Tuesday, December 25, 2007

New Startup

It's been a busy two months since I last posted. Australian businesses tend to take a fairly lengthy break (certainly by US standards) around Christmas time. The upside of this is that it's nice to have some time off; the downside is that everyone works furiously trying to complete projects before the Christmas shutdown. During this furious period, I've been progressing a couple of deals, which hopefully I can talk about in the upcoming months. This has prevented regular blogging, but like most errant bloggers, I'll optimistically declare that things will pick up again in the new year.

However, yesterday I confirmed progress on what might be my most exciting startup yet. A seed round was completed a couple of months ago and today we've confirmed that things are growing. What's most exciting, is that it looks like we can expect an exit as early as August! Amazingly, in terms of growth, I'm really confident that we'll see well over a 1000x increase by time of exit, and likely almost another 20x increase over the next 20 years! So, this is pretty amazing news, and I'll keep you all posted.

Merry Christmas!

Monday, November 05, 2007

CAFE - Automaker's best interests

ArlingtonBlue left a comment on my post about CAFE (not CAFÉ) the other day - thank you Arlington, I look at the stats and see I have many readers, but few posters; it's nice to have some dialog.

What was interesting about the comment was the suggestion that CAFE was not in the automaker's best interests. This is something I better need to understand. The typical line of reasoning over any regulation is that the regulation is bad for the auto companies. Catalytic converters, low emission vehicles, seatbelts/airbags, what have you - if it's regulated, it's bad news. However, I look at things differently, so would love to know where I'm wrong. Right now the car companies are in a very competitive industry, which little to differentiate vehicles, other than price (at least Ford, GM, and other such companies are often flogging "FACTORY INCENTIVES", whereas Honda, less so). Surely when a new regulation comes onboard that affects all car companies equally, this provides a new potential source of competitive advantage? If a new regulation came in that all cars had to have huge chrome fins, and Cadillac was the best car maker in the world at chrome fins, wouldn't they have a huge advantage over Hyundai?

So, for an automaker to argue against a regulation means that a) they don't think it is being applied uniformly, or b) they basically are admitting that they suck and don't have a chance in hell of competing under the new regulatory scheme. Regarding a), sometimes regulations only affect car makers who produce above a certain volume. So, GM would be unfairly biased a kit car manufacturer in keeping emissions down. Usually, this isn't any issue by the very nature of the fact that the kit car manufacturer isn't truly competing with GM. Regarding b) if a car maker is saying that they have no chance in competing under a new regulatory environment because they are not as innovative and skilled as their competitors, then I think Adam Smith (and myself) have opinions over what should be the long-term viability of that car company.

Anyone have theories over why economically rational automakers should oppose any regulations, and not see them as opportunities?

Thursday, November 01, 2007

Turning Green into Gold

I write about cleantech deals a lot because that is the primary investment focus for me (I say primary because I get involved in IT, manufacturing, and other engineering deals that fit my expertise as well). However, our friends over at Cleantech Ventures, who exclusively look at cleantech deals have co-authored a white paper examining the cleantech venture industry in Australia. It was written by Anastasia O'Rourke (currently finishing a PhD at Yale) and co-authored by Hans de Zwart of Cleantech Ventures.

Given that it is talking about Australian Cleantech Venture, the title Turning Green to Gold could not have been more fitting, and was even obvious to me, a non-Australian (for those who don't know, Green and Gold are Australia's colours, so to speak).

From the blurb:
Cleantech Ventures and Cleantech Network LLC (USA) have co-authored a benchmark report representing the first-ever comprehensive analysis of cleantech venture capital, buyouts, merger and acquisition and IPO activity in Australia.

It's a pretty good review of the Australian context of this industry and the link for the report is here.

Wednesday, October 31, 2007

Seriously...it's just CAFE, not CAFÉ

This is an amusing case of Microsoft changing the world, for the worse. In the US auto industry, many of the incumbent automakers are up in arms about increases to the Corporate Average Fuel Economy (CAFE) standards. CAFE is the acronym for the Corporate Average Fuel Economy. However, when you type CAFE into Microsoft Word (or other Office programs with Autocorrect) it will change the word to CAFÉ automatically. This has happened so much that I'm beginning to think that people feel that CAFE actually is spelled with an accent (I suppose it gives it more flair than a typical acronym). In all the articles in the media now about increases in CAFE standards, I'm seeing this happen more and more in real journalism. Gads!

Read Higher emissions standards to benefit U.S. automakers from CNet, and you'll see what I mean. Good article though, but it's just CAFE, not CAFÉ!

Thursday, October 04, 2007

Success with Powerpoint

Ok, I think I've figured out how to post a powerpoint presentation. Here it is:

There is one minor bug - the animations don't work, so the first graph shows the stock prices of Ballard and Sunpower, but doesn't say which is which. Sunpower is the yellow one and Ballard is blue.

