I recently posted an article on strategies and key points for Small Firms to consider when creating strategic partnerships on Forbes.com, which was published today, Friday, March 30th.   Let me know if you have an example or a counter example. The article is pasted below or you can find it on Forbes.com by clicking here.

Strategies for Small Firms Partnering with Big Companies

Partnerships between start-ups and large corporations are ot all created equal. The need for alliances in small firms competing in large cale, capital intensive industries has been understood or some time and I explained why these relationships are particularly mperative in the energy and material space in a previous article.  Many of you commented that there is no one-size-fits-all approach to strategic partnerships. I agree. Getting the most out of a strategic relationship requires a deep understanding of the market and careful negotiation of the terms. Below are a few points and examples to consider in your negotiations.

Exclusivity is often part of strategic arrangements, whether by product line, market or geography. Contour Energy Systems has an exclusive partnership with Schlumberger for oilfield applications of its battery technology. At first blush, this might look like too big of a market to give away to a single strategic partner, but this is where market knowledge comes in. Oil and gas services is a highly
consolidated market where Schlumberger has more than 60% market share, making entering this market without a partner nearly impossible. Since Contour can apply the technology it learns from Schlumberger to other markets, this exclusive arrangement is a winning proposition.

Even when an exclusive partnership is the right way to enter a target market, the start-up must still keep in mind the further growth of the company. If the start-up is too anxious to sign up a big-name partner, it might sign away the most lucrative market segments without proper compensation. While this can lead to the start-up receiving revenue earlier than the original plan, it might place restrictive limits on the ultimate growth. What other markets are good options for the core technology and are they profitable? What will be the approach for entering those markets and how long will it take? Does the start-up have enough funding and infrastructure to develop those additional markets simultaneously? If these questions are not adequately addressed, the start-up may have to resort to tackling another market that might be less familiar, have less potential or be more complicated to enter.

There may be times when exclusivity should not be considered at all, such as when the customer is not concentrated. Our portfolio company Solaria produces solar modules in a market where hundreds of down-stream developers compete for end customers.  Granting exclusivity to any one of these players would be a wild gamble, thus the company is creating many strategic partnerships for distribution of the product, all without exclusivity.

Another area of negotiation is IP and trade secrets.  Before embarking on a strategic partnership, each party must understand the full implications of who owns each component of a mutually developed solution and what rights are included. A colleague shared a story about a start-up that received a large equity investment from a company with manufacturing expertise.  However, the signed agreement not only granted the large company the right to manufacture, but also to sell the start-up’s product, creating a formidable competitor. The start-up made attempts to mitigate the risk by receiving royalties on all sales and by only granting access to the first generation of product. But, what if the large corporation iterates on the product? As the partnership progresses, new IP and trade secrets will undoubtedly be created.  Who owns that IP? Will both parties have access to these advances for use in other business opportunities? The start-up must consider all of these questions
and which risks are worthwhile and which are show stoppers. Only after it deliberates on the different potential scenarios, can the company make a wise choice on how to move forward.

These examples also highlight additional details that must be considered. When should a strategic partnership be started and what does the ideal partner look like? Strategic partnerships can be made with raw material suppliers, research firms, engineering firms, distributors, marketers or installers. Deciding which type of company to partner with requires an understanding of the market structure and how the unique technology of the start-up fits into that structure. Then, partnerships established too early in the venture can lock a young company into relationships that might prove detrimental once more details are understood. But waiting too long can have its own disadvantages; as the company progresses it might be impossible to break into a target market without a strong partner on board. Eventually, any successful company in the energy industry is going to have multiple strategic relationships. A strong management team will identify the company’s goals for strategic relationships and the characteristics of an ideal partner to seek out the right partner at the right time. Relying on a more opportunistic approach can result in poorly-formed partnerships that may just be an overall distraction. It is important to remember the relative power positions – the large partner has customers, money and infrastructure while the start-up has the advanced technology to solve
customer’s problems.

