Developing alternative sources of energy is a challenge ripe for technological innovation by ambitious entrepreneurs.
But perhaps just as challenging is the problem of creating business models that will bring such technologies to market in a way that is viable in a global marketplace.
Clean energy and its cousin, biotechnology — a sector which encompasses biofuels — do not fit neatly into the traditional business models supported by venture capitalism, according to Arthur A. Boni, John R. Thorne Chair of Entrepreneurship; associate teaching professor of entrepreneurship; and director of the Donald H. Jones Center for Entrepreneurship.
“They are very high-risk endeavors; they’re very capital intensive; they have long life cycles; and to a certain extent, there are regulatory issues in both,” says Boni. “The risk profile is much too high for VCs, particularly at the early stages and again at the later stages. The ’valley of death’ for emerging ventures is expanding, thus impeding innovation.
Likewise, hundreds of millions of dollars are required to bring clean energy and biofuel technologies to market, sometimes with life cycles that stretch to 14 years. Venture capital funds are typically 10 year partnerships, meaning investors would have to endure some special contortions before they got their money back via a liquidity event,” Boni notes.
Further complicating the issue is the fact that initial public offerings are stagnating in the current economic climate, and even mergers and acquisitions are no longer as robust as they once were.
To ensure that ambitious alternative energy technologies reach the market so they can potentially make an impact on the environment, students and faculty at the Tepper School of Business are creating new business models that support those endeavors in a way that will allow them to expand.
The work is being done in partnership and support from the Foundation for Enterprise Development, a La Jolla, Calif.-based private organization dedicated to supporting research and development in areas affecting global and national problems and encouraging broad-based ownership (shared capitalism) to reward value creation by entrepreneurs.
The Tepper School group has been working since the fall of 2008 on alternative capitalization and business models. To date, Boni says research points toward moving away from traditional vertically integrated business models and more toward broad-based ownership of decentralized, open innovation, networked entrepreneurial organizations.
“We’re really looking at forming open innovation networks, virtual companies, development companies, public-private partnerships,” says Boni. “The industry seems to be moving toward a collaborative, cross-disciplinary open innovation model. This approach is already being taken in the biotech field.”
Because Carnegie Mellon has a well-established track record of successful cross-disciplinary enterprise, the research team is ideally suited to develop a like-minded model for clean technologies, says Boni.
“That is exactly our sweet spot,” he says.
Also working on the project are Lester Lave, Harry B. and James H. Higgins Professor of Economics and University Professor; director, Carnegie Mellon Green Design Initiative; co-director, Carnegie Mellon Electricity Industry Center, and Laurie Weingart, professor of organizational behavior and theory and director of the Center for Interdisciplinary Research on Teams.
While venture capitalists are investing a lot of money into alternative energy, project financing is needed as early-stage development is completed, says Boni. Technology must be piloted and then scaled. A company that wants to build a large solar installation or battery production capacity still carries a lot of risk when scaling up to commercial size, he notes.
“These problems are not just localized to the United States. Indeed, if you’re going to be solving these problems, they’ll need to be solved in a way that’s scaled to globalization,” Boni notes. “It’s just as applicable to what’s going on in China, India, Japan, and Singapore. We’re all driving toward a low-carbon footprint, and the only way to do that is through developing a portfolio of alternative energy technologies.”
Three MBA students worked on the project before graduating in May; a new group of MBAs and one PhD student have joined the team.
“It gives them the opportunity to look at the macro level at problems that are really challenging to our country and the world,” says Boni.
In addition to working with the Foundation for Enterprise Development, the Tepper School team also is discussing funding options with other partners to continue and expand the project. Boni believes the team’s research will continue for the next two to five years. The work is addressing several elements of the business model development. First is the capitalization model and business model itself, but beyond that is the necessity for creating broad-based ownership models that are appropriate for the collaborative, networked teams that will be required to create and deliver value and to be rewarded for their contribution and risk.
Creating any new business model from scratch is essentially an entry into a brave new world — and when the model addresses a high-profile problem without a single solution, the task looms even larger.
“It really heightens the challenge that we have, because you must pursue these [solutions] in parallel,” says Boni. “We’re in a world where change is occurring, and we’re very mindful of the fact that things are going on around the world that will change what we’re doing — and we will respond to that. We will seek to lead the changes that are necessary to create and commercialize new alternative energy technologies including biotech solutions for both energy and healthcare.”