Technology-enabled services and cleantech

When you spend an entire weekend installing insulation in your attic all alone, it provides a chance to ponder a few questions.  Such as “Can’t somebody else do this?”  And “Is there a venture-backable business opportunity here?”

The answer to the first one is tough but clear if you live in New England, since the residential contractors up here seem to take it as their God-given right to charge you the equivalent cost of a decent used car for even the simplest home improvement project (no bitterness, no, none at all…).  So no, getting somebody else to do it isn’t the option it should be.

But the answer to the second question is a bit less clear.  Certainly, there have to be some good business opportunities here.  Installing insulation, and other energy efficiency improvements, often make very good economic sense, even if you’re paying someone else to do it.  As opposed to distributed generation approaches like solar, energy efficiency improvements around the home can often provide paybacks measured in months and not years.  And even when the paybacks are longer, it can still make sense for a homeowner, with long-term plans to stay in their property, to make the investment.

So it’s no surprise that there have been a few business plans going around recently with the idea of launching new takes on the ESCO (energy services company, or energy savings consultants) model that has been a decent service market in commercial and industrial building markets.  These companies plan to provide various building owners with an energy audit, and then be the contractor for installing the new systems and equipment.  Great idea.

The challenge for venture investors is scalability.  As we VCs often tell prospective entrepreneurs, don’t forget that only 2% of startups get funding from venture capital investors.  That doesn’t mean that 98% of startups are bad ideas, by any stretch.  All it illustrates is that venture capital financing won’t be the right fit for most good business ideas.

This is particularly true in service-model startups, where the company can only grow as quickly as it can add highly-skilled consultants/ engineers.  Some VCs will fund companies with this kind of business model, but certainly the typical VC is looking instead to back a company that is developing a proprietary technology that can be rolled out much more quickly and fetch a high valuation multiple at exit.  That’s dictated by investment strategies and investment returns expectations.  But it does mean there’s often a huge difference between a new service business being a lucrative idea for the entrepreneur, and it being a good fit for venture capital backing.

And it’s particularly a challenge for investors in clean technology markets, where so much of the value chains are in downstream services (think about the costs of solar installation vs. panel manufacturing, for example, esp. as nextgen PV technologies get introduced to the market).  The portion of the value chain directly attributable to any proprietary technology, on the other hand, can often be very small.

So in cleantech, investors have often looked to start with a proprietary technology, and attempt to use it to capture downstream value.  Back a proprietary sensor company, but sell the data services as a recurring revenue contract.  Back a company with one proprietary component involved in biofuels production, but use it as a platform for building a full-scale production company using mostly off-the-shelf processes with the proprietary component included.  Back that same proprietary component developer, but plan on generating value via licensing relationships with downstream producers.  Or, in some cases, venture investors have stretched their investment models and simply backed non-tech services, where they see some other kind of sustainable competitive advantage and a market opportunity that’s big enough to accomodate multiple winners.

Another model to explore, however, is in technology-enabled services.  That is, looking for the ways to use proprietary technology to make the downstream service sectors more effective, then selling to those downstream service providers.  To use the residential ESCO example from above, imagine a company that developed a) a rich database of easily-performed energy efficiency metrics and checklists for home inspections; b) a rich database of visually-simple instructions for installation of the most effective energy efficiency improvements, importantly include what NOT to do; c) fulfillment relationships with major energy efficient equipment/ home products manufacturers; and d) handheld/wireless/back-end capabilities integrating a), b), and c).  Then you could sell “ESCO in a box” information and product distribution services to wannabe residential energy efficiency consultants all over the country.

Instead of requiring highly-skilled auditors and contractors to do the work, it could be done with semi-skilled (and thus lower-cost) employees.  After all, if you trust a moving company to pack up your valuables and breakables and move them across the country using pretty low-trained workers to do the planning, packing, etc., then you should be able to trust someone’s full-time, semi-skilled employee to deploy batts of insulation and a staple gun in your attic.  The game-changing angle would be that, over the long-run, you would enable an entirely new class of regional service entrepreneurs to get started as residential ESCOs with a much lower cost structure.  And in the near-term, you could help those general contractors add another lucrative line of business to their service offerings…

This particular fiberglass-inhalation-addled vision may not work (bonding and licensing may be an issue…), it’s just intended to be a tangible example of what I’m talking about.   Smart entrepreneurs are already coming up with better versions of this in other cleantech markets.  But the idea is simple:  If the biggest parts of cleantech value chains are in services, then providing technology to the service providers (if it means a significant shift in their economics, and can mean a dramatic expansion of the market) can be an interesting investment opportunity.

(As always, send your executive summaries and personal insulation installation horror stories to (JavaScript must be enabled to view this email address)...)

Deals from the past week:

• GreenTech Media’s Funding Roundup from last week already talked about GroSolar, PlascoEnergy, AgraQuest, Viryd, and OPX...  Also, SolarEdge and International Battery, later in the week…

• Multi-junction solar cell developer Cyrium has raised a follow-on insider round of financing.  The amount wasn’t clear from the press release, but the company reports they have raised $5.5mm to date (so, including their $2.6mm Series A, and seed financing, probably a $2 to $2.5mm round).

• VentureWire reported that small-nuke startup Hyperion has raised an undisclosed amount of financing from Altira Group.  For more info on Hyperion’s approach, here’s a good article.

• Woburn (“woo-burn”), MA based Wilson TurboPower has raised an additional $4mm on top of the $3mm they raised back in October.  Funders were not disclosed.

• Here’s an amusing story mentioning gDiapers’ recent round of financing...  “Diaper bubble”, nice work, Dan.

• Cleantech investors in the news:  In-Q-Tel opens up a Boston-area office...  Vinod talks about why his biofuels startups may move to Colorado—and perhaps to the Midwest...  Andrew Chung of Lightspeed has some cleantech predictions for 2008... and Chrysalix and Robeco have formed a joint venture that will do European cleantech venture investing.

Other news and notes:  It’s not a venture deal, but it’s worth noting Recurrent Energy’s $200mm project financing from Morgan Stanley...  And last but not least, some good stuff out of NREL and the DOE:  An interesting interview with Paul Dickerson, and NREL attempting to walk the talk.