Cultivating a Clean Energy Boom

During the Texas oil boom "wildcatters" largely relied on gut instinct and luck as they drilled for oil and turned the state into one of the country's biggest energy producers. Today, Texas is in the midst of another energy boom, but this time nothing is left to chance. The clean energy industry relies on advanced science and substantial capital investment in developing technology to replace fossil fuels and reduce greenhouse gas emissions.

With its interconnected web of tech companies, research institutions, municipal programs, and business entrepreneurs, Austin -- despite being located in a state with conservative values and fossil-fuel driven economy -- has been a progressive high-tech hotbed for twenty years.

In 1989, the University of Texas created the Austin Technology Incubator (ATI) to accelerate bringing innovation out of the lab and into commercial applications. In 2001, ATI created a new division called the Clean Energy Incubator (CEI) to develop the next wave of renewable-energy and related technologies, including biofuel, geothermal power, energy storage, efficient irrigation, and thin-film solar panels.

In the past two decades Austin has implemented some of the nation's most progressive green policies, including requiring renewable energy generation, a thriving green building program, and aggressive energy-efficiency rebates and solar incentives through Austin Energy. The utility, which will install smart meters citywide, is rated as the top green-energy program in the nation by the National Renewable Energy Laboratory (NREL). Mayor Will Wynn, who initiated one of the most progressive clean energy agendas of any city in the country, has pledged to make all municipal facilities and operations carbon-neutral by 2020.

As Austin grows its green reputation, CEI is making sure that Texas will also be on the leading-edge of the clean energy movement. "There is a culture of innovation, creativity and entrepreneurship here that is well-built around technology," according to CEI's Director, Joel Serface. "Increasingly, it's trying to align with the needs of the community and clean technology," he added.

Serface came to Austin after a decade in Silicon Valley, where he was a venture capital investor during the dotcom boom as well as a leading member of several environmental protection groups. When he first arrived in Austin, Serface looked around at the knowledge base in the academic and business communities – with companies like Dell, IBM, and AMD located nearby – and saw a ripe environment for development.

"We do IT, semiconductor, and energy storage really well here, so let's pull some entrepreneurs from these known spaces and build more companies in those areas," Serface explains.

But since his arrival in Austin in 2006, he's focused on clean energy and has taken on the role of chairman of the city's Clean Energy Council. Some of the semiconductor and computing expertise is now being applied to everything from smart grid and watering systems, to solid state and OLED lighting, to energy management for data centers.

When Serface came over to CEI there were eight companies at the incubator, but he whittled the number down to two. Serface says if a startup hasn't received funding or showed enough promise within a year, the company can't stay. The average lifecycle for a company in the incubator is one year, and the longest a company can stay is three years.

CEI and Serface have been successful in meeting one of the most critical startup challenges -- securing capital. In 2007, CEI companies netted $130 million in investments, nearly double the previous year's amount ($70 million). Serface, who leverages his Silicon Valley connections, expects investments to double in 2008. He estimates that there are about 20 successful clean energy companies in the Austin area, with another 30 or 40 that need some improvements to get venture backing.

In the current crop of CEI companies, he says all of them have funding in the form of angel funding, institutional investments, or bank loans.

"One of the reasons I came here is because we didn’t' have that venture capital industry up and running to get these [clean energy] companies out of the labs and prove there is a pipeline of innovation worth investing in," Serface says.

Investing in technology startups is a risky business, but the agency that spawned CEI has set a high standard for success. Since ATI was founded in 1989, more than 150 companies have moved through the incubator, attracting approximately $725 million in investments. Of those, more than 40 percent have survived after leaving the incubator -- 30 were acquired by other companies, another 30 turned into self-sustaining companies, and four had IPOs. "That's better success than most venture capital firms have in the state," Serface noted.

Life in the Incubator

Companies that join CEI, contribute one percent of their shares to the foundation, and in return CEI offers subsidized office space and access to its considerable resources in the academic, business, and technology communities. Some of the first orders of business are setting up an advisory board, recruiting consultants, and creating partnerships.

Among the other advantages of being in a technology hub is the opportunity to network and interact with peers in the industry. "I socialize with other CEOs and bounce ideas off them and learn from their experience," said Tom Watson, CEO of AccuWater, a CEI company that joined on in 2006. "Joel has a wealth of knowledge, and there are other CEOs here that are going through the same things as me, dealing with a board of directors for first time, the nuances of funding, shareholders, and option plans."

AccuWater has developed a Web-based irrigation system that curbs pollution run-off and over-watering by 20 to 50 percent in landscape maintenance. The system looks at factors such as vegetation type and weather patterns to determine optimal watering times. Watson said his company joined CEI after several years of just skating by, and within a year at CEI the company had an angel round of investors -- primarily made up of its existing customers -- and a board of directors that helped to shape its sales strategy.

"We were technologists, but didn't have the business experience to put around our technology," Watson said. "They [CEI leaders] connected us with mentors and individuals that help us put a business structure around our technology and identify market spaces."

On the advice of CEI's consultants, Watson began to focus sales on commercial properties, and now AccuWater has systems up and running on the Dell and Apple campuses, and in large retail complexes around Austin.

As Texas and the entire Southwest contend with serious water shortages, AccuWater could end up having a major impact on water usage and conservation. "If you could save the city of Austin 30 percent of its water consumption on an annual basis, which saves it another five percent of its energy usage and prevents it from building another water treatment facility, how much is that worth?" Serface asks.

Out of the Lab, Onto the Grid

For any company, creating prototype products and field testing them are two of the most critical steps to commercialization. But in the energy business, these can be expensive and elusive mileposts, especially for startups with limited budgets and unproven clean energy technologies. To address this problem, CEI created a partnership with Austin Energy that enables incubator companies to test new technologies on its grid and receive valuable performance data.

"One of the major modes of failure for clean tech companies is getting the first customer adoption, and utilities are not necessarily the earliest adopting entities. They'll say, 'well, we'll try out your technology after ten other utilities have done it,'" Serface explains. "Austin Energy says 'we'll try it out because we're trying to be more efficient, better, and smarter than any other utility.'"

Field testing is just a first step, of course, and many clean energy companies then need to build a protoype industrial facility to test performance under real-world conditions. Texas, with a long history of building oil and energy refineries, offers invaluable experience and resources. "Texans know industrial scalability like nobody else," says Serface. "It's in their DNA."

This arduous process of developing, field testing and commercializing a new energy technology can make it difficult to convince investors it will pan out in a reasonable amount of time, and that revenues will follow.

For example, cellulosic ethanol, which creates biofuel from various types of biomass, including non-food plant materials, has been in research and development for more than 25 years but has yet to be fully commercialized.

"The biggest winners in the clean tech space will be driven by material and life sciences, and those take longer to move along," Serface said. "Venture technology groups have to get smarter, and be willing to go through a longer, biotech type process to get a company up and running,"

Serface suggests that if clean energy companies want to succeed over the long haul, they should look far and wide for funding. "To build a really robust renewable energy industry, we have to realize that Texas needs Silicon Valley, and Silicon Valley needs Texas," he said.