovationpipelinedoes nottrulytakeoff. Theextenttowhichlargeenergycompanieswillplayanequivalentroleintheinnovationpipelinefor cleanenergyisnotyetclear.whileenergycompanieshavenotchosentobeactivebuyersofclean technologystartups,itisstillearlyinthelifeofthecleanenergyecosystem,comparabletothe biotechnologyecosysteminthelate1980s.therearesomesignsthatthismaybechanging,withthe mostpromisingdevelopmentsbeingintheriseofanumberofcorporateventurecapitalfundsamong thelargeenergycompanies(nandaandrothenberg,2011). 4.3 GlobalCommoditiesandPolicyRisk AfinalimportantdifferencebetweentherenewableenergyproductionandthetypicalVCbacked startupisthatenergyisacommodity.successinenergycomesfrombeingalowcostproviderrather thanhavinganinnovationthatcanbepricedhighduetothewillingnessofenduserstopay(asisthe caseforbiotechnology).whileincumbentsinotherindustriescompetewitheachothertoacquire startupsinordertomeetenduserdemand,theenduserintheenergymarketcannotdistinguish electronsproducedfromcoal,thesunorthewind(unlessthegovernmentpricesthecostofcarbon appropriately).intheabsenceofappropriatepricesignalsorincentivestoinvestinrenewables, incumbentsarethereforenotpressedtoacquirestartupsinthisspace.inthecaseofbiofuels,the inputstotheirproductionprocessarealsocommodities.energyproducersthereforefacecommodity riskforbothrawmaterialsandendproducts.sincethesemarketscanexhibitsubstantialpricevolatility, itmakesrunningandmanagingthesecompaniesmoredifficult.forexample,secondandthird generationbiofuelstartupsproducingethanolorbiocrudeat$80$90perbarrelwerecompetitivein 2007priortotheglobalrecessionwhenconventionaloilpricestopped$100abarrel,butmostwent bustwhenoilpricesplummetedinthesubsequentrecession. Thechallengesofbackingaglobalcommodityproducerarecompoundedbythefactthatenergyand cleanenergyaresectorswithlargeinvolvementbygovernmentsacrosstheworld.giventhatclean energytechnologieshavenotyetachievedgridparity,governmentpolicyisalsocriticalindetermining thepricesofinputsandfinishedproducts.somegovernmentschoosetoeithertaxcarboncontentin conventionalfuelsortobuycleanenergyatapremium.otherschoosetosubsidizecleanenergy companiesthroughdirectgrantsandsubsidiesorthroughtaxbreaks.regardlessofthepolicy,itimplies thattheextenttowhichagivenstartup sproductislikelytobeprofitabledependsgreatlyonwhetherit

17 isincludedinthesubsidyorcredit,theextenttowhichcarbonistaxedorthepricepremiumatwhich thegovernmentbuysthecommodity. Policychangesanduncertaintyarethusmajorfactorshinderingthepotentialinvestmentbyprivate sectorplayersacrossthecleanenergyinvestmentlandscape(bloom,2009).thisisparticularlytrue whentheperiodicityoftheregulatorycycleissmallerthantheinvestmentcyclerequiredfor demonstratingcommercialviability.insuchanevent,nooneiswillingtoinvestinthefirstcommercial plantiftheydonotknowwhattheregulatoryenvironmentisgoingtobebythetimesuccesshasbeen demonstrated(basedontherulesofthepriorregulatoryregime). 5. Possiblesolutions ThesectionabovehastriedtodemonstratethatVCsentermarketswheretheybelievetheycancreate andthenexercisegrowthoptions.vc swereinitiallyattractedtorenewableenergytechnologiesinthe beliefthattherewouldbeashiftindemandfromsocietyforrenewableenergy,andthatshiftwould createlargegrowthoptionsforthemduetoaconstrainedsupplyofsociallydesiredrenewableenergy alternatives.thisbeliefhasnotyetpannedout,andmoreover,thecostofcreatingthegrowthoptions haveturnedouttobemuchgreater,astheinnovationpipelineisnascentandtheabsenceof incumbentsbuyingpromisingtechnologiesmeansvcinvestorsneedtofinancethescaleupbeforethey canexercisetheiroptions.inthissection,wediscusspossiblesolutionsthatmayhelpdriveamore robustfinancingecosystemforrenewableenergytechnologies. 