This document summarizes Bill Aulet's perspective on what is wrong with energy investing. Some key points: - While renewable energy receives significant investment, the hydrocarbon industry still accounts for 80-90% of energy demand and will for decades. More focus should be placed on improving hydrocarbon extraction and reducing its environmental impact. - Private equity money is flooding into renewable/alternative energy but not enough is going towards improving the hydrocarbon industry. Investors are "majoring in minors" by overemphasizing renewables. - Entrepreneurship in the energy sector is uniquely difficult compared to other industries due to factors like large scale, long timelines, regulation, and dependence on existing infrastructure. Not enough

1. ENERGY, CLEANTECH, INVESTING
What’s Wrong with Energy Investing? Part I
BILL AULET 8/6/07
I just returned to Kendall Square after spending a spectacular weekend at Squam Lake in New
Hampshire and at the forefront of my mind—and what I could not shake over the weekend—is the
state of the development of the New England energy ecosystem. Granted, I have a personal
agenda, as in 30 days I commence teaching a new class at MIT called Energy Ventures. Still, it’s
an extremely relevant question for the local economy, and arguably the nation and the world.
Energy is, after all, the biggest industry on the planet and certainly faces the biggest challenges.
Therefore, it offers the biggest and most attractive opportunities for investors and others who
want to make a difference.
A lot of smart and well-intentioned people have made a lot of progress in recent years in
developing the regional energy ecosystem. But let’s not congratulate ourselves too fast. For every
EnerNoc success story, there has been a GreenFuel setback (hopefully temporary). Not that
such setbacks are necessarily a bad thing, especially if they cause us to reflect and learn how to
improve. So the question that we should seek to answer is “what is working and what is not
working in developing a New England-based energy ecosystem?” Or even more specifically,
“what’s wrong with energy investing?”
To answer this question, we might refer to the Beatles’ George Harrison, who sang in “Got My
Mind Set on You” that “it’s gonna take time, a whole lot of precious time…to do it right.” But the
time is precious indeed, and I think enough results are in to make two important points about
energy investing.
Majoring in Minors
While there clearly used to be a shortage of private equity capital for energy ventures (and rightly

2. so because of their highly cyclic nature), that problem has gone away. Money is now gushing in.
By my simple calculations, the amount of money available to energy ventures from dedicated
private-equity funds quadrupled from 2005 to 2006, soaring from approximately $5B to $20B. I
believe this is even understated. The point is that the money is flowing in at an amazing rate. But
where is it going? Energy as a sector is almost as non-specific as technology or transportation.
We have to peel back the label and take a closer look.
The lion’s share of the money that is dedicated to energy is earmarked for renewable or
alternative energy. Renewable or alternative energy is a fantastic thing and it is necessary, but
wholly insufficient, to deal with the energy problem. The biggest part of the energy riddle that
needs to be solved resides—and will continue to reside for the next 50 years—with the
hydrocarbon side. How do we find more to meet the booming demand? And, how do we find
ways, through technology, process, and/or business-model innovation, to reduce the
environmental impact of hydrocarbon usage? Renewables is a rounding error when compared to
the 80 to 90 percent of the demand that hydrocarbons (i.e., oil, gas, coal—ah!, there it is the four-
letter word of energy) fill and will continue to fill for the foreseeable future.
We should and must invest in renewables and alternative energy for the future and there will be
some big wins there relative to investing. But with all the new money and attention rushing into
this small part of the sector, we are majoring in minors. The major focus should be how do we
deal with the continued need for hydrocarbons and how do we make this cleaner energy. Just to
put this in perspective, the world would be dramatically better off from an energy-supply
standpoint if we could find a way to improve recovery rates at oil and gas wells by 1 percent than
if we built a million new wind turbines. If we could find a way to reduce CO2 emissions from
automobiles by 1 percent it would be, from a quantitative and practical point of view, thousands of
times more positively impactful than increasing solar energy production by a hundred times.
For the investor, this line of thought would seem to make sense as well. One of the top funds of
any kind in the U.S. last year was First Reserve Corporation, and while they do not release their
results, we know they did very well. One gauge is that they were the top fee producer on Wall
Street last year. They also just raised an additional $7.8 billion to continue to do what they do
best—investing in the basic energy industry with a focus on making the good old hydrocarbons
industry more effective and efficient. These days the herd mentality of private-equity investors, in
my humble opinion, has them putting too much money into renewable/alternative energies and
not enough into fixing the core business of energy, the hydrocarbons. There will be a correction
but until such time, I think this is a fundamental problem with overall energy investing.
Not Enough of the New Brand of Innovators/Entrepreneurs
The nature of the energy industry is far different from that seen in IT, healthcare, biotech,
telecommunication, or any other field and it requires a new brand of innovator/entrepreneur which
is in short supply relative to demand. The lessons from other industries do not translate effectively
in many cases. The scope, scale, time horizon, interdisciplinary skills required, and the question
of how independent a new venture can be from the existing infrastructure are problems that, in
combination, are unique to the energy industry. But more on that in the next post…

