Moore’s Law and the fast pace of innovation in computing and the Internet have deeply spoiled and confused us in terms of how fast the pace of innovation should be for other sectors like energy. That was the basic sentiment from Microsoft (s MSFT) Chairman and former CEO Bill Gates at the Techonomy event last week (video here), and the idea explains a lot in terms of energy entrepreneurs’ and investors’ missteps and motivations.
In 1965, Gordon Moore famously predicted that the number of transistors on a chip would double roughly every two years. The result is that over 40 years later semiconductors are cheap and powerful enough to be embedded into everything from our bus passes to our library books, and the platform of personal computing has delivered our current always-on Internet-based society. Without chip innovation and Moore’s Law, there’d be no Facebook, Google (s GOOG), or the iPhone (s aapl).
But, as Gates put it last week, we’ve been fooled by the rapid success of IT, and “there are things that just don’t move forward.” The pace of chips and IT innovation “is rare,” said Gates.
Unfortunately, some of those “things that don’t move forward” are fundamental platforms for the energy industry. For example, as Gates pointed out: batteries. “Batteries have not improved hardly at all. There are deep physical limits,” to this technology, he said.
The standard lead acid and lithium ion batteries, which power our gadgets and laptops, have undergone only very minor improvements, despite the fact that in the past couple of years entrepreneurs and investors have tried to inject innovation into the space. Gates himself said that he is investing in five battery startups, while he’s looked at another 50 battery startups in the market place.
Another energy technology that has completely stalled is nuclear power. That stopped moving in the 1970s, Gates noted, and a major barrier for innovation has been the length of time that it takes to get a nuclear project approved and built in the U.S. “Most of us would like to work on things that happen during our lifetime. The lack of investment in this space is very understandable,” said Gates.
Gates is also trying to use his resources to inject innovation into nuclear power. He’s backed (and is “deeply involved with” he said at Techonomy) nuclear startup TerraPower, which is a spinoff project from Intellectual Ventures, an incubator founded by former Microsoft chief technology officer Nathan Myhrvold. TerraPower uses a “traveling wave reactor design,” that uses waste uranium to power it and can provide energy for hundreds of years without having to be refueled.
The Moore Effect on Greentech VCs
I think the slow pace of innovation in the energy industry has been fundamentally miscalculated by some of the first wave of venture capitalists that have backed energy companies. Just look at some of the leading next-gen biofuel firms, the solar thermal plant builders, and the thin film solar developers, and you’ll see that it’s not uncommon for these firms to have taken hundreds of millions of dollars of venture investment betting on the idea that an extra bit of innovation would lead to reduced costs. But most of the companies in these sectors have not yet reached commercial scale because of cost barriers, and many are approaching a decade old.
The classic model of venture success in the dotcom and IT eras – some three to five years to a 10x return exit — doesn’t commonly ring true for energy startups. They’re requiring heaps more investment and many more years to get to market (if they make it). The returns – even for successful IPOs like A123Systems (s AONE) and Tesla (s TSLA) – are generally on a smaller scale for most of the investors because the companies have needed to raise hundreds of millions of dollars in equity. At the end of the day it takes a lot more money to manufacture cars and batteries than, say, build Twitter.
Attempting to mimic the timelines and returns of the IT venture model, is one reason why greentech VCs have been eager to invest in the intersection of green and IT. Investing in technologies like the smart grid, which uses wireless networks and software to add communication intelligence to the power grid, has been a way that investors have been able to cross the gap between the the IT and energy worlds. The smart grid sector has the most M&A I’ve seen out of all of the greentech businesses.
How Can We Kick Start Energy Innovation?
It’s no surprise to anyone that Moore’s law doesn’t govern the pace of all innovation like gravity rules the physical world. As Nathan Myrhvold said back in a Wired Magazine article in 1995: “If the Boeing 747 obeyed Moore’s Law, it would travel a million miles an hour, it would be shrunken down in size, and a trip to New York would cost about five dollars.”
But the problem is that energy needs a solid kick if the world is going to tackle the pressing issue of climate change. To hit anything close to the carbon emission reduction goals that scientists generally agree will be safe for the planet, “the world needs energy miracles,” as Gates put it in his original TED energy-coming-out party earlier this year.
One way to kick start energy innovation is — and there’s no way around it — money. I asked Gates last week what he thought was a good investing strategy for the energy ecosystem, given VCs haven’t seemed to have gotten the routine down too well, and he said the government needs to step in and fund basic research and also help with pilot plant scaling, while VCs are good at early stage investments.
At the end of the day, Gates thinks the U.S. government hasn’t done a very effective job of encouraging energy innovation, and called the current system of various subsidies, tax credits and state-by-state mandates “insane.” He’s also a member of the American Energy Innovation Council, which is calling for a boost of $16 billion per year invested into basic energy research, up from an average (non stimulus year) of an annual $5 billion or so.
While that boost in federal energy research might not lead to a Moore’s Law for energy, it’s undoubtedly got to lead to an increased pace of innovation in energy. The fact is that when it comes to innovation in areas like batteries or nuclear power, it couldn’t move much more slowly than it has been.
(Note to the creators of Techonomy, your conference rocked! And I fully support new media ventures from journalist entrepreneurs).
Image courtesy of Jurvetson’s flickr stream.
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