5.1Privatecapitalmarketsolutions Withtheappropriatepricesignalsandincentives,incumbentsmaybeincentivizedtobuypromising technologies,therebyreducingfinancingriskconsiderably,astookplaceasthebiotechnologyindustry matured.wediscusstheseincentivesinthenextsubsection. Intheabsenceofenergycompaniesandutilitiesplayinganimportantroleinthisinnovationpipeline, thealternativeforwidespreadinnovationbystartupsinrenewableenergyproductionwillrequirethe structureofthevcindustrytochangeinkeyways. First,itwillrequiresignificantlylargerfundsthanistypicalforventurecapitalinvestors,inorderto addressthechallengesassociatedwithfinancingriskandthe valleyofdeath.indeedkleinerperkins $500MGreenGrowthFund,andKhoslaVentures $750Mfundareexamplesofsuchatrend 10,butthe sectorwillprobablyrequireevenlargerfundstosupportthescaleuprequiredbyenergyproduction companies.themajorityofventurecapitalinvestorsincleantechnologydonothavededicatedfunds forthissector,andcontinuetoraise$250300mfundsandmayneedtohavefargreaterlevelsof syndication,orpresetpartnershipsacrossvcsinordertosustainthelevelofinvestmentrequiredby 10 KhoslaVenturesalsocreatedadualfundstructure,whereasmallerfundwouldfocusonearlystage experimentswhileasecond,largerfundwouldguaranteefundingforcommercialization,helpingtoreduce financingrisk.

18 thissector.moreover,ifventurecapitalinvestmentintheenergysectoristobesustainedinthe absenceofearlyexitopportunities,itwillrequirearadicalreworkingofthevcfundstructuresand terms. Overcomingthesechallengeswillbecompoundedbyanotherfactorassociatedwiththeemergenceofa newindustry:learningthroughexperimentation.investorsinnewtechnologiesgetfeedbackontheir processofduediligence,thetypesofentrepreneurswhoaremostsuccessful,andanunderstandingof thechallengesfacedbycertaintypesofbusinessmodelsovertheinvestmentcycle(goldfarbetal 2007).Thisisalsoaperiodwhenagenerationofnewentrepreneursarises,driveninpartbythemany firmsthatfailduetoatechnologythatdidnotwork,butwheretheentrepreneursdevelopedagood workingrelationshipwiththeventurecapitalinvestors.alloftheseprocessesdevelopfasterwhenthe cycletimesfor experimentation bythevcsaresmaller.inthecontextofcleanenergy,thefeedbackis muchslower,drivenbythedualstagesofriskandthelongercycletimesofcleanenergy.manyplayers thereforeseeacriticalroleforgovernmentinsupportingthegrowthofthecleanenergyinnovation pipeline. 5.2GovernmentSupport TheUSgovernmenthasplayedanimportantroleinsupportingcleantechnologyinnovationintheUS. However,thevastmajorityofthishasbeenonthe supplyside,throughthedirectsupportofspecific governmentanduniversityprograms,grantstosupportprecommercialfundingofnewstartups throughthearpaeprogramandattemptstobridgethevalleyofdeathforindividualprojectsthrough thedepartmentofenergy sloanguaranteeprogram(roberts,lassiterandnanda2010). Whileclearlyveryhelpfulinattemptingtoaddressthefundinggapsinherentintheenergyinnovation pipeline,akeyaspectofensuringthatthepipelineofnewprojectscontinuetogetfundingfromthe privatesectorwillbetoensurethatthereisavibrantsetofexitopportunitiesforthesestartupsbefore