Apr 15, 2011

In search of a black swan : Nature Climate Change

Developing smart-grid technology to reduce electricity usage is a key challenge for green entrepreneurs.

Figure 1: Developing smart-grid technology to reduce electricity usage is a key challenge for green entrepreneurs.

Jason Aramburu, a 25-year-old Texan with a tangle of brown hair, first heard of biochar when — as an undergraduate at Princeton University — he visited the Smithsonian Tropical Research Institute in Panama in 2006. Ancient Amazonians, he gleaned, churned charcoal into fields to boost their yields of yam and corn. But it was the realization that the practice of burning crop waste and burying the resulting charcoal in soil could also combat climate change — by locking the carbon away for thousands of years — that inspired Aramburu. Johannes Lehmann, the soil scientist based at Cornell University whose 2006 paper1 alerted Aramburu to biochar's carbon-storage potential, had no plans to put the idea into practice, “so I decided to do it,” says Aramburu. He rented space at an 800-square-foot metalworking shop popular with artists in Brooklyn, New York, and — dressed in old jeans, a welding jacket and cowboy boots — set about building a machine that could convert corn cobs, rice husks and other crop waste into biochar. Aramburu mined his fellow metalworkers for welding tips while they wolfed down Polish sausage at a food truck across the street called Rosie's. “I also watched a heck of a lot of YouTube videos,” he says. Three months later, the prototype — a gleaming, ten-foot tall, stainless-steel-coated tube — was ready. Aramburu swapped his jeans for a suit, and pitched his idea to venture capitalists. But he rarely got beyond the first meeting. Instead of giving up, however, he adjusted his approach. Aramburu comes from a family of entrepreneurs — included are two of his brothers. “I'm told my grandpa sold flowers in Santa Domingo,” says Aramburu.
“The world needs entrepreneurs more than it needs scientists at this point. We know enough about climate change. It's time to start doing something about it.”
Rolf Wüstenhagen
Without entrepreneurs, the world would be very different. According to the British economist John Jewkes's 1958 analysis2 of 60 key inventions discovered during the twentieth century, over half of them — including the zipper, the jet engine and the helicopter — were invented by entrepreneurs. “Their great gifts arise from the habit of calling everything, even the simplest assumptions, into question,” Jewkes wrote of the entrepreneur. Over 40 years on, Jewkes's faith in entrepreneurs is still shared by many economists, venture capitalists and scientists. According to Throop Wilder, CEO of lithium-ion battery start-up and the Massachusetts Institute of Technology spin-out, 24M Technologies, entrepreneurs have “the ability to imagine a solution to a really big problem, the common sense to know how to convert the vision into a capital-efficient, doable plan and the ability to attract and organize great people around the common vision.” Wilder and many others believe that entrepreneurship is the only process that is sufficiently powerful to tackle climate change in the timescales required. With corporate research and development dwindling and many government coffers empty, how else will the world halve its greenhouse-gas emissions by 2050, yet double the amount of energy it produces?3Enthusiasts note that entrepreneurs generate up to 75% of all clean-tech innovations. Rolf Wüstenhagen, a director of the Institute for Economy and the Environment at the University of St Gallen in Switzerland, hopes that this trend continues. “The world needs entrepreneurs more than it needs scientists at this point. We know enough about climate change. It's time to start doing something about it,” he says.

