There's been too much blind faith within the cleantech venture sector on proprietary technology as the primary way for startups to create a competitive advantage.

Certainly, holding a defensible patent can help a startup with a cost or performance advantage to maintain that advantage over time.  Proprietary IP has been part of the success story of early cleantech "winners" such as First Solar, for example.

But the pursuit of such proprietary technology can be very expensive -- in both direct and indirect ways.

First of all, it can be expensive to develop and commercialize products based upon truly differentiated core technology.  Thin-film solar is again another example of this.  From successes like First Solar to to-be-determined stories like Nanosolar, MiaSolé, Solyndra, etc., the pursuit of proprietary manufacturing techniques has meant having to invest hundreds of millions of dollars and years of effort in developing manufacturing equipment and techniques, all mostly from scratch.  

But indirectly, there's also a significant cost from trying to be secretive during the development process, out of fear that larger established competitors will be able to steal (or just borrow from) the tech sooner than the startup can get out to the market.  This is the not-often-discussed downside of a company remaining in "stealth" -- it's tougher for the startup's technologists to get outside input on alternative approaches that might improve their tech, and for the startup's bizdev / senior management to know how best to position their product when it's ready for the market.  This can increase the chances that the startup develops a product that, by the time it's ready, has been leapfrogged, or that simply doesn't meet customer needs for other reasons.  When in the pursuit of proprietary tech, the startup remains insular for a few years -- and this indirect cost can have significant impact.

Furthermore, none of the above fits very well with the current cleantech VC rhetoric about "capital-efficient" businesses.

But there are other ways to create a sustainable competitive advantage.  A startup can build a key set of channel or customer relationships that would be hard for a follower to wrest away.  A startup can build in a level of integration with customer processes or products that would be tough to un-do.  Brands can be built and utilized. There's even a form of "capital momentum" that we've seen where an early market leader uses their position to raise a lot more capital, including perhaps via an IPO, than their competition.  And then they'll be better-positioned to grow more quickly than those competitors. EnerNOC was an example of a firm using this kind of approach.

One key way of creating a defensible competitive advantage that I'm increasingly seeing deployed by cleantech entrepreneurs is market partnerships.  In many cleantech markets, the value chains have certain chokepoints where there's a high level concentration of component or product vendors.  And given the increasing interest in the corporate world around cleantech as a growth market, often these larger companies have aspirations (and sometimes even have launched their own products and services) to get into cleantech markets.  

Over the past couple of years, I've seen a lot of cleantech startups seek to develop sustainable competitive advantages in the marketplace by forming partnerships with these larger players.  

Most often, it's a partnership where the larger player is helping the smaller company to commercialize their proprietary technology. Forming a JV to build a first commercial production plant, for example. This can help with some of the challenges mentioned above in developing a proprietary technology.

But what I find more interesting are the partnerships I'm seeing where the startup works with entrenched upstream companies. Product manufacturers in traditional product lines (like, for instance, lighting products) who are developing new products based around emerging technologies (so to continue the lighting example, LEDs), but realize that their existing channels and sales models don't do a good job selling these new products. So a startup comes along with a system integration play, or a business model innovation, and is able to establish an exclusive relationship with the larger vendor.  

These and other examples are pretty interesting ways that cleantech startups with or without proprietary tech are creating competitive advantages not based on patents, but instead based on market dynamics.  For the startup, it's a lot more capital-efficient and speedy than developing a brand new technology from scratch.  And it also takes advantage of existing value chains, rather than attempting to disrupt existing value chains -- and when these energy, etc., value chains are 100 years old or so, they have a tendency to resist disruption.

Now the question is, will cleantech VCs be open to such non-tech approaches to creating sustainable competitive advantage?  

After attending the Clean Economy Summit a couple of weeks ago, things have been a bit of a blur, so I'm only now able to write about one major takeaway I had from the event.

There's an emerging love affair between the cleantech sector and the U.S. military.

At the event, two of the best-attended sessions were a speech by the Secretary of the Navy Ray Mabus and a special panel session on the military and energy technology innovation.  And for good reason -- while the legislative branch of the U.S. government continues to dither away the opportunity to establish robust cleantech markets in the U.S., the military can't afford to wait.  And so they're providing a pathway to commercialization for emerging clean energy technologies, which is exactly what many cleantech startups desperately need right now.

The Navy, Air Force and Army have always provided strong support for technology innovation in the U.S. The long-standing DARPA program has helped launch any number of technology innovations that later became important to the private sector (the most often cited example being, of course, the internet) by supporting early research and 'productization.' That way, successfully commercialized technologies can rack up early (and lucrative) sales to the U.S. military, because of the services' prioritization of mission success over cost savings.

I recently sat in on a small private talk featuring John Trbovich of Arsenal Venture Partners, which has very tight relationships with the military.  He made a compelling case that the Department of Defense's energy challenges are actually a strategic opportunity.  According to my (perhaps faulty) notes from John's talk:

• The DoD has 93 billion square feet of facility space, spread out over 545,000 buildings.
• The DoD is the world's largest oil buyer. They spend $16B annually on fuel.
• The military directs $81B per year to R&D, which represents 22% of the overall R&D spending in the U.S.
• The Air Force has become one of the most important "buyers" of solar power, but primarily by leasing their land and engaging in power purchase agreements.
• The Navy has laid out very aggressive goals for reducing fuel use and carbon intensity across both sea and land operations.

I've also been invited into small sessions where Navy tech people have gotten together with cleantech VCs, as just one example of a case where the military leadership is directly reaching out to the cleantech entrepreneurial community for ideas and solutions.

All of which helps explain why the cleantech industry regards the military as such an intriguing potential partner -- deep pockets and compelling needs.  And I see this in some of my portfolio companies, particularly those who've engaged with various military efforts as potential early-adopter customers and research funders.

But as Trbovich pointed out, this is a lot easier said than done.  

• The DoD has no consistent technology acquisition policy or vehicle.
• Despite these strong directives from the top, actual purchasers are often given no budget authority for new tech.
• Decision-making is often highly decentralized.  For example, in energy efficiency and onshore renewable power, it's often a base-by-base decision -- which isn't very scalable.
• The DoD can hinder itself.  For example, the DoD has put a moratorium on new wind installations because of antiquated radar systems that are still in place.
• There's often a timeframe mismatch.  Solar PPAs are generally at least 20 years to make the economics work, but the max lease allowed for any base is 10 years.
• Base commanders may have the desire, but often don't have control over capex.  They are stuck with high operating expenses because they don't have the capital budget to do anything about it.
• It's easy to waste significant time chasing DARPA dollars and sales contracts where the process isn't as open as it may appear -- and where another vendor is already essentially baked in.

The ability to help navigate some of these challenges is exactly why my firm is an LP in Arsenal VP's fund. It's just a lot easier said than done, and those guys understand how to do it.

Secretary Mabus' speech at the Clean Economy Summit brought the conference crowd to its feet in applause. He spoke not only of the above needs, but also talked poignantly about how U.S. men and women in uniform are dying because of the need to transport massive amounts of fuel and batteries into war zones. He also described the frustration of military leadership when they see energy-related dollars ending up in the very regions where the military is engaged in conflict.

And so part of the reason for this love-fest is even more basic: it's the most visible way that those of us in the U.S. cleantech industry feel we're working not only for our own sake and for environmental goals, but also to support our country.  

If only such sentiments were more widely felt and understood on Capitol Hill, we'd see a lot fewer partisan political games around energy policy.