theyhitthevalleyofdeath.whilegovernmentguaranteeddebtwillhelpreducesomeofthisrisk, widespreadexperimentationanddeploymentofnewtechnologiescanonlytakeplaceoncestartups haveaclearpathtobeingacquiredorgoingpubliconthecapitalmarkets.thegovernmentcan thereforedomoreintermsofmakingexitseasier.wenotethreeinterestingideasthathaveemerged throughourdiscussionswithvcsandthatarealsoechoedinthebroadercommunityofinvestors lookingforsolutionstothe valleyofdeath (BloombergNewEnergyFinance,2010). Thefirstareawherethegovernmentcanmakeasignificantcontributionisthroughstable,predictable andlongtermpolicymeasuresaimedatstimulatingdemandforcleanenergy.removinguncertainty aroundpoliciesreducespolicyriskdramaticallyandmakesiteasierfortheprivatecapitalmarketsto plantheirinvestmentsaccordingly.furthermore,intheabsenceofenduserpressuretodrivem&a activity,thegovernmentcancreatethispressurethroughpoliciessuchasfeedintariffs(fits).while FITshavetheirmostdirecteffectonincrementalimprovementsofcommerciallyproventechnologies, solutionssuchasemergingtechnologyauctionsmaybeabletosuccessfullycreatetheappropriate demandfornewtechnologies.

19 Second,thegovernmentcandirectlystimulateM&Aactivityeitherthroughtheregulatorysystemor throughcorporateincentives.forexample,withoutdecoupling,utilitieswillhavenoincentivetoadopt newtechnologiesbeyondanythingthattheyaremandatedtodo.renewableportfoliostandardsas theystandtodaytendtobiasutilitiestowardsadoptingmoremature,currentlycheapertechnologies. Thegovernmentcanalsocreateincentivesforincumbentfirmstoactasfirstadoptersfornew technologies.thesecaneffectivelyhelptobridgethe valleyofdeath,createmoreearlystagefunding anddrivethegrowthofasufficientnumberofstartupfirmstoultimatelycreatelargefirmsthatwill competewitheachothertoacquireforthenextgenerationofstartups. Finally,thegovernmentcancreatepublicprivatepartnershipfundsthatcanhelpeitherwithfirst commercialtestingorasmechanismsthateffectivelycompetewiththeincumbents.creatingthis competitioncanhelpstimulatem&aactivityinthesectorandhencedrivetheinnovationpipeline (BloombergNewEnergyFinance,2010).ThiscouldbedesignedalongthelinesofFernandez,Steinand Lo(2012)whohavebeguntoidentifysimilarchallengesinbiotechnologyandaresuggestinginnovative financialengineeringapproachestofundinginnovationincancertherapy,thatcouldalsobeappliedto renewableenergytechnologies. 6. Conclusion Innovationinrenewableenergyhasgrowninrecentyears,inpartduetothesharpriseinventure capitalfinanceforrenewableenergystartupsintheearly2000s.however,theavailabilityofventure capitalfinanceforrenewableenergyhasfallendramaticallyinrecentyears.inthischapter,weask whetherweshouldworrythatthedeclineandshiftinvcwillslowtherateandalterthedirectionof innovationinrenewableenergy. Ourresultssuggestthatstartupsbackedbyventurecapitalfilepatentsthataremorelikelytohaveat leastonecitation,aremorelikelytobehighlycited,havefewerselfcitationsandaremorelikelytobe novelthanpatentsfiledbyincumbentfirms.althoughthelaginthepatentgrantsdonotallowusto directlyobservehowthefallinglevelsofvcfinancerelatetotheinnovationsbyvcbackedstartups,our resultssuggestvcfinancingisassociatedwithagreaterdegreeofeconomicexperimentationand therefore,weshouldworrythatvcshavemovedawayfromfundingsuchstartups. Ourchapterhasalsoaimedtoshedlightonsomeofthestructuralfactorsthathavemadesustained