This article is intended more to raise questions than provide tidy answers. There is no one right answer for when and how a startup energy company should engage a strategic partner. However, I still maintain that strategic relationships are crucial and navigating the creation of these partnerships is one of the core challenges for company leadership. A strong team will have a deep understanding of the target market and will seek out the ideal partner at the right time, then pay strict attention to the details of the agreement to establish a true win-win relationship.

Rachel Sheinbein is a Partner in the Energy and Materials practice at San Francisco investment firm CMEA Capital. She is also the President of the board of Expanding Your Horizons, a non-profit that encourages young women to pursue careers in math, science, engineering and technology.  Twitter: @RachelSheinbein

I recently posted an article on ‘Scaling energy companies with VC Dollars’ on Forbes.com, which was published today, December 8th.   Let me know if you have an example or a counter example.  The article is pasted below or you can find it on Forbes.com by clicking here. 

Is It Possible to Scale Energy Companies with VC Dollars?

The dictionary provides one definition of risk as “the chance of something going wrong”.  Venture capitalists often categorize the chances of “something going wrong” as technology risk, market risk and execution risk.  My recent post on venture capital investments in energy technologies describes a way to mitigate one execution risk by investing in companies with or recruiting a Commercialization Executive.  Another type of execution risk of particular importance to an energy company is the financing risk in scaling to the size required to make an impact. 

It would be difficult to make venture capital returns if it required that VC firms make billions of dollars of new investments in start-ups to compete with the billions of dollars of past infrastructure investments made by incumbents.  After all, the Venture Capital sweet spot is early stage companies that have technology and/or marketing risk left to resolve, but that won’t require large amounts of capital expenditures to start generating revenue.   There are a few sectors of energy companies that fit comfortably within this familiar model of VC investing. An example is energy management companies such as OPower, in which the core technology is in software and using data to drive decisions.  Another example is solar financing companies such as SunRun or Sungevity that are striving to own distributed solar power production.  While these companies need capital to install the depreciating assets on their customer’s rooftops, their ratio of variable expenses to fixed expenses is quite high.  Each incremental dollar they invest in purchasing another solar PV system directly attributes to increased revenue; there is no requirement to design and build a $100M manufacturing plant before the first revenue can be realized as is required of energy production companies. 

So then, have VCs been wrong to jump into capital-intensive energy investments? There is research to support the idea that even a year ago, VCs were already backing away from investments in capital-intensive energy sectors such as energy production in favor of less capital-intensive sectors such as energy efficiency. However, we believe there are still opportunities to make VC returns even in the ‘capital-intensive’ sectors.  One of the best ways to address the financing risk of scaling energy investments is to reduce the dollars needed with a business model that uses the output from other companies that have already scaled as an input.  By doing this, our companies build on top of capital that exists, leveraging others’ previous investments and reducing total funding needs.  

This is easily illustrated with an example from our portfolio, Solaria.  Building an efficient solar cell manufacturing plant requires an investment of hundreds of millions of dollars.   Luckily for Solaria, many of these cell manufacturing facilities have already been built. Solaria can then purchase the output (solar cells) from these factories as an input into their proprietary solar module design that delivers power at a lower cost.  The cost to build a solar module plant is at least an order of magnitude less than a cell manufacturing facility.  Solaria has found a way to tap into the scale of the existing solar photovoltaic industry with a more capital-efficient business model: Design, Assembly and Test. 

Another one of our portfolio companies, Danotek Motion Technologies, is also pursuing a Design, Assembly and Test approach as a means of lowering capital expenses.  Danotek has designed a more efficient and reliable permanent magnet generator for wind turbines.  Most of the components for this new generator design can already be produced at manufacturing facilities built and financed by other investors.   Danotek can purchase these custom-made or even standardized parts and assemble its own proprietary generators.  