Otherwise, not a bad service.

Monday, October 01, 2007

Welcome to Alice Springs!

I'm here in sunny Alice Springs. I'm not kidding, the weather forecast varies from "sunny" to "mostly sunny". The high temperature is 37C, which is 98 to my US friends, and it looks like the perfect place to hold a solar conference. I'm speaking at the ANZSES conference this week. My keynote compares the fortunes of Ballard Power Systems and Sunpower and tries to compare and contrast the fortunes of the fuel cell industry ten years ago to the solar industry today.

If I can figure out how to post a powerpoint presentation, I'll put it up after I present (thanks for the tips, Shuman!). The basic gist is that the solar industry today is looking a lot like Ballard was in 1998. Both Ballard and Sunpower rose from $1b~$2b market caps to ~$6b market caps in roughly 18 months.

Both companies have had a long string of successes. Both companies are built on the premise that there is a huge market to be served (automotive for BPS and utility power for SPWR). Both companies have their hopes pinned on expected, but not yet achieved cost reductions.

So what happened? Well Ballard went from stratospheric to ex-orbital (is that a word?) between January and March 2000. The value of the company shot up to around a peak of a $15b market cap! At this time the markets had thought that Ballard's product (the Mark-900 automotive fuel cell) was ready for mass-production and the market. Over the next 2, 3, 4 years it became clear that, while the product was fantastic (full disclosure: I was a proud Ballard engineer during this time) there were just too many hurdles to getting to market. Ballard's value fell and it is now "only" a $500m company.

What's different with the solar industry and will it suffer the same fate? While it is true that the solar industry, globally, is heavily subsidized, and if those subsidies went away there would be a massive decrease in the new installations of solar, the solar industry does not face the difficult path that the fuel cell industry did. The fuel cell industry faced a huge "chicken and egg" problem - no one would buy a fuel cell vehicle without refuelling stations established - no one would establish fuelling stations without an installed fleet of vehicles. There were many other difficulties too, but let's stick with this one as it is the one which is not solvable with technical improvements. This "chicken and egg" problem prevented, not just mass-production, of fuel cells, but darn near any production of fuel cells. Fuel cell companies could not even begin to start riding the learning curve of production down to reduce costs.

Solar, on the other hand, doesn't face such a barrier. This is allowing solar energy (and here I'm just speaking of PV) to be produced in huge quantities. Each solar cell produced costs less than the cell before that. This is giving the solar energy the momentum it needs to continue to drive down costs, and then eventually compete without subsidy against other forms of electricity generation. This slow, but steady, improvement is an opportunity the poor fuel cell was never provided. Ballard's engineers built a killer product, but it was required to compete fairly with the automotive engine from day 1, and build out a supporting installed base at the same time.

So, are solar energy stocks overvalued? Perhaps, perhaps not. If I knew for sure I'd be calling my broker. However, we at Starfish feel that the opportunities in the solar industry are certainly real, and that, this time, there are real, long-term, sustainable, businesses to be built that have a decent path to market. I'm here in Alice to see if I can support any. Oh, and to soak up some sun!

Sunday, September 30, 2007

More press coverage!

The Bendigo conference managed to generate a lot of press coverage. In the Sunday Age, a newspaper here in Australia, there was a feature story on the work we are doing here at Starfish. I am sometimes hesitant about the way that venture capital will be portrayed - either saviours of the economy and creators of jobs, or the financial barbarians at the gate, but I think this came off quite well.

Tuesday, September 18, 2007

Renewable Energy Conference

I just returned from Bendigo, Victoria. Bendigo is a regional city within Victoria, and one of the more successful regional centres. The conference showcased how regional Australia could benefit from a growing renewable energy industry. This reiterated how climate change should not be discussed in terms or "economy" vs "environment". Rather, addressing the full costs of carbon emissions will create tremendous opportunities for economic growth (especially in regional areas) addressing the problem.

I got to give an interesting presentation, and if I figure out how to host files off of Blogger, I'll try to post it here. A number of people seemed to really like it. I may have ruffled a few feathers in the fuel cell industry when I said that it was very difficult to make investments in the fuel cell space now after the tremendous exposure that fuel cell companies received in the last ten years. However, with my years at Ballard, and my exposure to Plug, UTC, GM and other fuel cell developers, I still am pretty confident I know what I'm talking about.

The ABC (Australian Broadcasting Corporation) interviewed me for their radio segment, which discusses portions of my talk. If you want to listen to it, it's listed here. It was great to see the enthusiasm at the conference, and it was good to meet up with some entrepreneurs. If anyone reading this blog has any questions about anything I mentioned, be sure to leave a comment and I'll try to respond.

