These screening criteria grew out of my work helping cleantech entrepreneurs develop new biomass energy technologies and build companies with them.  The criteria indentify the characteristics of potentially successful ventures and technologies.  Satisfying these criteria should raise the probability of success, but will not guarantee it.  Promising technologies do not automatically lead to successful companies without excellent execution and that requires superior management, marketing, and money.

Biomass will likely become a major energy source.  Absent unanticipated major technological breakthroughs in solar, geothermal or wind, biomass has far greater long-term potential.  After all, fossil fuel is biomass with an inefficient several hundred million year production cycle, clearly leaving room for efficiency improvement.

Currently, the sector is rife with muddled and emotional thinking, wasted effort and, as in many popular new endeavors, outright fraud.  While only a tiny fraction of biomass ventures (perhaps several of a hundred) will succeed, some of those successes will be spectacular—providing enormous benefits to humankind and extraordinary financial returns.

The winning technologies have not emerged; at the moment all suffer from one or more technical or economic flaws.  The joy and profit is in the quest for those winners.

I wrote these criteria for angel investors and serial entrepreneurs.  Since corporations and venture funds have greater financial resources, management and infrastructure in place, and different incentives, they can take on more challenging projects.  Ultimately, even their resources are limited, so similar principles apply. 

Don’t Burn Food

Never use a food crop as feedstock—do not even think about it.  Doing so does not get you a Nobel Prize.  How can you reach meaningful scale if you are quite literally taking food out of people’s mouths?  Until we end hunger worldwide, diverting food or cropland to a higher value use will be unpopular, if not immoral.  Even if it does not raise food prices, too many people will think it does.

Using Cropland to Grow Fuel Is Burning Food Indirectly; Don’t

Do not grow feedstock on land that should be used for food crops.  This is equivalent to burning food.  As you scale, folks will notice.  The adverse publicity and criticism will cause even your mother to wonder about you.  Without scale, you have a laboratory curiosity, not a viable energy source.

Do Not Deplete Your Land—If It Is Not Sustainable, How Can It Be Cleantech?

Do not consume anything that should go back in the soil to maintain its fertility.  If your technology depletes the soil, how can it be sustainable?  Doing so compromises your cleantech credibility.

Nitrogen: Necessary and Nasty

Nitrogen (along with many other nutrients) is necessary for plant growth, but our method of delivering it by chemical synthetic fertilizers has several adverse consequences.  They include (i) runoffs causing algae blooms which deplete oxygen and cause dead zones--20,000 square kilometers recently in the Gulf of Mexico, (ii) the algae blooms can be toxic, (iii) destruction of microbes necessary for soil health, (iv) energy intense manufacturing process, and (v) use of natural gas, a fossil fuel, as a feedstock.  Excessive use of chemical nitrogen has been justifiably described as “mankind’s most successful folly”.  No energy crop dependent on traditional nitrogen fertilizer is sustainable and cannot have a large-scale, long-term future. Corn has a particularly high need for nitrogen.  Determine whether your biomass source needs nitrogen, educate yourself on the subject and assess the vulnerability of the crop.

Be Cheap, Be Better or Be Gone—Have a Compelling Price or Performance Advantage

The technology must be cost-competitive with traditional black (dirty) energy at consensus long-term prices without tax credits or government incentives.  For oil and liquid transportation fuels, use the same forecast long-term planning price used by the major oil companies.  They know this business better than anyone does, and they are motivated to get it right.  Unlike environmentalists, politicians or bureaucrats, they pay a price for inaccurate forecasts.  Using that benchmark price moderates excess enthusiasm during price spikes and excess pessimism during gluts.

Do No Evil—Do Not Go Nuclear
Avoid any process or component that has even a remote possibility of creating or contributing to a self-sustaining, biological chain reaction.  If you think uncontrolled nuclear chain reactions have unpleasant consequences (like mushroom clouds), remember biological ones can be far worse over the long-term globally.  Apply Murphy’s Law—assume anything that can go wrong, will go wrong—and at the worst possible time in the worst possible way.

Reproduction was nature’s first and is still its most powerful chain reaction.  Some view humankind’s exponential growth in population and resource consumption as the most damaging self-sustaining (so far) biological chain reaction.