Of course, there are other options for successfully financing the scale-up of a capital-intensive venture-backed energy company.  Occasionally, government money is available to build new facilities that deliver on the promise of green jobs or energy savings.  In addition, an existing large corporation might have a strategic interest in a new technology and be willing to invest significant amounts of capital to reap the potential benefits.  We’ve talked with other venture capital firms that rely on strategic partners as part of the investment thesis for scaling and you can reference my blog post on the importance of Strategic Partnerships for energy companies.  However, since there are no legal arrangements or even formal discussions when the company is still in an early stage, we can’t rely on the partners as an absolute in the future.  While this is certainly an approach that has worked, we don’t want to depend on a future strategic partner to alleviate the financing risk for scaling the company.  Of course, we also have to remember the basics; for any technology to attract sufficient capital to scale up, it must solve a real problem, be cost effective, be replicable, and have the right supporting systems in place.  

The solution to how to successfully scale a venture-backed energy company to deliver a meaningful solution is tricky.  We evaluate several different scale-up paths for the company as part of our due diligence, routes both with and without significant capital from another source.  When other financing is not accessible, we want to be sure our investments have a viable capital-light business model available.  Leveraging existing capital mitigates risk.  What approaches have you seen work well? 

Rachel Sheinbein is a Partner in the energy and materials practice at San Francisco investment firm CMEA Capital. She is also the President of the board of Expanding Your Horizons, a non-profit that encourages young women to pursue careers in math, science, engineering and technology.

I recently posted an article on Cleantech startups Partnering with Big Companies on Forbes.com, which was published on September 26th.   Let me know if you have an example or a counter example.  The article is pasted below or you can find it on Forbes.com by clicking here. 

What do Chevron, General Motors and Proctor & Gamble have in common, besides all being global brands and Fortune 100 Companies?  All three have active and substantial relationships with venture-backed energy and ‘cleantech’ companies.  Why would lean-and-mean start-ups want to work with these large organizations?   We at CMEA Capital have learned that to be successful, they often must.  

Before we continue, let us clarify that we are not talking about standard transactional customer interactions in which the start-up is simply a supplier or customer.  We are also not talking about financial support from government organizations, as those relationships have different motivations and goals.  We are talking about deep partnerships in which well-established corporations put skin in the game via research dollars, joint development agreements, channel partnerships for customer acquisition or even equity investments. 

Now let us get back to why energy and material start-ups must have these partnerships with larger corporations.  Unlike some other sectors, energy and materials companies compete in markets that are global, mature and capital intensive.  Whether the end product is electrons, consumer goods, or cars, the incumbent leaders have spent billions of dollars over many years building out infrastructure such as transmission lines, gas stations, pipelines and more, along with the global sourcing and global manufacturing networks to deliver these products.   Serving these massive industries requires meeting hurdles of scale, cost, safety, and reliability that are daunting for any young company – even ones based on exciting new advances.  Partnerships can offer funding, credibility, channel advantages and supply chain simplifications that dramatically reduce the cost and risk of bringing new innovations to market. 

We are not the only ones to figure out that Strategic Partnerships are essential for clean technology companies.  Take for example the numerous partnerships of algae-based chemical and fuels producer Solazyme.  Chevron has invested money into the company and provided non-dilutive research funding.   In addition to offering Solazyme increased market credibility, the Chevron partnership has reduced the financial burden on venture investors. Another one of Solazyme’s strategic partners is already a customer; Unilever signed a research development agreement back in 2009 and then became an equity investor in 2010.  Today, Unilever is using Solazyme’s products for their algae-based soaps in an attempt to phase out the use of palm oil.  Solazyme has equity investors representing other potential markets such as food (Bunge, San-Ei Gen) and airline fuel (Virgin’s Sir Richard Branson).  

An example from the CMEA Capital portfolio is the strategic partnership between Contour Energy Systems and oil-and-gas giant, Schlumberger.   Contour is developing advanced batteries based on carbon-fluoride chemistry.  It turns out that Schlumberger has a hard time finding suitable batteries for the challenging underground environment and Contour’s technology provides the solution.  Thus, the start-up and the large corporation are working together to adapt Contour’s promising new technology for Schlumberger’s long-standing problem.  When it is perfected, Schlumberger will become a customer, driving sales for a young company.  In the short term, Contour benefits from the contribution towards engineering costs, materials provided by Schlumberger’s R&D group, plus an equity investment.  In the long term, Contour can leverage the technology advancements to enter other markets with the backing of a strong Schlumberger endorsement. 

