Head Starts for Clean-Tech Startups

The latest take on traditional business plan competitions aims to turn ideas for decreasing the use of fossil fuels into working businesses

Alex Hornstein, a senior at MIT majoring in electrical engineering and computer science, had been interested in clean technology throughout his college career, but never thought he would start a company devoted to it. Hornstein's eureka moment came one night when he stumbled into a clean-energy dinner at MIT, mentioned an idea for harnessing solar energy on the cheap, and eventually formed a team to turn his concept into a business plan to present at the university's clean-tech competition (see BusinessWeek.com, 2/1/07, "Ethanol: Too Much Hype—and Corn").

Hornstein's team made the semifinals but didn't end up winning. Still, the competition succeeded in accelerating the development of his fledgling business, Light Shed. He also found a mentor and entered other competitions with the idea of nudging his business along. Today, Light Shed is close to making money. "We hope to have a prototype that can generate electricity by September. It could be less than two years before we start hitting mass market," says Hornstein, 21. He plans to enter the MIT competition again this year.

The market for clean technology has been growing since the 70s, when solar panels and wind energy gained a small but loyal consumer following. Today, after years of hype, the money is starting to pour into clean tech startups (see BusinessWeek.com, 2/26/07, "Big Ideas for a Greener World"). Still, many take a long time to develop. To help accelerate the process of turning an idea into a functioning company, clean-tech business plan competitions have started sprouting up.

Rewarding Cleanliness

The first one Hornstein entered, MIT's Ignite Clean Energy, was founded in 2005 and was the first of its kind. Today it is open to both students and professionals and is designed to train entrepreneurs to pitch their clean-energy ideas successfully to investors in order to develop clean, renewable, and/or efficient energy resources.

The other two major U.S. competitions, both founded in 2006, are the University of Colorado at Boulder Cleantech Innovation Challenge, which is open only to student teams, and the California Clean Tech Open, which is open to any team or existing business that hasn't raised more than $200,000 in funding in the last 12 months. All three provide the kind of training and technical assistance—not to mention prize money—to make clean-tech startups attractive to venture capitalists.

Recently, VC money has started finding its way into clean tech. According to the Clean Tech Trends Report, released on Mar. 6 by San Francisco-based industry research and consulting firm Clean Edge, U.S.-based venture capital investments in energy technologies nearly tripled from $917 million in 2005 to $2.4 billion in 2006. As a percentage of total VC investments, energy tech increased from 4.2% in 2005 to 9.4% in 2006. Over the last seven years, venture investments in energy technologies have increased from less than 1% of total venture investments to nearly 10%.

Big Initial Costs

And companies are finally starting to make money off clean technologies. Annual revenue for solar photovoltaics, wind power, biofuels, and fuel cells climbed nearly 39% in one year—from $40 billion in 2005 to $55 billion in 2006, according to the report. And that trend should continue. Clean Edge predicts those four technologies will be a $226 billion market by 2016.

But clean-tech startups often require significant technology research and development, a long time to develop a working business operations plan, and when all that is done, expensive production facilities. A company can take up to nine years to become highly profitable, says Jeremy Walker, a clean-energy startup consultant and volunteer who oversees communications for the California Clean Tech Open, one of the three major competitions.

Designed to help incubate clean-tech startups, while providing them with access to the Silicon Valley venture capital community, it is in its second year and provides $100,000 prize packages to winners in five major clean-tech categories.

Area VCs have taken notice, scouring the competition for the next big thing. "This is an unprecedented time in the clean-tech sector—with public, entrepreneurial, and capital awareness at an all time high," says Ira Ehrenpreis, general partner at Palo Alto (Calif.) venture capital firm Technology Partners, and chairman of the 2007 Clean-Tech Investor Summit.

Creating a Buzz

Organizers are hoping their competitions will help broaden the way people think about clean tech. "When you talk about clean energy, most people think of solar cell and wind. We define it as anything that allows us to use less in the way of fossil fuels," says MIT's Jim Walker, chair of Ignite Clean Energy 2007 and of the MIT Enterprise Forum of Cambridge Energy SIG, and managing director of Energy at Global Insight. And the clean tech startups that have gotten funded, in many instances, are the ones that are efficiency improvements instead of completely new ideas, he adds.

While the California Clean Tech Open is largely made up of functioning businesses and MIT's competition is a mix of professionals and students, the University of Colorado Cleantech Innovation Challenge, also in its second year, is all about getting the next generation of business students buzzing about clean energy alternatives.

"It's partially to tell the world that there are lots of opportunities to make money while you help make the world a better place…and furthermore, it's to demonstrate these technologies work," says Thomas Dean, faculty director of the Deming Center for Entrepreneurship and professor of entrepreneurial development at the University of Colorado Leeds School of Business, who oversees the competition.

Spurring Success

Take Stellaris Corporation, a Lowell (Mass.) company founded in 2005 to develop a technology to improve solar power output by reducing optical inefficiencies while decreasing manufacturing costs. It placed second at the Colorado contest and first at MIT ICE last year. When Stellaris won the competitions, it was little more than a business plan, a great team, and a great idea, with no production facility planned or financed. The competition money, office space, and technical assistance has kept the company going for over a year while it developed its production plans and designed a production facility.

Now the company is in talks with a number of potential funding sources, finding a location for its production facility, and sourcing bids for manufacturing equipment. Thanks to the competitions, production could be up and running in late 2007, with product shipping to customers in the first half of 2008, says Tom Ward, co-founder and vice-president of marketing and sales. "The contests provided us with confirmation from industry experts that we were on the right track," he adds.

For profiles of the winners from each of the major competitions, click here for the slide show.

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