Note: the picture and the interview (I imagine - although I suppose I provided most of the content) are copyright the ABC.


Friday, September 07, 2007

Hello to RMIT

I had an interesting discussion with business undergrads today at RMIT in Melbourne (apologies to Georgia Beattie, who I accidentally called Georgina...oops). As undergrads I was fairly encouraged that they were as interested as they were in venture capital, business strategy, and what makes a successful start-up. Very likely some of them are reading this blog, so if that's you, I hope you found it useful. I had fun talking with you.


Thursday, September 06, 2007

Other VC Blogs

Since I've begun writing my blog I've been reading a number of other blogs by various other VCs. In fact, it was the fact that there are so many other VC blogs that got me thinking of starting this in the first place. I'm actually kind of dismayed at the low quality of most of the posts. It seems that a lot of bloggers just enter something - anything - so that they can update their RSS feed. Most of the time they will simply take a clip from another website and then add the comment - "This sounds great!".

However, I have found a few that I think are pretty good. I then came across Marc Andreessen's blog, which, hands down, has some of the best content I've seen on startups and VC funding. It's funny, because I know that I'm just doing what I described above as being bad (having a post about nothing other than other people's posts), but Marc's site is pretty special.


Sunday, September 02, 2007

More on Climate Change

When I mentioned in my last post, that the IPCC is requiring that the per capita CO2 emissions on this planet peak and start to decline soon, I should mention that I don't actually know if the IPCC have specifically made those recommendations. However, I arrived at that conclusion after reviewing their data, so I thought I would share it with you.

This also relates to the discussion of a carbon tax vs. a trading system. In a carbon tax situation, the price of the carbon is fixed, and the amount of carbon is let to float. This is good when it is important to know the likely impact on the economy, but not so good if you want to know the effectiveness of the CO2 reduction. The other approach is to set a level of CO2 reduction required, and let the price float. This is good if you want to constrain CO2 production to known levels, but not so good if you want to know the effect on the economy. One thing discussed in Australia is the notion of a "safety valve" - ie, a cap on the price of carbon. The name "safety valve" clearly shows a bias to the economy and making sure it is "safe". If the price of CO2 is very high, it could be for a good reason - that the levels of CO2 emissions are still too high, and greater economic forces are needed to come down, but, as I said, the language of "safety valve" is biased towards economic performance, not emissions control.

Nevertheless, let's get back to the issue of determining when per capita CO2 emissions need to peak and fall. The book, "Six Degrees: Our Future on a Hotter Planet" by Mark Lynas discusses various effects that each one degree increase in temperature for the planet can mean. The great concern isn't just the global warming, it is the risk that one, or more, positive feedback triggers can occur, which would greatly affect our planet and dramatically hinder our ability to do anything. These positive feedback events include the melting of the polar icecaps (reducing the reflectiveness of the Earth and causing the Earth to heat up more), the methane release of thawing permafrost, the burning of the Amazon, etc. The link I provided is actually a summary of the book from The Guardian, and is an interesting read.

The end result is that we don't really want to increase temperatures past two degrees increase, otherwise we end up triggering the "tipping point" events which lead to runaway destruction. So, now let's turn to the IPCC for some charts. This paper from Bert Metz shows the temperature rise from various emission scenarios. The two graphs of interest are below.

Now, looking at the second graph first, we see that pretty much anything past A1, A2, or B is certainly going to result in a long-term temperature rise of three degrees or more. If we want to avoid this, we need to follow emissions profiles for A1 or A2 (or, at the most reckless, B).

Now we turn our attention to the first graph. We see that for A1, A2 and B, the emissions all peak at similar times (around 2020). The only difference between the different scenarios is the rate of decline in CO2 emissions. So, 2020 - since it is now 2007, this means that we have to begin an actual decline in emissions in the next 13 years - yes?

However, this is where the ever growing population that I discussed a few months ago comes back into play. The population is ever increasing! So, for the population simply to continue with the same rate of CO2 emission, in an increasing population situation, means that the per capita CO2 emissions need to drop. Therefore, the per capita emissions need to begin to decline sooner than 13 years, maybe closer to 10.

Ten years. Ten years ago was 1997 and the handover of Hong Kong to China. Ten years ago was the death of Princess Diana. Ten years ago I joined an exciting fuel cell company, Ballard Power Systems, in hopes of helping its mission of having the "Power to Change the World". Ten years seems like a long time in some respects, but an absolutely terrifyingly short time in others. We don't need to slow down the growth rate of emissions, we need to slow down our actual rate of emissions, and continue to decrease our rate of emissions. We're driving towards a brick wall and discussing weather we should have a foot fully on the accelerator, or less fully on the accelerator...we've got only ten years to look for the brake. Unfortunately, we're not driving in an easily stopped sports car either, we're on the lumbering freight train called the global economic system. The demand for solutions cannot be greater.