Most relationships last because they are mutually beneficial, and so it’s important to mention that these large corporations have much to gain from these partnerships. Years of declining energy R&D budgets by both the public and private sector have slowed down the pace of innovation at established companies.  This trend is so pronounced that private R&D funding in energy technology in 2005 was less than half what it was 20 years earlier.  Many large corporations have found partnering with a young company focused on a promising new technology is a more cost effective way to reap the benefits of a new technology while capping the downside risk.  These benefits might include improved performance, lower costs or other desirable attributes for existing products or the innovation might represent the enabling technology to develop entirely new product offerings. 

There are exceptions to every rule, but we have a hard time finding a venture-backed energy or cleantech company that has been successful at the go-it-alone approach.  Some may try (even some we’ve been involved with), but rarely does it go well.  When a young company wants to break into ultra-established, largely-commodity industries, securing a strategic partner is usually a wise approach.  Now, exactly when and in what form that strategic partner should be engaged is a matter for a management team and board to determine depending on the needs of the company and its market. 

It was great to get your thoughts on Commercialization Executives, so please send your examples (or counter-examples) of Strategic Relationships.  When did your start-up bring on a strategic partner?

Rachel Sheinbein is a Partner in the Energy and Materials practice at San Francisco investment firm CMEA Capital. She is also the President of the board of Expanding Your Horizons, a non-profit that encourages young women to pursue careers in math, science, engineering and technology.
Twitter: @RachelSheinbein

I recently spoke to Pemo Theodore, who has a business focused on winning the venture capital game for women. Here’s a recent interview offering advice for women entrepreneurs, and my take on being a female venture capitalist.

See more of Pemo’s interviews here.

I recently wrote an article on Cleantech startups and Commercialization Executives for VentureBeat.   Let me know if you have an example or a counter example.  The article is pasted below or you can find it on VentureBeat by clicking here.

Warning: Trite Statement to Follow: The leadership at a start-up makes or breaks the success of the company. 

Yes, you’ve heard it a million times. There are multiple reasons for this, and that topic alone calls for a whole different article. Right now let’s focus on one particular skill-set of a leader that has been a positive indicator of success time and time again for energy and ‘cleantech’ venture-backed companies: a successful energy investment requires a Commercialization Executive. 

Many venture capitalists will tell you that this is not so, and there are examples where a technical founder is the right CEO to lead the company from start-up through the early growth phase, through a public offering and beyond.  There are even studies showing that founder-led companies tend to outperform professionally led firms three years after an IPO.  However, these studies usually look at high-tech companies creating new products for new markets.  Having worked with and sat on the board of many energy and materials companies for years, we have observed that this sector necessitates this particular commercialization skillset.

Why?  The energy industry is dominated by large incumbents with years of experience delivering a commodity product with extraordinary reliability and a high degree of safety at a reasonable cost.  Think about it – when was the last time you stopped to question if a light bulb was really going to work before flipping the switch?  Or when did you stop to wonder if the gas you are putting in your car will get you to where you need to go?  The energy industry is not one in which you can throw a beta version out to the market and see how customers respond.  New products must meet the same reliability and safety requirements of existing offerings on day one. 

Additionally, selling a product in this industry means dealing with one or more of these large incumbent companies as a customer, distributor or partner.  Doing this successfully requires company leadership with personal experience in working with these companies.  Being a Commercialization Executive does not necessarily mean that the person doesn’t have a technical background or is not a company founder.  However, it always means that the executive has business experience, relationships, and a successful track record in either the exact same or a closely-related industry.

