An Open Letter to Mr. Gates
January 22nd 2018
An Open Letter to Bill Gates
RE: The Breakthrough Energy Coalition/Ventures You’ve Launched with a $Billion
Dear Mr. Gates:
A friend of mine recently forwarded an article about your new Breakthrough Energy Coalition/Venture initiative. Here’s the headline from the article:
This is of course a terrific effort on your part to address the Earth’s biggest problem – Climate Change. Thank you. I remember well when you first announced this initiative at COP 21 on December 2015 in Paris. All of us in the sustainable technology business were literally euphoric; Breakthrough Energy’s $1Billion investment fund in combination with the Mission Innovation’s promise of a 2X increase in sustainable energy R&D spending meant that the world was finally getting serious about Climate Change.
There’s only one teeny tiny problem, and I say this with all due respect, Mr. Gates, as you and your your foundation(s) have done a lot of good things: I don’t think a $1Billion dollar venture fund is the answer. What’s worse, I think it may in fact hurt the cause you’re trying to help because of who you’ve gathered around you – the best, the brightest, the most credentialed, the wealthiest. These kinds of Big Huge Ideas from Really Powerful People projects tend to suck all the air out of all the rooms full of other people trying to deal with this, thus preventing anyone else from mounting a scaled approach.
I’ll get to what you should do instead of a $1billion venture fund in a minute, but I want to spend a couple of minutes talking about how you are going about this world-saving effort (in all seriousness, this could be a world saving effort which makes this so maddening).
So, here is one entrepreneur’s perspective on what is wrong with the Breakthrough Energy Coalition and its Breakthrough Ventures group.
1. THERE IS ABSOLUTELY NOTHING BREAKTHROUGH ABOUT THE BREAKTHROUGH – BREAKTHROUGH ENERGY INITIATIVES
Is it possible that you have forgotten what it means to be an entrepreneur? Remember, things like disrupting the tried and true! Zig when the world is zagging! Entrepreneurs think about things differently from the rest of us… they see opportunities that we don’t. This BEC’s effort is so standard that its description could be found in Wikipedia under the Big Investment Organization definition.
Entrepreneurs act quickly! They fail fast and learn even faster. And they act as if their life depended on it because it does. Where’s the sense of urgency that matches the desperate consequences we’re all facing if we fail to slow climate change in time?
None of this is particularly surprising, but still disappointing. The twin brother of conventional thinking is slow pace.
2. NO SURPRISE, THE BEC SEEMS TO BE MOVING SLOWLY
So, it’s taken the BEC TWO YEARS to figure out that a public private partnership is necessary to develop, introduce and scale sustainable energy technologies? This is not breakthrough thinking.
BEC has also identified the five biggest mega trends (did you know there’s a bulging middle class in developing countries?) five focus areas for investment (roll the drums… energy storage is one of them), and some really really neat graphics and thought leadership pieces.
Bill – may I call you Bill? — this is the kind of pace we’d expect from a large, traditional organization staffed by Established Energy Innovators. While I agree that building something that’s capable of scaling globally will take a bit more time than building something for a city, state or “just” the U.S., we’re facing an immovable deadline to prevent a rise of 2 degrees. I just don’t see the sense of urgency needed.
3. TOO BIG TO SUCCEED?
The Breakthrough Energy Ventures part of the BEC plans on investing a billion dollars in early stage clean energy companies, which sounds great on the surface, but quickly falls apart upon close examination. Here’s Fred’s Simple Stupid Way of Understanding Big VC Firms:
- Every VC wants a big fund, if for no other reason than 2% of $500M is a lot better than 2% of $50M. For those who aren’t familiar with how VC firms operate, the 2% is the management fee that the General Partner uses to pay expenses. Hence the math above means $10M in mgmt fees vs $1M.
- Big funds require big investments, otherwise how are you going to deploy the capital? What’s more, for every investment, their needs to be some oversight of the company by the VC. So, ten $50Million investments is a doable oversight proposition. One hundred $5Million investments not so much.
- Big usually means later stage as its usually the later stage companies that need that kind of money. Later stage implies no/limited technology risks, market risks, etc.
So, you’re thinking what’s wrong with all this? Aren’t energy companies capital intensive? Don’t they need lots of money to scale quickly? Well, yes but there are a bunch of other things happening that make this approach untenable.