Friday, August 31, 2007

Emissions trading in Australia and Climate Change and Business Conference

I am a huge supporter of a carbon trading system. Without capturing the external costs of carbon dioxide, the full value of cleantech products cannot be realized. I just returned from the Climate Change and Business conference, held in Brisbane this year, and it was very worrying and informational.

It was worrying because many people reported on data from the Intergovernmental Panel on Climate Change, which basically states that we need to make massive changes to peak our per capita emissions of CO2 within the next few years or we risk catastrophic changes to the Earth. I'll talk about this more in a later post.

However, it was informational because I learned a little more about the emissions trading scheme that Australia is considering. Both parties now claim to support such a scheme (with, of course, no real details available until after the election!) However, both parties plan for a roll-out in the next 5 years (2012 for Liberals, 2011 for Labour). I think this is great, because once capital markets can influence things, they can be a tremendous force for change. However, this highlights the slow pace of change - 5 years before an emissions trading scheme is active!? If we take decades to make changes, and we only have a little over a decade to start moving the needle, we need to get away from the "environment or the economy" discussion which many politicians use to frame the debate, and quickly recognize the Stern Report conclusion, which is that the "pro-economy" policies are ones which mitigate the damage of climate change. It is the policies which allow greater climate change damage to occur that will truly destroy the world's economy.

More to come...

Wednesday, August 01, 2007

The Power of Network Effects and Harry Potter

As part of my continuing series of posts on exciting business strategies, this time I would like to talk about the power of network effects. Network effects can have multiple fantastic properties, including simultaneously providing rapid adoption rates as well as erecting barriers to entry.

A network effect takes place when the value someone places on something increases with the number of people who use that thing. If I enjoy taking a taxi to work rather than walking in the rain, I don't value that taxi any more if other people also are taking taxis to work. However, if I use a certain operating system, I will get more value out of it if everyone else also uses that operating system - there will be more software, support will be more readily available, and costs will go down. This is how Microsoft has managed to maintain its lock with Windows, now that it is the dominant system. This is why VHS finally won out over Beta, DVDs over Div-X, and this explains the various successes and failures of the console gaming systems. Whichever system managed to establish a lead ended up dominating the market.

What does this have to do with Harry Potter? Well, after the release of the final book in the series I have been reading a flurry of posts on the book. However, one of the most interesting (I've looked for it, but I can't find the link) was a post describing one of the reasons for Harry Potter's success and this was due to the fact that the book had become popular enough to benefit from a network effect. Most books are enjoyed by the reader, independent of what other people are reading, yet because Harry Potter was so huge, the experience of reading could be shared with other Harry Potter readers. Harry Potter became more exciting because many other people were reading Harry Potter. Woe to the child who shows up in the schoolyard not knowing what happened in the latest Harry Potter installment!

So, if you are developing a business, if the business strategy can include a network effect, allowing for the value of your product/service to improve as the number of installed users increases, then you can be included in the same list as Microsoft, Nintendo, Sony, and J.K. Rowling, which is a pretty good list indeed.

Monday, July 30, 2007

Disruptive Technologies

I have been wanting to write a blog post about this topic for some time. I think it is one of the greatest concepts in technology marketing strategy, and yet I think it is one of the most misunderstood. When I use the term Disruptive Technology, I am referring to the phemonenon discussed by Professor Clay Christensen in his book, The Innovator's Dilemma. I highly recommend this book, and it's follow-up, The Innovator's Solution, for anyone devising a marketing strategy for a technology company. These books show how certain types of technologies, as they mature, can displant Sustaining Technologies, even though they originally may be inferior to these technologies.

Let me begin by describing what does not constitute a disruptive technology. Many people assume that a disruptive technology is one that is "really different"; specifically something that is technologically impressive, the "next generation", and generally a lot better than what it is replacing. As I will discuss, this is generally an incorrect way to look at these technologies. For example, some people mistakenly say that the CD was a disruptive technology over the audiotape, because, CDs are "really different" from audiotapes. By the same logic, it is argued that the Internet itself is a disruptive technology (in this case, it isn't even mentioned what technology the Internet "disrupts"), solely because, well, the Internet is really different, isn't it? I mean, it's a pretty big thing, so it's got to be disruptive, right? The same argument is used for iPods, GPS navigation, and DVRs. In some cases these are disruptive technologies, in most cases they are not.