Take for example, the recent successful IPO of biofuel company Amyris.  Amyris was founded by UC Berkeley professor Jay Keasling and key members of his lab to design anti-malaria drugs, biofuels and chemicals sought by the market.  When the investors brought in a new CEO in 2006, they selected John Melo who was president of the $30 billion U.S. Fuels Operations business unit of British Petroleum, in addition to his experience in the refining and marketing segments of the business. John not only focused the company on biofuels, but also squarely on diesel production (the world’s most widely used transportation fuel) instead of the in-vogue ethanol.  Within six weeks, the company had its first yeast strains ready to produce a diesel precursor. 

This was someone with first-hand knowledge of the fuels industry on a commercial scale – a Commercialization Executive.

CMEA Capital has applied this lesson to our portfolio companies, including Danotek Motion Technologies.  Danotek makes permanent magnet generators, largely for the wind industry.  The founder developed the initial innovative technology and successfully led the company through the development stage.  Now that the technology is proven and it is time to grow the company, we have added an experienced Commercialization Executive.  Don Naab was most recently a Group President with Broadwind Energy, running a $120M business in Gearworks and Energy Maintenance.  His success in the wind industry gives him the authority and contacts needed to develop Danotek as a major supplier to that industry.  As a result, he has been able to multiply the sales pipeline by more than 10X since coming on board.  In talking to customers, many have mentioned that their prior relationship with Don is the reason that they are confident in the success of their contract.

Are there exceptions to this lesson?  Of course!  Lots of them.  One notable exception is in the area of customer-facing energy software products.  This sub-sector of the overall energy industry looks much more like high tech, where a founder with sufficient high-tech experience is probably more valuable as a leader than a senior executive from a utility’s IT department. Should we not invest in a company where the technical founder is still leading the company?  No, but an ongoing conversation needs to be started. As the company begins to grow, a plan must be in place for the leadership of the company to get through the critical commercialization phase.

As recent NVCA statistics show, significant VC money is still flowing into energy companies.  Do you have examples that either meet or contradict this perspective on a Commercialization Exec?

Rachel Sheinbein is a Principal in the energy and materials practice at San Francisco investment firm CMEA Capital. She is also a board member for Expanding Your Horizons, which encourages girls to pursue careers in math, science, engineering and technology. Twitter: @RachelSheinbein 

I recently wrote a guest post for Mashable about Hacktivism: Lean Startups for Change. Let me know if I’m talking about you.  To read the full article click here.

Jim Hornthal just gave an awesome speech at Ted today on deconstructing complexities through genome pattern recognition across fields. Genomics 2.0? We think so. More on this topic soon – but here’s a peek into his presentation for those who were unable to make it out to Long Beach.

TED Talk- Pattern Recognition- Lessons from Pandora’s Box

I wrote a guest post for VentureBeat this morning called The Like-ification of 2011. Start-up opportunities abound for entrepreneurs that can figure out how to leverage what we “like”.

Please let me know if you heart it.

I spent a few days at CES last week and here are my top 10 observations:

1) Confidence: There were over 140k attendees this year vs. about 115k in 2010.  Companies were spending big marketing bucks.  Every major company had big celebration events with expensive musical headliners.  Broadly speaking, the expectation is for a strong 2011 with very healthy consumer spending on technology.

2) Connected TV: I would argue this was the highlight of the show.  The connected TV is finally here and I believe is ready for adoption over the coming few years.  LG, Samsung, Sony, Panasonic will all be shipping a bulk of their TVs ready to go with internet content.  In addition, there are dozens of manufacturers promoting their add-on connected TV box.  The content is quite good and finally being adapted correctly for television consumption.  Yahoo launched the surprisingly good Yahoo TV.  Combine all of this activity with what we already know about Google TV, Apple TV, Hulu, Netflix, etc. and all of the hardware coming and it’s easy to see that connected TV’s time has come.  (A related note is Skypes TV based video conference from their new connected TV app)

3) Android: The android momentum is strong.  There are several companies who have and are launching android apps before iPhone, which is quite a shift.  There’s a flurry of new, compelling devices from every major manufacturer – all running android.  Android will be one of the top trends to watch.

