Into the Valley of Death

Everybody is talking about how new breakthroughs—in energy and elsewhere—require helping startups through the valley of death. This is a well-intentioned but dangerous policy.

The valley of death refers to the severe financial risks that startups face as they struggle to grow from small teams to viable ventures. The dip of the valley refers to the debt -- i.e., the negative balance sheets -- that companies experience as they invest money now in hopes of making it back upon success (the accompanying figure provides a general description).

Nowhere is this valley of death more evident than in clean technology, where startups face a difficult combination of challenges. On the one hand, there is the challenge of teams seeking $50k to $5M or more in funding to begin translating their advanced science into industrial processes (moving thin-film solar or fuels from algae out of the lab and into commercial production) and, on the other hand, there's the challenge of funded startups trying to raise investments for the industrial-sized plants and equipment needed to utilize those emerging processes.

If we want to bring these emerging ventures to market quickly and at a scale that impacts energy security and climate change, policy wonks and private investors alike are arguing, we must provide the financial support these entrepreneurs need to make it through the valley of death.

Now might be a good time to reconsider.

Saying that most startups perish in the valley of death is like saying that most patients die of cardiac or respiratory failure -- the moment when the heart stops pumping or the lungs stops breathing. Indeed, doctors now take great care in noting not just the immediate cause of death but also the antecedent causes: patient died of [blank] due [antecedent cause] due to [antecedent cause]. Without looking past the obvious, few lessons can be learned.

Innovation policy must similarly take great care not to confuse the ultimate with the antecedent causes of failure. Running out of money is the ultimate cause of death for almost all ventures. Without considering the antecedent causes, it's also a dangerous basis for policy decisions.

In addition to financial capital, there are three other forms that at different times can be significantly more valuable: physical capital (the physical resources someone has already acquired and organized), intellectual capital (the knowledge and skills someone has acquired and organized), and social capital (someone's social network, or access to the capital "stocks" of others).

While a startup's balance sheet might clearly show where they stand with respect to their financial and physical capital, it does little to reveal their intellectual and social capital. And yet for companies to avoid their own untimely demise, they depend as much or more on knowledge, experience, and the ability to manage their company's fortunes -- and on their social networks to discover, guide, and acquire the critical resources they will need to succeed.

Supporting the success of small companies advancing clean technologies requires more than financial or physical capital; it requires ensuring that these companies have access to the best knowledge and experience, and the right social networks, as they get started.

The traditional energy sector is extremely large, bureaucratic, and entrenched. The competitive landscape in which new companies hope to thrive is a product of regulatory policies and industrial coordination that transpires in places and ways that are difficult for entrepreneurs to see, let alone access. Yet this is a large portion of the knowledge and networks that new companies must acquire if they are to survive and make a difference.

Institutions are emerging to provide new startups in clean technology with these resources. At UC Davis, for example, the Green Technology Entrepreneurship Academy, in coordination with the Graduate School of Management and with support from the Kauffman Foundation, brings scientists and engineers from across the country together to explore the commercial potential of their research with instruction and mentorship from leading entrepreneurs, investors, and corporations. The emphasis is on combining entrepreneurial knowledge and networks -- the critical intellectual and social capital that new ventures need before the financial capital can be put to best use.

Similarly, the Energy Efficiency Center supports promising new ventures advancing energy efficiency by providing access to their established network of university researchers, manufacturers, venture and corporate investors, electric utilities, energy service companies, and major energy customers such as the state of California and Walmart.

As the Department of Energy begins funding its new Energy Hubs with an eye toward commercializing new research breakthroughs, it should seriously consider how it will provide these emerging ventures with the right capital to succeed.

Indeed, the valley of death may be an apt description for other, less valiant reasons. The term came from Lord Alfred Tennyson's famous poem, "The Charge of the Light Brigade," describing the tragic British cavalry charge over open terrain in the Battle of Balaclava, in the Crimean War, in which 278 of 607 soldiers were killed or wounded within moments.

To those who witnessed it, the charge of the Light Brigade demonstrated both the courage of the British soldier and the incompetence of their commanders. The soldiers died because they rode directly into withering crossfire from three sides. Wrote the war correspondent William Russell:

"At 11:00 our Light Cavalry Brigade rushed to the front... The Russians opened on them with guns from the redoubts on the right, with volleys of musketry and rifles.

They swept proudly past, glittering in the morning sun in all the pride and splendor of war. We could hardly believe the evidence of our senses. Surely that handful of men were not going to charge an army in position? Alas! It was but too true -- their desperate valor knew no bounds, and far indeed was it removed from its so-called better part -- discretion. They advanced in two lines, quickening the pace as they closed towards the enemy. A more fearful spectacle was never witnessed than by those who, without the power to aid, beheld their heroic countrymen rushing to the arms of sudden death."

Poor intelligence, miscommunication, and unthinking obedience on the part of their commanders were the antecedent causes of the Light Brigade's valley of death. Companies run out of money for all sorts of reasons, including perfectly good ones: the market wasn't ready, the technology couldn't scale, or the economy tanked. But some of those reasons might have been avoided.

Public financing of new ventures can prolong a company's life, but it won't fix poor planning, miscommunication, or blind faith. Money hides more bad decisions than it cures. To ensure companies make the transition from small venture to a sustainable business, financial capital may be the last form of capital startups need.

Public finance is an attractive tool for federal policy makers; it is easily wielded and often well-publicized. But it alone will not save clean tech entrepreneurs from riding bravely into their own valleys of death. Investing in the infrastructures that inject intellectual and social capital into these emerging ventures may be a more valuable -- and more critical -- intervention.

Andrew Hargadon is the Charles J. Soderquist Chair in Entrepreneurship and a Professor of Technology Management at the Graduate School of Management at University of California, Davis. He is the author of How Breakthroughs Happen: The Surprising Truth About How Companies Innovate (Harvard Business School Press, 2003).