A marketing manager at one of the companies I worked with in the past used to say to me, "Selling disruptive technologies into conservative markets is really hard." This company made a lot of extremely cool technological products, however, few of them could be argued to be disruptive technologies, and there were many other reasons that it was difficult for the firm to sell its products. The key thing to understand is that a disruptive technology will almost certainly be hard to sell into a conservative market - that's why you shouldn't try. The beauty of a disruptive technology is that it should be sold into the market that values the product. Most disruptive technologies, when tried to be sold head-to-head against traditional sustaining technologies will often lose.

The reason that the definition above is often incorrect is that a disruptive technology is often one which is inferior to a current technology on the metrics valued by the incumbant organization and market. However, the technology addresses market needs by a different market - often one without competition, and (here's the best part) often unattractive to the incumbant firm. This allows the startup to grow its product without competition.

The reason that the incumbant firm cannot compete effectively against the startup in these situations, is that the incumbant firm either cannot recognize the value of the inferior product, or it is making good margins selling a premium product, and the sales the incumbant loses to the startup (if any) are the low-margin unattractive customers. When this happens, the incumbant sees its gross margins increase - it actually feels good to lose its business to the startup, and thus it does not recognize the threat.

Because of this, the CD is not a disruptive technology to the audio tape. The metrics that the incumbant manufacturers and the market value about traditional audio tapes - recording quality, recording time, compactness - are the same metrics which are improved by the CD. It was very easy for cassette tape manufacturers to realize that the CD was a potential threat. Likewise, the iPod was a sustaining technology to the Walkman, GPS navigation was a sustaining technology to the map, and the DVR was a sustaining technology to the VCR.

No, a true disruptive technology might be something closer to a comparison between Virgin Blue and Qantas. Virgin Blue (like Southwest Airlines, Easyjet, and others) is a discount airline. These types of airlines are great for value concious consumers. Qantas (and BA, United, and others) offer services for Business Class travel and enjoy fantastic margins on their premium business. Now, from this point of view, Qantas might say they have nothing to fear from Virgin Blue - all the low price rabble that fly on Virgin Blue lower Qantas' margins anyway. They may convince themselves that they are a premium product who cater to a more valuable customer. However, as has been shown many times already, as the discount airlines begin to succeed and offer better service, more frequent service, and become the airlines of choice for millions, it becomes harder and harder for the full service airlines to compete. In fact, faced with declining revenues, a full service airline will likely move upmarket in an effort to extract even more money from their premium customers. Virgin Blue is able to grow their market, with little competition from Qantas - not because Virgin Blue is better, but because Qantas has a harder time competing with Virgin Blue when Qantas' most valuable customers, the ones that Qantas will work the hardest to keep happy, are not demanding the discounts that Virgin Blue can apply. The metrics valued by the Qantas business class traveller are not the same as those valued by the Virgin Blue traveller.

So, if you can set up your business strategy to allow you to compete in a market niche along a different set of value metrics to an incumbant, you will likely not face immediate competitive threat. In fact, if you can position your business to attract a market untapped by the existing incumbants, that also is unattractive to the existing incumbants because of their current commitments to their current best customers, then you will be well positioned to grow your company, improve your product, and prepare to compete before your competitors even see you coming. It is that type of disruption which earns the title Disruptive Technology.

Tuesday, July 24, 2007

Business Plan Tips Part 1

Part of the purpose of this blog is to help describe what issues are necessary when trying to succeed as a venture capital backed startup, with a focus on Australia and clean technologies.

So, I've started to start a series of postings called Business Plan Tips. These tips will help your business plan be more readable by, and therefore more interesting to, investors.

Today's tip is something that, when I first saw it, I dismissed it as an anomaly. However, I have since seen it four other times, and so I decided it was worth discussing, so here it is. Please do not include a "Total" column in your Income Statement.

I'll explain. If you look to the figure at the left, you see a three year Income Statement for that hot new startup, Fantastic Co. You can see modest growth in revenue and EBITDA, until glancing at the last line you see $9m in sales, with almost $5m in EBITDA. But, wait! Looking up you will see something odd. The company doesn't have $9m in sales in year four. Instead, the company has had $9m in sales across the previous three years. What does this mean?

In short, it means almost nothing. Nobody cares what the cumulative sales/EBITDA/COGS or anything else performance is over some arbitrary period of time. Putting in a Total column is just misleading, because most investors will look to the last line to see how the company is performing in the final year. Companies are valued as multiples of EBITDA, or multiples or revenue, but no company is valued as some total of previous years. I suppose the only purpose of this column would be if the company were to be liquidated at the end, but even then, the Retained Earnings figure on the Balance Sheet would be more appropriate.

So, please don't put a Total column. It's misleading. It's pointless. It frustrates the reader (and worse, once they realize their mistake, the next emotion is disappointment, because the actual final year figure is much less - even if the final year figures are reasonable, why would you ever want your reader to feel the emotion of disappointment when reading your business plan?) The goal of your business plan should be to quickly and clearly communicate your good-news story of why your company will be a success. A Total column just gets in the way.