To market, to market

Jason Aramburu founded biochar clean-tech company re:char in 2009.
At the age of 20, Vinod Khosla tried to found a soya-milk company in India that would service the multitude of people who couldn't afford refrigerators. Now a billionaire living in Silicon Valley, he has done more perhaps than any other venture capitalist to spur radical innovation among clean-tech entrepreneurs. Between 2002 and 2008, his California-based company Khosla Ventures and a number of other venture-capital and private-equity funds boosted global investment in clean energy from $0.9 billion to almost$33 billion, according to the research group Bloomberg New Energy Finance. Khosla believes that the clean-tech sector needs a 'Cambrian explosion' of entrepreneurship, in which just a few radical innovators survive and transform the landscape. To fuel that explosion, venture capitalists must invest in 'black swan' technologies — ideas that have a 90% chance of failure, but would be game-changing if they succeeded, he explains. “They are engines that are 100 per cent more efficient, or quantumnanothingamajits that are ten times better at storing energy than today's batteries.” Although many venture capitalists are sceptical of Khosla's pursuit of high-risk 'black swans', Josh Lerner, a professor of investment banking at Harvard Business School in Boston, acknowledges that venture capital has a disproportionate impact on innovation. A dollar of venture capital is three times more potent in stimulating patents than a dollar of corporate research and development, according to Lerner4.
Khosla is at present rearing a 'black swan' called QuantumScape. The start-up, still in stealth mode, uses exotic physics rather than electrochemistry to make energy-storage devices for electric vehicles, and the US Department of Energy's Advanced Research Projects Agency-Energy programme, which provided the enterprise's first grant, describes the device as “a completely new class of electrical energy storage device.” Like many other start-ups, QuantumScape did not invent the technology it is using, but licenses it from a university — in this case, Stanford in California. Until scientists are incentivized to commercialize their innovations rather than to simply publish more papers, entrepreneurs will have a central role in bringing low-carbon technologies to market, points out Pamela Hartigan, director of the Skoll Centre for Social Entrepreneurship at the University of Oxford, UK. One of the very first jokes Hartigan heard when she took up her new position in 2009 was “how many Oxford dons does it take to change a light bulb?” she says. “The answer was 'change'?” Lucy Marcus, CEO of Marcus Venture Consulting, cautions that not all scientists are cut out to take their research to market. “The person who can sit in a lab for twenty years and produce an ingenious invention is unlikely to be the same person who wants to go to endless business-development meetings, hire people, and deal with sales and marketing,” says Marcus.
Wind turbines are the most mature form of clean technology on the market today, with corporations such as Siemens and GE amongst the leading manufacturers — yet seven of the top ten wind-energy companies were founded by entrepreneurs. Enercon, the fourth largest wind firm in the world according to the Global Wind Energy Council, was founded in 1984 by a graduate engineer called Aloys Wobben, who built his first prototype in his back garden. The next wave of entrepreneurship is likely to be in energy efficiency, according to Rob Day, a venture capitalist at the Boston-based private-equity firm Black Coral Capital. “People are realizing that the cheapest and cleanest kilowatt-hour is the one that doesn't get used in the first place,” he says. In particular, entrepreneurs and venture capitalists are focusing on the smart grid — the use of computers and web-based approaches to add intelligence to previously 'dumb' assets such as lighting, and thereby reduce electricity usage, explains Day (Fig. 1) Between 2009 and 2010, venture capitalists globally doubled their investments in smart-grid companies to $2 billion, according to the research group Bloomberg New Energy Finance. Digital Lumens — a recent addition to Day's portfolio that was founded by two technicians based at Philip's Color Kinetics group — makes intelligent lighting systems that can reduce electricity usage in warehouses by up to 90%, compared with conventional lighting systems. “They've basically turned lights into computers,” says Day.
Day predicts an explosion of innovative, low-carbon business models, rather than simply products in the coming year. “The world doesn't need a two-hundredth solar-panel start-up,” he says, “but it does need two-hundred service companies dedicated to getting those panels on rooftops.” A UK-based solar-panel firm, Solarcentury, exemplifies this novel approach. As well as leasing its photovoltaic systems out to clients that would be otherwise unable to afford to buy them, Solarcentury recently struck up a partnership with ethical, Bristol-based Triodos Bank. The bank will buy solar systems from Solarcentury, which will then install them on school roofs throughout the UK. “The schools will each save around £1,000 a year and the bank will profit through the feed-in tariff,” says spokeswoman Charlotte Webster. Another company with an innovative business model is Lichtblick, a German provider of green electricity. In September last year, Lichtblick launched a 'swarm power plant', or 'schwarmstrom', in Hamburg, which involved installing around 100,000 Volkswagen gas engines in the basements of homes. The engines produce power on demand, softening fluctuations in the electricity grid caused by dips in wind or solar power, and store heat that can be used for hot water. The swarm can generate as much energy as two nuclear reactors, Lichtblick claims.