Avoid Government Handouts—Welfare Is For Wimps

You may take government handouts if you wish, but never, never rely on them, whatever their form—tax credits, loans, mandates, etc.  Force yourself to ride without trainer wheels—the winners will.

Government support is frequently as deadly as addictive drugs and can be withdrawn with a change of government or the popular mood.  The public eventually figures out the true cost.  If you do not know why California’s 1980s vintage Standard Offer 4 contracts are relevant, find out or find another endeavor.

Take whatever government largesse is given to you (you will be paying more in taxes to fund it anyway), but do so intelligently.  Impose the following self discipline on your venture: (i) confirm that it comes without restrictions that will unduly constrain your business, (ii) never base your business planning on its continued availability, (iii) never change any material business practice to take the benefit, (iv) do not allow your core management team to be distracted by the government money, keep them focused on the real business, (v) since technical mistakes can escalate to felonies when government funds are involved, get the process and paper work right (and verify, verify, verify), and (vi) hire inside-the-Beltway types to deal with the government—it is a different world there.

Even with these constraints, there is a downside.  Government incentives create bubbles by over allocating economic resources to the favored sector.  When those bubbles burst, as they all do eventually, investors lose substantial sums.  Bubbles start from good ideas that are carried to an excess.  The politicians and press conveniently forget any role government had in the bubble’s creation and focus on the inevitable excesses of the private sector, using them to place blame exclusively on business.  Since business is a convenient and popular scapegoat, the politicians can avoid their just share of the blame.

Consider the recent real estate and mortgage finance bubble.  The politicians passed laws requiring banks to make loans to low income would be homeowners.  They created entire institutions to refinance those loans, and then passed additional laws to make it easier to make those loans and encouraged banks to do so.  The loose loan practices then extended to all income and home price levels.  The politicians rejected the criticisms of the excesses and were in denial on the embedded risks until after the bubble collapsed.  Many bankers engaged in abusive and fraudulent lending practices, but even those who were honest lost money and were condemned with the real miscreants.  What makes you think the energy boom-to-bust cycle will not develop along a similar course?   

Wait Until It Works—Avoid Unproven Technology

Avoid technologies that are commercially unproven or where significant technology issues remain.  Research is not a business; it is science and engineering.  You cannot predict the R&D process—not yours, not your competitors.  There is more fantasy in cleantech than in Disneyworld; more self-delusion than on internet dating sites and more unjustified hope than at casino gaming tables.

Minimal Capital Requirements

Avoid anything that will require large capital investment to become cash positive.  Leave those capital-hungry technologies to the heavy wallets—the oil majors and venture capitalists; they have the funds, the friends in Washington and the ability to crush you.  They also have the staying power to wait for the slow adopting utilities to accept the technology, whatever the delay.  Even Kleiner Perkins and Google are challenged by the time and money required to scale up energy technology.

Dig In Fast, Dig Deep—Build a Sustainable Competitive Advantage Quickly

Avoid situations where you cannot build and maintain a superior competitive advantage quickly, before you attract the attention of the large players who specialize in spotting and crushing the early movers.  First mover advantage is overrated; just ask anyone who was in the first wave of an amphibious landing or had the point on a combat patrol.

You will need more than a strong patent wall, unless you plan to spend more money on lawyers than the rest of your business.  One entrepreneur knew he was in trouble when the other side showed up with more lawyers than he had employees.

Avoid Overly Popular Technologies

Any obviously promising green technology gets lots of publicity and attracts hordes of well-funded, high quality teams.  What is your competitive advantage against that?  If the technology has been featured in The New York Times, look elsewhere (unless they panned it, then take a second look).  Angels must find the overlooked gems. 

There are at least 30 visible serious players researching oil from algae, and no one knows how many more geniuses in garages.  Worse, you will be competing with some powerful alliances; Craig Venter (who beat the government at sequencing the human genome) and Exxon are partners.  Are you smarter than Craig and better funded than Exxon?  As Dirty Harry asked:  “Are you feeling lucky?”

Transportation Costs

Whenever possible use your feedstock where it is created and, unless the output has an unusually high value-to-weight ratio, find a local use for it, if not on site.  Transportation and handling costs erode economics and energy efficiency.  Gold is shipped around the world; concrete is used locally.