Adventures in Domain Hosting

As I work towards improving this blog I registered the name www.aaronfyke.com (however, if you click on it, you come back here). However, doing so has been a bit of an adventure for me. First off, I'm not entirely certain that I've set it up correctly. I have it set up so that if anyone visits aaronfyke.com (or www.aaronfyke.com), they are sent here - which is actually my old aaronfyke.blogspot.com address.

The thing is, that's not how Blogger suggested setting it up. Instead, they suggested using DNS management and setting up a CNAME alias. So, I'm wondering if this will make it so that aaronfyke.com never gets picked up by a search engine? I'll have to wait a few days and see.

Bizarre Formatting!

This is one of the most bizarre Firefox/IE compatibility errors I have come across. For some reason the posting below looks very different in Firefox vs IE. I always use Firefox, but I looked at my blog using IE and I see that one of the lines is Greek! I've repeated it here rather than changing the previous post so you can see too. Have a look at the blog using Firefox and IE, and you'll see what I mean.

what are the most likely sources of renewable energy for regional Australia?

Sunday, July 22, 2007

Renewable Energy Conference

There is an interesting conference happening in September in Bendigo, Victoria, regarding renewable energy. I'm going to be speaking at the conference, giving an overview on how venture capital investing works, and some of things that VCs are looking for in new investments. If you think this might be interesting, I recommend that you look into it.

A national conference on ideas, examples and action being presented in Bendigo, Victoria on 16th, 17th and 18th September 2007.

Regional Australia is particularly vulnerable to the vagaries of alternative energy supplies. Energy for transport as well as industrial, mining and agricultural development is essential if regional Australia is to develop and continue to play its role in the long term success of the Australian nation.

The conference presentations will address questions such as:

· what are the most likely sources of renewable energy for regional Australia?

· what is the state of development of these different sources?

· how accessible are these energy sources to people in regional Australia?

· what needs to happen to make them readily available? and

· what can regional communities do to assure their access to renewable energy?

Keynote presentations from government, business, academic and community leaders will be complemented by a focus on practical renewable energy initiatives.

For more information or to download a registration brochure: www.renewableenergyconference.com.au

Monday, July 16, 2007

Business Strategy

One of the first things I look at when evaluating a deal is the business strategy that is being proposed. If I understand the strategy, I have a pretty good idea of whether the business will make money, and how likely it may be to succeed. Most of the business plans that I've decided to pass on have been because of a bad strategy, or having no strategy at all (or at least one that wasn't made clear).

So, I thought that a good thing to write about, at least over a few posts, would be to talk about some of the best things I've learned about strategy - marketing strategy, technology strategy, etc.

One of the simplest places to start is by examining the supply curve. The profit of a venture is shown in the green area. Q is the quantity of a good sold, P is the price of the good being sold, and C is the cost of delivering the good.

So, when starting any business, ask yourself, what can you do to make the green rectangle bigger? You can either increase the price by offering a premium product, decrease the cost, by being more efficient, or shift the supply curve to increase the quantity sold.

Once you have thought about how you are making money, the next question is - how is this sustainable? What can be done to ensure that these profits can be made over time.

The next model helps examine how easy it will be to protect profits over time. This is the famous five forces analysis (Porter). The five forces analysis helps determine where the value is likely to end up in the value chain. A mantra of management consultants is the notion of creating value and capturing value. Most inventors only think about creating value. One of the most important parts in determining the success of a business is its ability to capture value. This can be determined through the five forces analysis. These forces are:

Supplier power - The strength of a company's suppliers in negotiation.
Buyer power - The strength of a company's customers in negotiation.
Threat of new entrants - The ease by which competitors can enter the marketplace to compete with the company.
Threat of substitution - The threat that other, different, products can compete with the company's products.
Threat of competition - The strength of the company's competitors.

The higher each of these forces are, the less attractive the industry is for that company. When devising a strategy, it is important to work to weaken these forces. Reduce supplier power by purchasing commodities from multiple suppliers. Reduce buyer power by selling to several customers. Erect barriers to entry through IP protection, exclusive agreements, and switching costs to prevent other competitors from entering the market. Reduce substitution threat by developing unique products. Reduce the threat of competition through entering untapped markets.

All of this sounds easy to say, but understanding these frameworks can help entrepreneurs frame business strategy which is profitable and sustainable over time. And it is these business plans which are most attractive.

Stay tuned for further posts including a discussion of some of my favourite technology strategy books - Crossing the Chasm, the Innovator's Dilemma, and the Innovator's Solution. Lot's more to discuss!