All hands on deck

Although entrepreneurs have a critical role to play in tackling climate change, they can't win the fight alone. “There's a great romance about the lone, charismatic entrepreneur saving the world, but in this case that's simply not going to happen,” says Arati Prabhakar, a partner at California-based US Venture Partners who works closely with clean-tech entrepreneurs. This is mainly because most venture-capital funds — the entrepreneur's main source of revenue — are loathe to invest millions or billions of pounds in a technology that may take over a decade to bring to market, she explains. Ken Caldeira, a climate scientist based at Stanford University, California, agrees. “Dot com companies can start-up on peanuts, but you are not going to demonstrate carbon capture and storage at power-plant scale without spending a lot of money,” he says. As a result, many game-changing innovations perish in the 'valley of death' — the period when an entrepreneur's savings run out before the innovation has had time to attract a venture capitalist.
The idea that a lone entrepreneur can save the world is not only wrong, it's also dangerous, states Prabhakar — it relieves the pressure on corporations, governments and scientists to do their bit. Marcus agrees. “Climate change is far too important an issue to leave to just the private sector,” she says. “It's all hands on deck.” Conspicuously absent from 'the deck' so far are corporations, says Lerner. Between 2008 and 2009, corporate research and development in clean-tech globally dropped 16% (ref. 5). And although many pharmaceutical giants buy up start-ups to foster innovation — a practice that was kick-started by Genentech's merger with Roche in 1990 — similarly fruitful alliances have failed to emerge in the clean-tech sector, Lerner explains, depriving entrepreneurs of a critical revenue stream. “Maybe what the clean-tech sector needs is a successful merger that will inspire other giants to say 'we have to go and play that game too',” says Lerner. Although corporations have failed to pull their weight so far, Usher predicts that utility companies and development banks will play an increasingly important role. “We're going to need very big financial actors to be able to pull off large offshore wind farms and the like, so there won't be much room for entrepreneurs.” Wüstenhagen agrees. Although entrepreneurs provide innovation, they don't have the established brands, distribution channels and manufacturing capacity necessary to roll innovations out on a large scale, he points out6.
Governments could also do more to help entrepreneurs, according to Leo Johnson, who heads up the sustainability and climate change team at PricewaterhouseCoopers. Without the right economic incentives — such as those in China — entrepreneurs can't flourish, he explains. In China, wind-energy companies enjoy a three year, 100% income-tax break, and a 50% tax break for the following three years, says Johnson, “it just helps to even the playing field a bit.” Johnson would also like governments to levy a carbon tax, kill the $550 billion subsidy that fossil fuels enjoy each year and plough the extra money back into clean-tech. Tom Dean, who researches green entrepreneurship at Colorado State University in Fort Collins, agrees. “Much of our problem results, not from the lack of technology or innovation, but from the lack of economic incentives to employ that technology,” says Dean7.
“Global advertising spend is expected to reach $500 billion in 2011. If we can spend that much on advertisements for new cars and impotence medication, then certainly it's at least feasible to think that the private and public sectors together could invest that much in energy.”
Rob Day
According to Bloomberg New Energy Finance's Global Energy and Emissions Model, global investment in renewable energy must rise to $500 billion by 2030 if the world is to reduce carbon dioxide emissions from 42 to 39 gigatonnes a year. In 2010, just over half of that figure — $243 billion — was invested, according to the group's latest analysis, which was published in January8 (Fig. 2). Together, governments and the private sector must ramp-up investment if that target is to be met, says Day. “Global advertising spend is expected to reach $500 billion in 2011. If we can spend that much on advertisements for new cars and impotence medication, then certainly it's at least feasible to think that the private and public sectors together could invest that much in energy,” he says.

