Challenges Facing Cleantech Startups (And Resources to Overcome Them)
A dynamic subset of entrepreneurship focuses on the “cleantech” industry, which is a broad term encompassing energy, water, manufacturing and other alternative solutions designed to improve efficiencies, consumption, and more. Regardless of the variety of innovations being created in this sector, cleantech entrepreneurs face unique challenges beyond the traditional startup development lifecycle.
Overcoming “green fatigue”
We see new energy solutions everyday on television and in the news: electric cars, solar and wind alternatives, sustainable battery systems, and more. We keep hearing how they are going to change the way we use and consume energy in our personal and professional lives. But many of these options have failed to be adopted on a large commercial scale, and that is due in large part to “green fatigue.” As consumers, we tend to be skeptical of constant claims that these types of products have environmental benefits AND cost savings as a result. We see higher retail prices than perhaps less-energy-friendly alternatives, and so we opt for more familiar products.
In addition to consumer-based products, b2b clean and renewable technologies experience a similar challenge. The adoption of these innovations in mid-to-large size corporations can be daunting due to the lack of education showcasing the long-term cost reductions. Even if a company is willing to look at alternative energy options, young startups in this space may have a difficult road when compared with more-established competitors. As entrepreneur and policy expert Holmes Hummel explains: “Clean energy entrepreneurs face an additional challenge of fierce competition from incumbents. The energy sector in the United States is characterized by monopolies in the electric power sector and very strong concentration in the liquid fuels market. These incumbents have repeatedly demonstrated an ability to discourage competitors.”
Scaling the deployment and/or implementation of the technology
One of our favorite sayings at CEI is “growth kills companies.” It is not unique to cleantech startups, but it certainly is a real concern. As Greg Silverberg writes in “Innovating in a New Market: Challenges for Cleantech,” premature scaling has led to significant failures in recent years within the industry; this is primarily due to the lack of education in the marketplace (and the often sensationalized media attention toward what is communicated) as well as the lack of technical due diligence among early investors, he says.
Moreover, companies with comprehensive solutions are faced with an additional challenge of scaling the deployment of their innovation(s). One of our clients, Energy Conservation Management, has developed technology that improves the energy efficiency of industrial boilers; these “draft regulators” are typically installed by the ECM team onsite. Although this helps mitigate technical failures as a result of installation and ensures delivery of the benefits promised, it also makes it difficult to expand installations across multiple locations quickly. Thus, overall customer and sales growth may be hindered as a result.
Lack of funding for cleantech
These aforementioned large cleantech failures along with green fatigue have investors perhaps running scared from startups in the space, and the statistics seem to confirm it. Cambridge Associates (Clean Tech Company Performance Statistics) evaluated more than 72,000 investments across more than 440 different funds and determined that 2008 was the peak year for capital investments for cleantech companies. Since then, there has been a steady and significant decline in first-time funding in clean energy technology companies. Silverberg also notes similar data: there was $129 million invested in Q1 of 2015, significantly down from the $773 million invested in Q1 of 2010.
Navigating the political and regulatory landscape
Political factors absolutely play into the success of clean energy companies. Not surprisingly, as presidential administrations change, so too does energy policy. Here are just a few articles that highlight the differing opinions and actions on clean energy investments, solar/wind solutions, and global warming, among other topics:
- Democrats and Republicans: The Choice on Energy (2012)
- Democratic Views on Energy and Republican Views on Energy (2015)
One example of how the federal government can impact cleantech is the fact that $24.5 billion has been invested into more than 100,000 clean energy projects as a direct result of the §1603 American Recovery & Reinvestment Tax Act program. That is no small number.
Similarly, Holmes Hummel cites the important role of states in cultivating new and alternative energy solutions: “Policymakers at the state level are given a tremendous opportunity to shape market conditions. In the aftermath of debates in Congress in 2007, 2009 and 2010 over energy and climate policy, what is clear is that states have a leadership opportunity.” Therefore, a thorough understanding of federal and state policy as well as areas of opportunity becomes imperative to a company’s growth in this sector.
Resources for cleantech startups
It is not all doom and gloom for cleantech. There are resources available for young startups developing these valuable products and services. Here is a sampling of some that may be relevant for your business:
- Cleantech Open: a not-for-profit organization whose mission is to find, fund and foster entrepreneurs with big ideas that address today’s most urgent energy, environmental and economic challenges.
- Corporations: Large corporate entities, such as Intel (and its VC arm “Intel Capital”), are involved in supporting (with both financial and intellectual capital) cleantech entrepreneurs.
- Business incubators and accelerators: Another valuable resource is business incubator and accelerator programs, which typically offer mentorship, facility space and even some financing for young companies. LA Cleantech Incubator (LACI) and ACTION New England (Association of Clean Tech Incubators of New England) are prominent leaders in the United States.
Want to know what Arizona incubators support clean and renewable startups? Download our Arizona Incubator & Accelerator Resource Guide!