Thursday, July 12, 2007

Farmer's Viewpoint

Interesting. Last night ABC (the Australian public broadcasting network) ran a movie called The Great Global Warming Swindle. It was a pretty shonky piece of non-science, and it was quite fun to try to unravel the various half-truths that were said in the piece. The ABC took too much of an "anti-skeptic" stance, in my opinion. It would have been better to show the fallicies and let the data speak for itself. But no matter. I am worried at the number of people who would be mislead by this film.

Nevertheless, I was reading some of the online comments and there were a few from the Australian farming community. I thought of my posting a while back, and thought I'd share one of them with you.

Author Backblock
Date/Time 12 Jul 2007 4:39:22pm
Subject A farmers viewpoint

As a farmer, climate change is not just an academic question. It affects my life, and the life of my associates. The question of whether global warming is real or imagined could mean the difference in whether our farm is viable or not.

For years we have watched on as academics fought it out over whether man-made global warming is real or not. We placed some hope in the possibility that climate change sceptics were right, but kept an open-mind to other climate experts.

As many people know, the current drought has had many of us worried because if it keeps going many farmers will go broke. While some areas are looking better with recent rains, our local district still has lower than average soil moisture levels and our dams are empty. But many of us have hung on with the hope that climate change has been exaggerated. Australia's climate can be highly variable naturally.

However, I noticed that the issue of increased solar activity has been recently ruled out by academics, and it seems that there is no other viable explanation for global warming other than greenhouse gases like carbon dioxide.

I now feel that the people who are saying man-made global warming is not real have hoodwinked many in the farming community. You sceptics seem more interested in saving face rather than finding out the truth. You gave farmers false hope, and have influenced many of us to keep going when this may be ill advised. One good year in 10 is not enough to maintain a viable farm in our area.

What you sceptics need to remember is that climate change also affects people’s lives. It’s not just an argument to win at all costs. And if everybody else thinks this will not affect them, think again. The current increase in vegetable prices is largely a result of an increasingly unstable climate.

In the end you sceptics will have to face your conscience and God.

Monday, July 09, 2007

More fun with numbers!

The analysis I did in my last post was quite enlightening. To grapple with the sheer scale of the issue of CO2 reduction, it was helpful to determine what year would have the equivalent emissions as a 40% reduction in 1990 levels (1959), and what year would have equivalent per capita emissions as a 40% reduction in 1990 levels in 2050 (1900ish).

Another analysis would be to take the per capita emission levels we are taking about and compare it to equivalent countries today. The point of this analysis shouldn't be misinterpreted. I am not suggesting that people's standard of living will become equivalent to the countries mentioned. However, I think this shows how substantial the changes need to be in order to meet the cuts required.

I determined that in 2050, in order to have emissions equivalent to 40% of 1990s levels, the world would need to average only 0.25 tons per person. The current average per capita emission rate now is approx 1.23 (2004 data). Looking at the list of countries we see that the country closest to this today is either Morocco (1.2 tons/person) or Colombia (1.3 tons/person). Now, if we need to reduce the emissions to 0.25tons/person, that would be equivalent to dropping the average world's emissions to the levels of Bangladesh (0.25).

I should note that I was confused when one of the sources I quoted mentioned tons of CO2 and the other mentioned tons of CARBON. I am going to assume that by "Carbon" it is meant CO2, otherwise this comparison isn't fair.

So, if the world's average country will have to go from Colombia to Bangladesh, I'm not sure if that tells us a lot. Mostly because I only have a really vague idea of what the CO2 emissions and standard of living is like in both Colombia and Bangladesh. So, the next useful thing is to try to equate US/Canada/Australia emissions. Let's assume that if the mean per capita emissions has to drop by a factor of five that we can safely scale *all* countries by a factor of five. This might be unrealistic, but maybe not. The countries with near zero per capita emissions would not change much and the ones with the most per capita emissions would change the most - maybe that's fair. So, if we take current U.S. per capita emissions, they are 19.8 tons. Reducing this by a factor of five becomes only 4 tons per person. Today, ironically, Mexico has 4 tons per person.

So, let's review. If the U.S. were going to match South Australia's requirement of a reduction in CO2 emissions to 40% of 1990s levels in 2050, this would result in a drop in emissions per person from what the U.S. has today to what Mexico has today. Or, put another way, if the U.S. does not want a massive drop in standard of living, there is a MASSIVE amount of clean energy that needs to be implemented to accomplish this.

Actually, there is a bit of a flaw - I'm assuming that the US will see a population growth rate equal to the growth rate of the rest of the world. However, this isn't likely to be the case as most developed countries are seeing a drop in population growth rates, but still, the irony of comparing the U.S. and Mexico was too good to not persue.

