The clouds of economic recession do indeed have silver linings. One in particular is that trying times tend to produce a lot of innovative start-up companies. So says the Kauffman Foundation, a non-profit which studies and promotes entrepreneurship. Researchers there point out that about half of all Fortune 500 and Inc 500 companies were founded during recessions or bear markets. That list would include such notable successes as Microsoft, FedEx, and CNN.
Moreover, a lot of these start-ups were based on ideas that rocked their industries. Competitors often failed to figure out what these agile newcomers were up to until it was too late to react.
There are already signs our current malaise will have a similar effect on business creation. One thing for sure: Venture capitalists seem to be desperately trying to get some skin in the game with firms oriented toward saving energy. According to a report from Marketresearch.com, VCs invested $19.3 billion in energy-focused startups last year. Among the ideas they have funded: cylindrical solar panels, energy storage systems for wind farms, LED light bulbs, cheap PV cells, tidal turbine generators, and much more.
Many of the technologists developing these ideas have never met a venture capitalist. With that in mind, consider some advice from a techie who has run a VC-backed company. David Leinweber is now a professor of Finance at the Haas School of Business at UC Berkeley. After earning a Ph.D. in applied math, he founded two firms based on applications of artificial intelligence. He drew on his experiences at these outfits in writing a recent best seller called Nerds on Wallstreet.
Despite these credentials, Leinweber may be best known for a joke that got out of control. Some years ago he published a tongue-in-cheek paper noting that butter production in Bangladesh had been an excellent a predictor of how well the S&P 500 stock index would perform the following year. He was trying to highlight what can happen when people run correlation studies mindlessly. He was shocked to find that some took his butter correlation seriously.
Leinweber's advice about venture capitalists is basically to benefit from their money but not from their advice. The reason is that people from VC firms who sit on company boards are just spread too thin to give meaningful counsel. At board meetings for the companies he founded, it was rare for the same VC director to show up twice in a row. It was obvious that most of them never prepared in advance. In fact, most had only a vague idea what Leinweber's company did. “Some would show up at the meeting furiously flipping through the notebook we had sent out,” he sighs.
This disinterest comes from the fact that VC firms frequently invest in hundreds of companies in one way or another. They also spend much of their time trying to round up additional investment money. That leaves precious little time to keep track of the firms in which they are already invested.
For erstwhile entrepreneurs, Leinweber has a tip: He thinks one of the ripest fields for start-ups is in devising sophisticated approaches to the market-pricing of electricity. Most of what has been done in this field so far is just theoretical, he says. “It is reminiscent of the joke about the mathematician who wakes up in a hotel that is on fire, walks to the sink, turns on the water, says, ‘A solution exists,’ and goes back to sleep.”
All in all, market pricing is one of the areas of energy efficiency where there's plenty of room for creativity.