Figure 2: Global total new investment in clean energy from 2004 to 2010 (in billions of dollars).
Global total new investment in clean energy from 2004 to 2010 (in billions of dollars).
Includes corporate and government research and development, and small distributed capacity.
The recession has dealt a severe blow to clean-tech entrepreneurs. Between 2008 and 2009, investment in clean-energy companies by venture-capital and private-equity funds plummeted globally by 42% to $6.8 billion, with early-stage venture-capital funds hit worst, according to Bloomberg New Energy Finance'sGlobal Trends in Sustainable Energy Investment 2010 report5. “The venture-capital community is seeing about a fifth of the amount of capital flowing into its coffers today versus five years ago,” says Wilder. “As a result, the filter on which ideas get funding has become much stricter.” Many small venture-capital funds folded, and funding to the UK government's Carbon Trust, which catalyses investment in early-stage clean technologies, was cut by 40% in February of this year. The impact of the recession is visible in the number of energy-related patents coming out of the US, points out Michael Lenox, director of the Batten Institute for Entrepreneurship and Innovation at the University of Virginia. A preliminary analysis by Lenox suggests that although the number jumped threefold in the past decade, it levelled off at 1,000 per year when the economic crisis struck. The worst is over, however. According to the research group Bloomberg New Energy Finance, venture-capital investments in clean-tech rocketed by 71% in 2010 compared with 2009, reaching $4.6 billion. “Investors and lenders are starting to recover their nerve, and many funds that refrained from investing during the recession are starting to get hungry for deals,” says Marcus.

Green shoots

Today, Jason Aramburu and his team — which consists of two engineers, two business developers and a brood of chickens — work out of an old concrete-mixing factory in the industrial heart of Austin, Texas. “We're looking into getting some goats,” says Aramburu. A close friend of his operates a pedicab company out of the office, a 400-square-foot house that Aramburu painted blue, green and red. In front of the house is a garden where he grows kale, broccoli and chard — fuel for his prototypes. The garden is also littered with re-purposed 55-gallon oil drums, the raw material for Aramburu's latest model. He decided to move to Austin in 2009, after realizing that he needed to do more work on his innovation before he would attract venture-capital funds. According to Rob Day, he made the right decision. “So often, I get approached by clean-tech entrepreneurs who have a better mousetrap, but they haven't ever actually caught a mouse.” Aramburu recruited two local engineers, both of whom had day jobs, but agreed to help in their spare time in exchange for a stake in the company. Together, they optimized the initial prototype, using thicker metals for the casing.
Aramburu launched re:char in March 2009. Although he initially wanted re:char to be a benefit corporation — a new type of company that is dedicated to solving social and environmental problems — he decided against it because the certification process was too expensive, and is only legally recognized in Maryland and Vermont. “We decided to sign our own contract that says pretty much the same thing,” he says. In the meantime, Aramburu was running out of money. After months of applying for grants, in September 2010, “things started happening,” he says. The foundation Echoing Green awarded re:char £60,000. “Once we had that funding it was much easier to get more from other groups,” says Aramburu. The Dutch Postcode Lottery soon added £170,000 to the pot, and the Hitachi Foundation a further £50,000. A venture-capital fund offered to invest in re:char in exchange for a stake in the company, but Aramburu, much to his delight, found himself in a position to turn it down. “It didn't make sense to accept funding that had strings attached to it when we had plenty of money rolling in from foundations.”
Thanks to the grants, Aramburu could try out his machines in the field. He singled out Haiti and Kenya, countries where farmers often make charcoal from illegally logged wood and sell it to make up for a bad harvest. In both countries, charcoal production is the number-one driver of deforestation. In January, civil unrest in Haiti made Aramburu shift his focus to Kenya, where he is now located. There re:char partnered with the African Christians Organisation Network, a non-governmental organization in western Kenya that has been selling biochar to local farmers for the past five years. “They wanted a bigger, better process,” says Aramburu, who envisages that small groups of farmers will invest in a shared biochar unit by putting down a deposit and then paying for its total cost in monthly payments. Partnering with a local non-governmental organization has been critical, he says. “These guys have been going door-to-door in the village, selling biochar, for five years, so we've got a great head start.” In six months time, Aramburu will go out to raise another round of investment, this time around $1 to 2 million, he says. The venture-capital fund that Aramburu turned down a year ago is eagerly waiting in the wings, he says.
Stoyek Okumo, a farmer who grows kale, maize and beans on a one-acre patch of land in Bungoma County in Kenya's Western District, is one of Aramburu's customers. Three months ago, Okumo tested Aramburu's biochar on a portion of his crops. After one season, his yields of maize grown in biochar and manure were twice those of maize grown in diammonium phosphate, the chemical fertilizer that he normally used. Over the coming months, Okumo will use re:char's technology to generate more biochar and finish treating the rest of his farm. Okumo is hopeful that if enough farmers practice biochar, it will help not only the crops, but the climate too.

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