Energy Startup 101: Beyond Innovations
An expert panel discussed the state of the energy startup industry and larger industry and policy trends at an event hosted by EPIC and the Polsky Center.
Building a successful startup company is hard work. Throw in a tangled regulatory system, changing global landscape and incumbent industry forces, and you’ve got the added complexities of building a startup in the energy space.
An expert panel discussed the state of the energy startup industry and larger industry and policy trends while offering insight to aspiring entrepreneurs last week at an event co-hosted by EPIC and the Polsky Center for Entrepreneurship and Innovation.
Part of the University of Chicago Innovation Fest 2018, the panel was moderated by the Future Editor at Axios, Steve LeVine. It featured Amy Francetic, managing director of Invenergy Future Fund, Charles Murray, co-founder of the energy startup Switched Source, and Manoj Kumar, CEO and co-founder of Social Alpha and head of innovation at Tata Trusts.
Battling Incumbent Forces
The panel underscored several trends shaping the energy landscape and impacting energy startups—low electricity prices that disincentivize innovation, waning federal support for clean energy innovation in the United States, and incumbent players such as large utilities focused on recouping their ratepayer-funded investments rather than seeking out new technologies.
Amy Francetic addressed that last factor directly.
“The large utilities that are essentially monopolies are doing what the regulations tell them to do, so utilities are investing in areas where they can recover the cost in that investment,” Francetic said. “If they can’t recover cost, then they’re not necessarily investing to compete against other utilities because there isn’t a lot of competition in these locations. They’re not going to be leaders, they’re going to be followers.”
Many traditional utilities, in short, don’t yet face significant pressure to innovate. But companies working to deploy or scale clean energy technologies often do feel this need. Francetic is well aware of this. Her fund’s parent company is Invenergy LLC, an independent power producer (IPP) based in Chicago.
“Independent power producers are much more entrepreneurial and scrappy and in favor of finding innovation and trying to win,” she said. “They’re going to be supplying power to utilities but their pathway will encompass a lot more innovation and looking for ways to be ahead of the next IPP. These folks have an appetite for risk.”
So You Want to Be an Entrepreneur…
As co-founder of a company that relies on a variety of funding sources, Charles Murray understands the need to find the right partners and niche markets. His company Switched Source has developed electrical grid technology that allows for two-way energy flow that can be retrofitted to the existing centralized grid.
He and his co-founder, Neal Lane, chose an even more difficult path than most startups face. Startups typically try to maximize investment early on, to secure financial stability early. Switched Source focused instead on acquiring “non-diluted capital.” Rather than seeking a large initial investment from venture capital funds, which would have forced them to sacrifice a significant ownership stake and brought expectations of large and rapid returns, they sought investment that would enable them to retain control of the company while pursuing smaller but more reliable returns.
It may mean less money, but it also means less pressure to hit a home run on a risky idea.
“You can discover niches for products, but it’s not $30 million-level money that you have to justify a moon-shot initiative,” Murray said. “You have a higher shot of success. Niche markets are up for grabs if you don’t take a huge check.”
Instead of taking a large check, Switched Source has gained funding from the U.S. Department of Energy ARPA-E program. They’ve also accumulated small checks along the way through competitions. They placed second in the University of Chicago New Venture Challenge, the top university accelerator in the country, and were among the winners of the University of Chicago’s Innovation Fund.
These competitions have also allowed them to publicize their company to find the right partners.
“When you’re working with incubators, you have to understand if they’re invested in the success of your technology and company or if it is a hedge,” Murray said. “You do not want to be there so that they can just cover their bases…You want them working to help you disrupt them.”
Growing Innovation in Emerging Economies
With a rapidly growing economy, low levels of energy access, and a population of 1.3 billion people, India is in many ways the future of the energy industry. The country needs to provide more people with access to energy. But it is also in the midst of a battle against air pollution. These competing priorities need innovative solutions, which should make the country a good place for energy startups.
Manoj Kumar said that is unfortunately not the case. India lacks a robust platform for innovation, he said.
“We really don’t have an ecosystem of innovation labs, incubators and investors who work (together) to take things to market,” Kumar said. “We have a gap between the lab and the market.”
Kumar is a senior advisor to the Tata Trusts—one of the oldest, non-sectarian philanthropic organizations in India—and is helping to lead their strategy for investing in incubators for energy innovators. Kumar also is the architect and chief evangelist of Social Alpha, which a supports social innovators and entrepreneurs. He is currently raising an enterprise fund to provide early stage risk capital to high impact technology start-ups who are tackling social problems.
Kumar’s aim is to support innovations that actually address the problems India is facing. Too often, he said, projects follow fads rather than the evidence of what people want. He cited microgrid projects as an example.
“People need energy, they don’t need microgrids,” he said. “There are a lot of products pushed in this space, rather than understanding the needs of people and solutions.”
In the questions and answers portion of the evening, UChicago Law Professor Mark Templeton, an EPIC-affiliated faculty member, asked each of the panelists to name one policy they would like to see implemented in the energy industry to help foster cutting-edge innovation.
Francetic said she wanted to see more investment in electric vehicles. They have multiple benefits, such as reduced greenhouse gas emissions and air pollution. But they also represent a new source of demand growth—a potential boon to utilities and other power producers.
For Kumar, he said India needs to help investors by providing incentives for working capital finance.
“In India, we have huge issues, even if you are a startup and you’ve sorted out your innovation and are taking it to market, the access to credit is very difficult,” he said. “There has to be some incentive.”
Murray returned to a recurring theme from the evening, saying regulations should spur utilities to innovate, particularly in clean energy.
“If it were really up to me, I would let utilities rate-base a megawatt of solar for every circuit that they have. If you really want to have an impact, let’s just go and do it—tomorrow,” Murray said. “Let’s just provide the right incentives for them to be able to rate-base what they need to move the needle on the things we care about.”
Regardless of whether those policies come to bare, LeVine hit on one of the biggest challenges to making it in the startup industry: staying patient. Successful energy innovations often don’t take a year or two to come to fruition—they take five or ten years, or more.
“If there’s one big takeaway from the evening, it’s that what Amy, Charlie and Manoj are trying to do is very, very hard,” LeVine said. “The world of instant gratification does not include this.”
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