3. Bill Aulet is senior lecturer at MIT’s Sloan School of Management and Managing Director of the
MIT Entrepreneurship Center.
Reprinted with permission for classroom use from Xconomy, August 6, 2007. On the web at
www.xconomy.com/
© Xconomy, Inc. XCONOMY is a registered service mark of Xconomy, Inc. All rights reserved.
Permissions license #XCO-14830-CNG

4. ENERGY, CLEANTECH, INVESTING
What’s Wrong With Energy Investing? Part II
Bill Aulet 10/15/07
I had the good fortune to receive a substantial amount of feedback on my first post on this subject
a few weeks ago. The feedback was productive and helped to clarify key points and in general
reinforced my conviction laid out in the Part I entry. In that article, I advanced the idea that while
“we should and must invest in renewables and alternative energy for the future,” to do so to the
exclusion of hydrocarbons means “we are majoring in minors.”
My point was simply that a more balanced approach to our energy investments should be
pursued that focuses as well on the hydrocarbon reality we face for the foreseeable future. While
we develop alternatives for the longer term, I argued, we must simultaneously invest in making
hydrocarbons a cleaner, more efficient form of energy—as well as energy efficiency initiatives.
“Just to put this in perspective,” I wrote, “…If we could find a way to reduce CO2 emissions from
automobiles by 1 percent it would be, from a quantitative and practical point of view, thousands of
times more positively impactful than increasing solar energy production by a hundred times.”
The post generated a lot of comments, but the numbers behind my argument are quite
compelling in the end, so I can’t say that my view has changed. My second installment on this
subject will be regarding a topic that is much harder to qualify. But I believe it is another
fundamental, yet often-overlooked factor that has to be dealt with more realistically if energy
investing is to succeed: our critical shortage of energy entrepreneurs. Clearly, money for energy
innovation is no longer an issue, but the entrepreneurs to effectively put that capital to work will
prove to be a system constraint.
People in many industries will whine and complain about how their industry is so unique and
more difficult than others, and so one has to sort through this groaning to find the truth. After

5. some close analysis, though, I have concluded that for energy, unfortunately, it is definitely true.
Energy entrepreneurship is much harder than entrepreneurship in other sectors, and I believe
most investors have yet to come to grips with this fact.
To explain my case, I will break the discussion down into some key points (which follow below).
These are general points about energy ventures and so may not apply specifically to individual
cases—but in aggregate I believe them to be true. They present a real challenge for the energy
sector today and into the near future.
All Entrepreneurs Are Not Alike, or Energy Entrepreneurs Are A Rare Breed Indeed
When new industries arise (e.g., computer hardware, software, telecom, internet, wireless,
medical, biotech), they have their own unique characteristics. Obviously, the technical talent
required differs greatly in these industries, but so do the entrepreneurial skills required.
Entrepreneurs are the change agents who commercialize the disruptive invention, and the
inventor (a technologist or some sort of visionary) needs them to create a meaningful new
venture. The entrepreneur is the great integrator and the propeller of the new venture.
An entrepreneur who is successful in software usually is particularly skilled at identifying market
opportunities and then executing a market-pull, customer-intimate, product strategy in a rapid
fashion—getting innovations to market quickly and then iterating to improve the products. These
skills are clearly transferable to Web 2.0 venture creation but are not as relevant, and, in fact,
may be counterproductive, in a biotech entrepreneurial venture. Biotech entrepreneurs need to
have a much more methodical approach over a longer period of time than Web entrepreneurs,
and they must possess a distinct ability to manage a company and a project through significant
regulatory obstacles. Similarly, as I will explain further, Energy Entrepreneurship is much different
than any brand of entrepreneurship we have seen to date. In fact, I would argue that being an
entrepreneur in the energy arena is unquestionably the hardest form of entrepreneurship by at
least one order of magnitude.
While it’s easy for me to say that energy entrepreneurship is harder than entrepreneurship in
other sectors, it’s a bit presumptuous of me to estimate how much tougher it is. I do so, however,
to make the point that there is a big gap between it and other fields that people are
underestimating right now. Let’s look at all the attributes or dimensions of expertise that an
Energy Entrepreneur needs:
1. Multi-dimensional knowledge of science and engineering disciplines. While the entrepreneur is
most often not the technologist or inventor, he (note: I use “he” and “his” in the gender neutral
sense) does need to understand the core scientific drivers of the market as well as the technology
or science drivers behind his various product offerings. For many new Energy Ventures that could
well mean possessing an understanding of aspects of chemistry, biology, engineering,
biotechnology, environmental science, computer science, and production systems, to name just a
few. Does that make energy entrepreneurship unique amongst technology sectors? To the
magnitude that such expertise is required, yes.