Think Small, Think Local—Avoid the Edifice Complex

Large utility-scale plants are difficult for entrepreneurs to finance.  Look for technologies that enable small plants with local consumption and distributed power generation.  Doing so diversifies risk, making financing far easier.  You can grow just fast as with many small plants as with a few large ones.

Success Creates Its Own Problems—Scale Can Destroy Your Economics

Think hard about how large-scale deployment of the technology will affect the supply/demand relationship of feedstock and outputs.  Realistically estimate the likely feedstock cost increases and output price decreases that will result from large-scale deployment.

The financial forecasts for the first municipal recycling programs were spectacularly wrong because they assumed the prices of recycled product would remain stable despite the enormous increase in supply.  Taxpayers made up the shortfall.

Field of Dreams—Avoid Any Technology Requiring New Infrastructure

If you build it, they may not be able to come—for lack of infrastructure.  Existing energy sources benefit from trillions of dollars of infrastructure built over decades.  Unless a new energy source integrates neatly into the existing infrastructure, full deployment can take 30 to 50 years.  While hydrogen has many advantages as a fuel, the lack of infrastructure is prohibitive.

You Eat the Steak, Not the Sizzle—Don’t Count on Carbon Credits

Treat carbon credits as potential upside only.  They may have some value eventually, but technological innovation and politics will probably make the credits less valuable than expected. 

It is extraordinarily difficult to credibly or confidently value carbon credits.  First, their monetary value is set and manipulated directly by bureaucratic fiat and indirectly (i) by politicians, who are under the influence of campaign contributors and (ii) by voters who the politicians follow (as they claim to lead).  Voters, in particular, are a fickle and changeable lot and are wont to turn vindictive when they realize they are paying more green cash for green energy.

Second, the values of the credits are too easily reduced by improving technology and radical innovation--both of which are damnably difficult to predict.  Technology innovators are smart, motivated, ingenious and often defiantly successful.  Even worse, from an investor’s perspective, the field has attracted too many of them.

Verify, Verify, Verity, Then Maybe Trust—Do Your Basic Due Diligence

Verify, then verify again by independent means.  Trust at your peril.  When there is a bubble mentality, the fraudsters find ready prey.  Even otherwise savvy institutional investors (purportedly the “smart money”) unconsciously relax their due diligence standards.  There already have been and will be more mini-Madoffs in biomass.  Do a search for “Cello Energy” and read how an Alabama boy took two of the biggest, “smartest” Silicon Valley venture capitalists.  Learn from their loss.

Beware the Software Millionaires—Expertise Does Not Always Transfer

Many self-designated cleantech entrepreneurs and investors have not yet earned the designation.  They have been very successful in ICT startups; they know how to manipulate data and electrons. 

Google deploys new technology in seconds with the push a button; they may or may not know how to manage metal and fire.  They have not yet proved they know how to move and manipulate tons of metal while, quite literally, playing with fire.  Black energy specialists know how to do this.

If the ICT crowd is involved, look for situations where either they made the transition early and have had some successes (like Vinod Khosla) or where they have brought in black energy pros as equal partners.  Otherwise, expect what the heavy metal crowd calls “energetic disassembly.”

Applying the Criteria: Rules versus Guidelines

Males of a certain age remember Bill Murray, playing opposite Sigourney Weaver in the movie Ghostbusters, saying he had a rule against sleeping with demons.  When she put her hand on his inner thigh, he continued: “Well, it’s more of a guideline.”  Consider these criteria as either rules or guidelines as circumstances or your basic instincts suggest. 

A Final Word

As Franklin Roosevelt said:

“Happiness is not the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.” 

If we succeed in building a new energy economy through entrepreneurial creativity and achievement, then we are truly engaged in such a thrilling and joyful activity.

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Richard A. Sun, CFA is the founder and owner of Sun & Co. and has been involved, often in a key role,  with 25 startups and early stage companies as an advisor, investor, executive, founder or member of the Boards of Directors.  He was a banker for 22 years with Bankers Trust Company (now Deutsche Bank), Goldman Sachs, First Boston (now CreditSuisse) and UBS.  From 1994 to 2001, he was a private equity investor with Emerging Markets Partnership, a $6 billion firm backed by AIG and the Government of Singapore.  He has arranged, advised on or made over $11 billion of private debt and equity investments.  He received a BA from Princeton University and an MBA from New York University.