Sunday, July 08, 2007

South Australia emission targets become law

I got this from Responsible Investment News. It will be interesting to see how this plays out - less than 40% of 1990 levels by 2050 is a lot, but it's also a long way off. More interesting is the 20% renewable energy target by 2014, which is only seven years away.

South Australia has become the first state in Australia to legislate targets to reduce greenhouse emissions with the Climate Change and Greenhouse Emissions Reduction Act 2007 becoming law on 3 July 2007.

The legislation sets out three targets:

- to reduce by 31 December 2050 greenhouse gas emissions within the State by at least 60% to an amount that is equal to or less than 40% of 1990 levels as part of a national and international response to climate change;

- to increase the proportion of renewable electricity generated so it comprises at least 20 per cent of electricity generated in the State by 31 December 2014; and

- to increase the proportion of renewable electricity consumed so that it comprises at least 20 per cent of electricity consumed in the State by 31 December 2014.

For more information go to: http://www.climatechange.sa.gov.au/news/news_4.htm


For interest, I decided to see at what year the world was emitting 40% of 1990 levels. I grabbed some data here. It looks like 1990 levels were 6.2 billion metric tons of carbon (note, that this says carbon, not carbon dioxide. Since the molecules have different weights, I wonder if the difference is intentional? At any rate, it should still answer our question. So, 40% of 6.2GTons is 2.48GTons which is the rate of emission in...1959! Hmm...

An even more interesting analysis is to determine what that works out to be in CO2 emissions per capita. In 2050 the population of the world is expected to be about 10 billion. I know the link shows a graph of around 9.5 billion, but another pop clock put the population at 10 billion by 2037, so I took a round number in the middle (besides, it makes the math easier). So, 2.48GTons/10Gigapeople = .248 Tons/person. So, to achieve, for the whole world, what South Australia is proposing requires cutting our carbon emissions to a quarter of a ton/person. Seeing as our current output is 1.23 tons/person, the last time emissions were down to about .25 Tons/person was between 1897 and 1907 (depending on population data, which I didn't have handy). To support the number of people on this planet in 2050, and to achieve, globally, the South Australia targets, we need to turn the CO2 production clock back to the turn of the century - the previous century. Clearly there is a huge need for low-carbon solutions to maintain our standard of living!

Wednesday, July 04, 2007

Rural folk

I have noticed something with the upcoming Cleantech revolution, and that is a growing power placed with one of this nation's earlier entrepreneurs (as well as the entrepreneurs of my previous nation - the US - and my previous nation before that - Canada). I'm talking about farmers and ranchers. These people don't get much thought these days (at least by city-dwelling folk like me), and in many ways I think that they've been sold short. I've noticed in all three countries that I've lived that there is a divide between rural and urban dwellers. That being said I must say that the divide in Australia is the narrowest, and in the US it is the widest (so much so, that the political spectrum is almost neatly divided between urban "blue states" - Democrat supporters, and rural "red states" - Republican supporters). As an aside, I've noticed that the split is nearly reversed in Canada - the rural people are left wing, and the urban people are right wing (sort of), but I digress.

Where am I going with all of this? Well, with much of the "new economy" hoopla over the past ten years many people in the media have given the impression that entrepreneurs are all engineering students between the ages of 20 and 30 starting up web-based businesses. Everyone else was dismissed as "old economy". Agriculture wasn't even hip enough to be classed as "old economy", it was simply dismissed entirely. Growing up in Saskatchewan (a very farming oriented, rural province of Canada) I saw a lot of this. However, farmers are some of the most entrepreneurial people I know. The original pioneers who populated the West of Canada and the US (and rural Australia) endured risks far more than any dot.com entrepreneur, and the farmers of today know what it takes to run a business, and are very innovative.

What I think we'll see happen, and in many cases I have begun to see it already, is the entrepreneurial spirit of farming will resurge and play a major role in Cleantech. At least three huge sectors of Cleantech are a good fit for rural life - wind farms, solar farms, and biofuels production. Farmers are used to using their land as a business to make money, and I've seen many cases where farmers were eager to set up a wind farm or grow biofuel suitable plants. There is a lot of push in the rural community to make big on the opportunities presented by Cleantech, and given the entrepreneurial history required of rural life, I think it is somewhat exciting that this group, often overlooked by traditional urban, tech-oriented folk, could have a resurgance and play a major role in this new wave of tech adoption.

Tuesday, July 03, 2007


It seems that most venture capitalists these days have a blog and I decided it was time for me to share. I'm an Australian VC investing in Cleantech, which is a big deal here in Australia. This blog will discuss the Australian private equity industry, the Cleantech industry (renewable energy, water efficiency and pollution abatement), as well as my general musings from moving down-under.