Friday, June 15, 2007

The challenges of re-inventing the engine

There continue to be a lot of great ideas out there for re-inventing the internal combustion engine ("ICE"). From small tweaks to major redesigns, engineers have been coming up with innovative approaches that promise efficiency gains and other benefits. And yet, with all these better mousetraps, the world hasn't yet beat a path to their doors. It's surprising to many of these entrepreneurs that new engine technologies haven't gotten more venture capital attention than they have so far.

The story of the next generation ICE helps illustrate the market and financing challenges facing many startups.

First and foremost, introducing a new ICE to the market is very difficult. Performance is one factor for success, but so is cost and manufacturability. Many of these new design efforts would have difficulty scaling up to mass production levels that are necessary for business success. And the buyers of the technology are big (and slow-adopting) auto makers and capital equipment manufacturers who are very risk-averse and cost-focused. There's some anecdotal evidence that the "not invented here" dynamic is easing up a bit at some of these big OEMs, but even if they're open to trying new things it's going to take a long time for them to adopt any new outside technology at scale. Especially when the supplier is small and lacks manufacturing capacity.

Furthermore, the business models for capital equipment components (which is what ICEs are, in the end) are always challenging for early-stage funders like VCs. Facing slow market adoption, the entrepreneurs are often tempted to attempt to ramp up their own manufacturing capabilities, or even to use their engines in the development of their own end products. But this is typically a very capital intensive and (relatively) low margin path, with low exit multiples. Alternatively, some nextgen ICE entrepreneurs pursue a pure licensing business model. But a licensing-based business model is generally disliked by VCs, who assume that the company will end up having to give away most of the value of the technology in the pursuit of signing up a key customer, and furthermore that any successfully licensed IP will have a big bullseye painted on it by the customers and others out there who will seek to undermine patents, etc., anyway they can.

Ironically, the plethora of good nextgen ICE ideas out there is also hindering investor interest -- it makes it that much tougher for a VC to get convinced that the individual startup they're looking at really has the silver bullet idea as compared to all the other good ideas out there. So there's a vicious cycle of good idea creation hindering the financing of good ideas, leading to a big backlog of inventions out there. A simple patent search for internal combustion engine designs is a daunting exercise...

So all of which is why it's more difficult than many might expect for great new engine designs to become exciting businesses and investments... All that having been said, with current ICEs only about 20% efficient, there's certainly a lot of room for improvement. And as more VCs get comfortable with engine technology, it's the kind of big market pain and big market potential that usually attracts investors. We're already starting to see the beginnings of such VC activity. And as mentioned above, anecdotally it appears that the big OEMs may be more open these days to innovative new approaches. So the challenges may yet be overcome.

For another good take on this topic (albeit focused on electric motors and not ICEs), see this article (note: opens pdf).

New cleantech deal news:
  • Speaking of engines, Stirling engine startup Infinia has raised a $9.5mm Series A round of financing. Khosla Ventures, Vulcan Capital, EQUUS Total Return and Idealab participated in the round, which also included existing investor Power Play Energy LLC. The company's technology has a number of applications, including solar power generation. As part of the transaction, Infinia also acquired another company -- Stirling Cycles -- from Idealab, for an undisclosed sum. John Cook has more coverage here, as the cleantech cluster in the Pacific Northwest continues to heat up.
  • Austria's Cycleenergy has raised a 6.7mm euro round of equity financing (note: pdf) to support the company's biomass and biogas power plant build-out efforts in Europe. 3TS Capital Partners led the round, providing 4.3mm euro, and founding shareholder Ventacc provided the other 2.4mm. The company eventually expects to raise over 100mm euro in equity and debt financing.
  • UK-based fuel cell motorbike company Intelligent Energy has raised a GBP 8.5mm round of financing, according to the CEO. Credit Suisse Securities and Black River participated in the round, which also included existing investors Meditor Capital Management and Evolution Placements Corporation, who had participated in the company's October, 2005 GBP 11.3mm previous round.
  • Jonathan Shieber at VentureWire revealed earlier this week that AMR developer Silver Spring Networks has raised a $39.9mm Series C. Only existing investors Foundation Capital and JVB Properties are known participants in the round. It's also unclear if this financing is related to a $10.5mm debt and warrant financing the company filed earlier this year.

Cleantech investors in the news:
  • An insightful interview with Erik Strasser:

Brief sector update -- fuels: T. Boone Pickens is convinced we're already at Peak Oil... Meanwhile, another voice of reason in the ongoing ethanol net-energy-balance debate (basically, corn-based ethanol is marginally beneficial at best, but alternative feedstocks are the key)... And ethanol continues to be the lawmakers' darling... But biodiesel is coming on strong -- farmers and biofuel processors are catching on, and automakers are providing the cars. Biodiesel is poised for strong uptake.

Other news and notes: A nifty new site for doing cleantech searches -- Mr. Cleantech... Promising results from efforts to use waste heat for coal drying... Massachusetts continues to get friendlier to the region's cleantech cluster -- but the fact that $9mm of PV projects will increase the state's solar capacity by 50% shows how far the state has to go to catch up with other regions... Speaking of the Mass cleantech cluster, check out how much activity there is in the MIT community on clean energy, as evidenced by this recent newsletter (note: pdf)... "Energy farms are the future"?... A merger of solar concentrator startups: NuEdison and SV Solar... Finally, Neal Dikeman explains why you're not powering your laptop with micro fuel cells when you get on an airplane -- but these guys hope that airplane might itself be powered by fuel cells.


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