experimentationbyvcshard,withaparticularemphasisonthedifficultyofexitingtheirinvestmentsto incumbentfirmsthathavetheexpertiseandcapitaltofinancethescaleupofsuchtechnologies. Larger/longerFundsmaybeonealternative,sincesuchfundscouldgetpasttheuncertaintyandtoa stableplaceforexit),butmeasuresdesignedtoincentivizeincumbentsupthefinancingchaintobridge the valleyofdeath alsoseemlikepossiblesolutions. Weshouldnotethatouranalysisisnotmeanttosuggestthatprocessinnovationsareunimportant,or thatthefocusofvconotheraspectsofcleantechisnotvaluable.rather,ourobjectiveistohighlight thefactthattheshiftingfocusofventurecapitalislikelytohaveanimpactonboththerateandthe characteristicsofrenewableenergyinnovationinthecomingyears.totheextentthatthereisstilla

20 needforexperimentationwithnewtechnologiesadesiretocommercializeradicalinnovationsin renewableenergy,ourworkhighlightsthatinadditiontofallingnaturalgasprices,therearestructural factorsaboutenergythatmakesustainedexperimentationbyvcsdifficultinrenewableenergy. Althoughitisstillearlyinthelifecycleofthisindustry,ourdiscussionhasoutlinedsomespecificfactors thatmayfacilitatethedeploymentoflargeamountsofriskcapitalthatarenecessarytofinance renewableenergyinnovations. References Akcigit, Ufuk, and William Kerr, 2011, Growth through heterogeneous innovations. Harvard Business SchoolWorkingpaper. Balasubramanian,NatarajanandJeongsikLee,2008,Firmageandinnovation.IndustrialandCorporate Change,17: Bergemann, Dirk, and Ulrich Hege The Financing of Innovation: Learning and Stopping." RAND JournalofEconomics,36: Bergemann, Dirk, Ulrich Hege, and Liang Peng Venture Capital and Sequential Investments." WorkingPaper. Bloom,Nick.2009.TheImpactofUncertiantyShocks.Econometrica,77: BloombergNewEnergyFinance.2010.CrossingtheValleyofDeath;Solutionstothenextgeneration cleanenergyprojectfinancinggap.june2010whitepaper BP Statistical Review of World Energy. Review2012/statistical_review_of_world_energy_2012.pdf Conti, Annamaria, Jerry Thursby and Marie Thursby Are Patents Endogenous or Exogenous to StartupFinancing?WorkingPaper Fan,RongEnandKaiWeiChang,ChoJuiHsieh,XiangRuiWang,ChihJenLin:LIBLINEAR:ALibraryfor LargeLinearClassification.JournalofMachineLearningResearch9: (2008). Fernandez, JoseMaria, Roger M Stein and Andrew W Lo, 2012, Commercializing biomedical research throughsecuritizationtechniques.naturebiotechnology30, Gans,Joshua,DavidHsu,andScottStern,2002,Whendoesstartupinnovationspurthegaleofcreative destruction?randjournalofeconomics33, Goldfarb,B.,D.KirschandD.Miller,2007, WastheretooLittleEntryintheDotComEra? Journalof FinancialEconomics86(1): Gompers,Paul.1995.OptimalInvestment,Monitoring,andtheStagingofVentureCapital."Journalof Finance,50: Gompers,Paul,andJoshLerner,2002,TheVentureCapitalCycle,MITPress,Cambridge,MA. Guler,Isin,2007,ThrowingGoodMoneyAfterBad?AMultiLevelStudyofSequentialDecisionMaking intheventurecapitalindustry.administrativesciencequarterly,52: Hall,Robert,andSusanWoodward,2010,Theburdenofthenondiversifiableriskofentrepreneurship. AmericanEconomicReview100:3, Hellman,ThomasandManjuPuri.2002.VentureCapitalandtheProfessionalizationofStartupFirms: EmpiricalEvidence,JournalofFinance57(1): Henderson,RebeccaandKimClark.1990.ArchitecturalInnovationtheReconfigurationofExisting ProductTechnologiesandtheFailureofEstablishedFirms.AdministrativeScienceQuarterly 35(1):930.