Creative Destruction—for the Environment

Clean-tech companies, mostly small entrepreneurial businesses, pose a challenge to many large, long-dominant industrial enterprises

Ecology teaches us that forest fires can be a form of creative destruction. Fires create openings in the forest canopy that allow sunlight to reach smaller plants. This stimulates ecosystem diversity. Burning also enriches the soil by depositing calcium, potassium, phosphorous, and other minerals.

In economics, creative destruction is the process by which entrepreneurs introduce innovations that force established businesses to adapt or die. The phrase was coined by the eminent economist Joseph Schumpeter (1883-1950), who believed that long-term economic growth is sustained by radical innovators, even as they destroy the value of large dominant firms.

This analogy is fitting: By mimicking nature, the economy serves it. Just as fires renew the forest, creative destruction renews the economy.

Today radical innovators working in alternative energy, water treatment, sustainable agriculture, construction, manufacturing, and transportation are beginning to offer products that promise dramatic reductions in energy consumption, pollution, and waste. These upstart clean-tech companies—mostly small entrepreneurial businesses—pose a challenge to many large, long-dominant industrial enterprises (see, 3/19/07, "Special Report: Green Business").

Challenging Global Goliaths

Metabolix, for example, is a small business in Cambridge, Mass., producing sustainable, bio-based, biodegradable, "natural plastics." It is doing so by harnessing the highly evolved solar collecting ability found in green plants. The materials produced by Metabolix (MBLX) will replace many of those now made from petroleum and natural gas, thereby challenging the $250 billion global plastics industry.

Metabolix sees itself as a startup David taking on a global Goliath. "We are commercializing disruptive, transformational technology," declares James Barber, the company's chief executive officer. The company is moving fast. Last November, an initial public offering raised nearly $100 million.

Investment in other clean-tech companies is soaring here and abroad. Four examples of ventures that are getting significant funding follow.

•Mascoma, a company formed by Dartmouth College researchers, is developing ethanol—not from corn, a valuable food crop, but from materials that have limited commercial value such as wood chips, grass, and leaves. They then use microbes to create ethanol. The company has raised $39 million to help it move beyond the experimental stage (see, 5/16/06, "Khosla's East Coast Ethanol Play: Mascoma").

•Imperium Renewables, a biofuel developer in Seattle, just raised $113 million in new equity to build four biodiesel processing facilities. This is one of the top five single investments in a renewable energy company ever made (see, 8/14/06, "Wall Street's New Love Affair").

•Southwest Windpower, located in Flagstaff, Ariz., is the world's largest producer of small wind generators suitable for use by households and small businesses. The company has received $13 million from venture capital investments (see, 3/30/07, "Products for a Greener Home").

•A123Systems, a fast-growing company headquartered in Watertown, Mass., produces lithium-ion batteries that are safe, can be recharged in minutes, and have long life. These high-power batteries have the potential to make plug-in hybrid vehicles practical. The company has raised more than $102 million in funding from a variety of investors.

"Mother of All Markets"

Will these clean-tech companies—and others like them—penetrate the marketplace and supplant older, bigger firms they are challenging? It's too soon to say, of course, but prospects are brightening (see, 3/29/07, "Are You Being Greenwashed?").

According to Clean Edge, a clean-tech research firm, global clean-energy markets are poised to quadruple in the next decade, from $55.4 billion in revenues in 2006 to more than $226.5 billion by 2016.

Venture capitalist John Doerr, who invested early in Google (GOOG) and Amazon (AMZN), recently declared, "Going green may be the largest economic opportunity of the 21st century. It is the mother of all markets."

To that, I would add that "going green" also may be a 21st-century manifestation of creative destruction and the mother of all economic transformations.

I think Professor Schumpeter would be pleased to learn how his seminal insight has endured and evolved. He must have been an engaging fellow. As a young man, he declared his intention to become a great lover, a great horseman, and a great economist. Later in life, he claimed that he'd achieved two out of the three but declined to reveal at which endeavor he'd failed.

If I had the chance I'd tell him, "No matter. Now you can claim to have been a great environmentalist as well."

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