4) Tablets: This was what all of the pre-conference buzz was about.  There are a lot of nice looking devices being launched.  The majority are running android (blackberry’s device being the exception.)  Tablets sales are expected to grow significantly faster than PCs and comprise more than 25% of total PC sales in a few years.  Apple will have their (large) piece of the pie and everyone else will be sharing the rest.  Each device had its own little unique twist or feature, but there was nothing that was substantially better than the iPad.  It will be all about distribution, pricing and marketing.

5) Mobile Central Device: There’s been a theme around for a while regarding the mobile device being the center of one’s digital world, but it seems like it is finally becoming possible.  We carry computers in our pocks (handsets) and the promise has been that this would be THE computer.  It hasn’t happen yet, but it will soon.  Phones have been introduced with dual core processors and substantial amounts of RAM and flash storage, enough for most computing applications.  Motorola introduced a slick device called the Atrix, which is a 4G android handset that comes with a laptop “dock.”  It is essentially a keyboard, LCD screen and a battery.  The phone drops in and you’re now running your browser, email and applications using what looks like a laptop, but is just your phone with a larger screen and keyboard.  The nice thing is that there is never anything to synch, “email to yourself,” etc. and there is just one context and one UI to know.  Similarly, they also have a dock to plug into your TV.  So now that same phone provides your connected TV experience and also holds your key audio and video content.  There were other similar types of devices, all revolving around the same theme.

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Kee Ming Chi from the Hong Kong office of O’Melveny & Myers recently gave an interesting presentation on Chinese investment in cleantech.  China is way ahead of the rest of the world when it comes to cleantech investments and Kee Ming Chi covered two big reasons why.

(1) He calculated that $34B in Chinese stimulus money was SPENT on cleantech in 2009; that’s compared to $33B DOE ARRA funding authorized with only $8B disbursed so far.

(2) China’s 12^th Five Year Plan sets energy efficiency and GHG targets, and is expected to call for investing another $753B in cleantech over that period. A lot of that will go to building out China’s electricity grid, including a focus on ultra-high voltage long distance transmission lines, interconnection of regional grids and a focus on making the grid smarter.

However, China’s cleantech investment path is not without some obstacles.

• (1) China’s lack of grid connection means that up to one third of Chinese wind farms are effectively “white elephants” at present.
• (2) The Clean Development Mechanism’s (CDM) Executive Board (EB) is apparently rejecting a lot of Chinese wind project applications for carbon credits, as China is seen as exploiting the carbon credit system.
• (3) The Chinese have built a lot of excess capacity in PV and the government is scrutinizing new manufacturing projects much more carefully before approving. There is talk of the government reducing its subsidies to solar like the Golden Roof program.

(4) Feed-in tariffs are project by project, and even without them they get a lot of very low loss leader bids on new power projects that make it very difficult for foreign companies to compete.

(5) Capital markets in China are “temperamental”; Xinjiang Goldwind, for example, is doing a $916M IPO in Hong Kong after pulling their IPO earlier in the year, but the feeling is that the capital window could close at any time. Project financing in China has become much more conservative and revenue based, though some private equity and utility funding has stepped up as have China Development Bank and China Exim Bank.

The aforementioned obstacles aside, China will continue its domination over the United States when it comes to cleantech investing.  Why?  The U.S. continues to focus on innovation; even though we’re good at it we cannot rely on innovation as the cure to our economic ills though, because we will not capture sufficient economic value and job creation unless the US government learns from the Chinese example and helps bridge the valley of death between innovation and manufacturing. China’s focus on project financing for manufacturing helps give them their competitive edge in areas of strategic importance like alternative energy. DOE’s loan guarantee program was a great step in that direction but still a baby step compared to what the Chinese are doing; hopefully the program doesn’t fall victim to the Republicans. Without more of this kind of government support the valley of death likely cannot be bridged by younger companies in the current financing environment, and they are our best hope for significant job creation.