The world was changing and Bill Gates almost forgot to notice – “almost” being the operative word. It was the mid-1990s and this crazy thing called the Internet was taking hold, but it wasn’t Microsoft that was capitalizing. Netscape was the first to commercialize the Web browser and thought the ant could swallow the elephant. Awakening to Netscape’s potential threat, Gates literally stepped out the window of his Windows comfort zone, pointed his cannons at Netscape and the rest is history.
Now, history threatens to repeat itself. Acknowledging that Microsoft may have equally ignored the search market, Gates has set Google, the high-flying Internet search firm, in his sights and is again taking aim. At the World Economic Forum in Davos, Switzerland, his intentions were, in fact, no longer a secret. “We took an approach that I now realize was wrong,” Gates said in a New York Times article about Microsoft’s earlier decision to ignore the search market. But, he added ominously: “We will catch them.” There’s nothing like a CEO who can admit his own shortcomings – and back it up with a threat.
What’s fascinating about Gates is not his own humility and subsequent hubris. It’s his willingness to take Microsoft, turn it on a dime, and set it in a new direction completely outside its comfort zone. There’s a growing argument that we, as venture capitalists, will soon have no choice but to follow in Mr. Gates’ footsteps, laying aside our own areas of expertise if we hope to find the best technologies serving the newest markets in perhaps even unheard of industries.
Steve Jurvetson of Draper Fisher Jurvetson offers a well-known industry case in point. Say what you will about nanotechnology – expensive science project or future commercial blockbuster. At least Jurvetson took this same first step, allowing himself to become a student of an entirely new industry in the hopes of becoming one of its first major investors and, thereby, reaping even greater early rewards for his limited partners.
What Jurvetson did is what we all must do to varying degrees if we are to seek ripe deal flow in those few areas left that have not been inundated by a crowd of competitors offering only marginal technological innovations. Does the world really need another enterprise software company, let alone a VC investment in one?
Skeptics will counter that changing directions within a VC firm is easy enough to say, far more difficult to do. Agreed. Nearly all of us live under limited partner agreements that often spell out intended areas of investment, like telecom, software and biotech. Additionally, there are sometimes guidelines about the stage of investments, capital per deal and even geographic location (CalPERS requires a certain percentage to be invested in California, for instance). These guidelines constrain how wide an individual firm may cast its net. Having said that, in a 10-year partnership agreement, pre-committing to invest in areas that look interesting when the fund begins may not always be the wisest approach either. Just ask the Internet-only funds of 1999, or the communications-only funds of 2000.
The best firms are already reaching beyond their comfort zones. Firms including DFJ, Mayfield, Kleiner Perkins, and Technology Partners have started exploring investments in fuel cell technology, even though such firms may still be hesitant at pulling the trigger given nascent in-house expertise. Then again, others are diving right in. Neah Power Systems, a Bothell, Wash.-based company that is developing micro-fuel cells for hand-held devices received funding from Alta Partners and Intel Capital, along with Frazier Technology Ventures. Fuel cells may seem like a big step for Intel, but the investment isn’t as out-of-the-box as one might think. If Neah Power achieves its objectives, we will one day see laptops with enough power to run all day long.
The application of similar know-how to an adjacent (though not precisely the same) technology seems like the smartest way for an investor to tiptoe into a new market. What Intel and the folks at Intel Ventures don’t know about fuel cells they more than make up for in knowing the ins and outs of laptop design, its power needs and its technological architecture. It’s this same model for in-house expertise expanding one click into a new market that VCs might use as they inherently expand into new markets and industries.
Light in Darkness
For example, there’s little doubt given the blackouts of last summer that the nation’s electrical grid needs upgrading, if not a complete overhaul. Yet few mainstream VCs are anywhere close to being utility specialists. Many, however, have in-house security technologists who are well versed in creating secure and well-monitored networks. Apply that knowledge to the electrical grid – which is one giant series of interconnected networks – and you can clearly help those young companies that have developed new ways of securing and monitoring the nation’s transmission and distribution of electric power.
In fact, power is a preoccupation hardly ignored by some of the Valley’s most notable VCs. U.S. Venture Partners and Benchmark Capital have made a $6.5 million investment in Nanosolar to develop inexpensive flexible solar cells. Mayfield participated in a $15.6 million round to fund Polyfuel, which is developing a direct methanol fuel cell for mobile applications. And DFJ joined a syndicate along with Eastman Chemical Co. and Chevron Technology Ventures to fund Konarka Technologies with $13.5 million in fresh capital to better market the company’s claims of a flexible, polymer and nanoparticle-based photovoltaic technology.
Are these firms solar experts? Hardly. Not yet, at least. Though if one looks closely enough, a solar cell is conceivably nothing more than a really dumb semiconductor that does just two things rather than hundreds of thousands of things per second. It takes sunlight and converts it to energy. Get a fairly intelligent semiconductor engineer and have him knock heads with a solar guy for a while and there’s little doubt enough due diligence will emerge for an average venture capitalist to understand whether there’s a market – and a business opportunity – to turn a company’s solar technology into a viable long-term business.
We had our own drive-by with a solar technology company as we, too, look beyond Charter’s comfort zone to decide where the next market-leading opportunities are hiding. Solaicx, a Los Gatos, Calif.-based solar technology company may be one of those hidden gems. I’m no solar expert and I don’t pretend to be, but I have been around my fair share of manufacturing businesses to understand that more than half the costs within any manufacturing company can be saved within the manufacturing process itself. That’s what Solaicx is doing.
Second Hand Lion
In an industry that’s been building solar cells with second-hand semiconductor equipment for years, this startup decided it was time to optimize the manufacturing process and equipment for solar itself. With seven U.S. patents in the works, the company is attacking the cost structure of the relatively expensive single crystalline wafer, the heart of 86 percent of solar cells made today. Given that wafers typically account for half the cost of a photovoltaic module, the company’s solution is to reduce the amount of silicon used in a wafer while providing higher quality material, which would enable 21 percent solar cell conversion efficiency.
Do this while creating solar-specific manufacturing processes and equipment necessary for handling high volumes of silicon material and Solaicx aims to drive 75 percent of the cost out of solar cell manufacturing. If one reduces the cost of solar modules to $1 per peak watt – the holy grail industry benchmark – solar electricity becomes competitive within the $1.5 trillion electric power generation market.
Now I’m no genius (although I did pick the Carolina Panthers to make it to the Super Bowl), but even I can understand that in a market starved for alternative sources of energy – where solar is a $3.5 billion industry and is still growing by 35% per year – a 75% cost reduction spells real money for the OEMs who represent the final manufacturers of solar panels.
Is Solaicx a Charter type of business? No. Not yet, at least. But is it a business that VCs with expertise in semiconductor manufacturing, for instance, might spend more time to understand value in terms of the potential to change industry economics? Absolutely. Thus, while it is never easy to leave the comfort zone, and for that reason, most venture capitalists continue to crowd around historically lucrative diamond mines (sectors), the best diamonds may just be found in the untapped mines.
Ravi Chiruvolu, a general partner of Charter Venture Capital, is a regular technology columnist for VCJ. If you’d like to send him feedback or ideas, email him at firstname.lastname@example.org. Chiruvolu specializes in enterprise software, software infrastructure, e-business and wireless technologies. He sits on the boards of Ellie Mae, ManageStar, Niku (NASDAQ: NIKU), Quantum3D, Talaris, Verano and Winery Exchange.