- Risk. Big investment avoids big technology risks. Early stage sustainable technology companies are still somewhere in the technology/pilot/manufacturing scale-up/market proof stage. Lots and lots of risk.
- Time. Energy technologies take a lot of time to develop and get to market. VC’s rarely have more than 5-8 years, which is just too short of a timeframe for these “deep tech” technologies.
- Complexity: Everyone in this business needs to figure out how to do business with… utilities, governments (local, state, fed), large corporates, research labs and on and on. The clean technology ecosystem is complex, which is one of the reasons it takes so much time.
- Location: All VCs like to invest in companies within an Uber ride of University Avenue in Palo Alto. Unfortunately, that’s not where these technologies are being developed.
So, will probably be the result of the above dynamics on BEC:
- Big investments will be poured into large scale sustainable energy deployments. Think huge wind and solar farms in India, China, Africa, etc. This is a good thing, no doubt, but it certainly doesn’t address the “breakthrough” part of the equation.
- The capital will not be invested very quickly. Not only does it take time to vet any serious investment, it will take lots more time to vet these kinds of investments.
- The above will put pressure on Breakthrough Energy Ventures to make big, dramatic, IMPACTFUL investments. Quickly. This will affect their judgment.
4. THE BEC IS OPAQUE
Bill, you might tell your team they need to work on their transparency. They might think about reaching out beyond the “normal” circle. And while the BEC’s website lists the team, try finding out how they’re organized, who does what to whom, how to contact them, etc. There is no contact information listed. No emails. No address. No phone-number. Bill, your team really needs to work on its communications and outreach activities. There’s a bigger world out there that BEC will need to engage.
Bill, here’s what I think you and your BEC team might consider in order to increase the likelihood of BEC’s success
1. Instead of one $1Billion Fund located in Silicon Valley, create 50 $20M funds in 50 different markets. These funds should make more, smaller investments in innovators across the globe, not just the innovation centers of the U.S. To keep the math simple, let’s say the average investment per company is $200K, and assuming we keep 20% of the money for follow-on funding, this roughly gives us investments in 80 companies. Times 50 markets and the BEV portfolio is now 4000 companies in every key market in the world.
2. Find or create 50 excellent incubators/accelerators in these markets. Attach each fund to its respective incubator. This accomplishes three things at once: (1) It is the only scalable way of doing due diligence on enough companies to be practical. Essentially, we’re asking each BEC Incubator to do the screening (entrance into each Incubator’s program will select 1 out of 10 applicants) and due diligence for the $200K and follow-on investments. (2) This spreads the cost of due diligence among both BEC and its incubator partners; and (3) Most importantly, it provides best-in-class business assistance programming for the companies that get an investment, thus reducing risk and increasing the likelihood of success
3. Create and enforce quality standards amongst the 50 Funds and 50 Incubators. This should be the primary purpose of BEC/V. This means teaching these 50+50 how to do business using the world’s best practices, provided by the world’s brightest folks (all tailored of course to each market). There’s lots of ways to accomplish this, but are for another time and place. This will be easy to gain agreement to as it will be a condition of being accepted into the BEC/V team.
4. Provide strategic direction for the 50+50 from various high-level Technology Strategy Steering Committees, numerous thought leadership seminars, etc. To be clear, I don’t think the 50+50 should be able to invest in any opportunity they choose, but only those that fit into BEC/V’s general investment thesis. We need a mechanism that combines the goodness that flows from the current BEC/V Board and Team as well as local market entrepreneurs, scientists and policy makers. Once again, I think this doable.
5. Finally, string all the 50+50 together to form a global network in which all the players are sharing investment opportunities, best practices, market dynamics, operating learning, etc. in real time. This will turbocharge the entire BEC/V investment and performance.
6. Do all of the above double-quick and have it in place and operating in 18 months. This won’t be easy, but Bill and his associates have the resources to make it happen. They just need the Plan and the commitment to urgently getting it done.
Bill, I hope you take this advice in the spirit its offered – the world needs you to succeed and I’m only trying to help with some ideas.
Fred H. Walti II
Co-Founder, The Los Angeles Cleantech Incubator