6. 2. Longer time frame. While there are exciting exceptions like EnerNOC (NASDAQ: ENOC), the
time frame required for an energy company to get traction is much longer than with companies in
most other sectors. Ann Winblad, the software venture capitalist, said at the recent MIT
Technology Review Emerging Technologies Conference that her companies took a long time to
bear fruit—an average of 6.2 years. While for Ann that may seem long, most energy companies,
even poster success stories like EverGreen Solar, can only dream of such short time horizons.
While the current enthusiasm for energy companies is compressing the time before they bear
fruit, the historical starting point (for good reasons) is significantly greater than 10 years. Indeed, if
the time required for energy companies to bear fruit could be reduced to an average of 10 years,
it would be a substantial improvement (Which raises a question as to how venture capitalists with
10-15-year funds can handle energy investing, but we must keep moving and stick to the main
topic…). The persistence and patience that Ann said is so difficult to find for typical software
startups is a fraction of what is required for energy companies. Biotech companies are similar in
this regard, but in general, energy is far outside the bounds of other sectors.
3. Bigger scope and scale from a financial standpoint. Just from a financial standpoint, a typical
energy new venture requires large amounts of capital. Investors have to make significant initial
bets and then be ready to follow them up with even bigger bets. While energy is not unique
(biotech, telecom, and now wireless—see Helio—come to mind as similar stories), it does add
another dimension of required sophistication.
4. Ability to deal with public perception and often-intense emotion. Energy is inextricably tied to
controversial natural resources, public safety, and environmental issues—not to mention
questions about economic impact. Part and parcel with this come public politics and emotion.
Some of it is clearly justified, and some of it is not. But, as ex-football coach Bill Parcells said, “it
is what it is,” and the energy entrepreneur needs to be adept at dealing with it. (See the
comments on my first post for evidence of this tendency.)
5. Adroitness in governmental affairs. Energy is not just emotional—it is politically charged with a
significant policy dimension. If one chases down the full value chain of energy-related products,
he or she will almost always find that they are directly affected by governmental actions. This
action can be regulation (such as utility rate setting in the U.S.), subsidies (e.g, U.S. or Brazil
ethanol production or Germany’s solar industry) or price setting (think OPEC). This is generally
something entrepreneurs (and venture capitalists) hate. It’s not unique to the energy sector: the
medical and biotech arenas have similar considerations. Strong capability and comfort in dealing
with government affairs relating to policy and economic issues is absolutely critical to the
successful energy entrepreneur.
Any one of these factors alone adds complexity to the already challenging task an entrepreneur
faces, but the challenge becomes particularly daunting when the compounding effect is
considered.

7. Numerous Routes for Attackers in Other Fields, Not in Energy
In addition to these traits, there is another important and challenging market condition that exists
in energy that is fundamentally different from other high tech industries today. It is the imperative
to effectively deal with (e.g., by partnering, collaborating, or at least neutralizing) the very people
you are trying to disrupt. To a much greater degree than in other sectors the existing hierarchy in
energy cannot be ignored.
Entrepreneurs thrive as “attackers” armed with disruptive technologies, business models, or other
ideas that they bring to bear against the “defenders”—specifically the entrenched, resource-
endowed hierarchy that is being threatened. Since the demise of IBM’s monopoly (Isn’t it hard to
fathom that less than 25 years ago the biggest concern IBM had was anti-trust suits because it
dominated the computer market so completely?), there have been multiple options for
technology-based entrepreneur-attackers to create new products and to get to market. There has
not been a dependence on a real or de facto monopoly on the defender side. It has been
relatively easy to bypass the defender completely, or use defenders against each other to get the
disruptive innovation to market.
For example, when Lotus came up with its breakthrough 1-2-3 spreadsheet, it did NOT have to
work with IBM to have it fit into IBM’s closed mainframe architecture. It could operate on the open
personal computer platform. Today, when Web 2.0 companies arise, there are no monopolies
controlling the infrastructure that they need to deliver their offerings to customers.
Contrast this to the entrepreneur who wants to harness wind energy in the Dakotas and finds that
there is no grid available to deliver the energy to the customer. To solve this problem would
require dealing with numerous de facto monopolies (including utility companies but also state,
local, and federal governments) that ultimately make the problem essentially intractable.
Energy entrepreneurs, especially those in energy production, don’t enjoy the luxury of having
numerous possible routes to market—because it is almost always the case (even though they try
to avoid it if they can and a few succeed) that they must deal with the existing hierarchy, which
controls the infrastructure.
This is a difficult challenge in general because existing successful hierarchies are very content in
homeostasis and resist significant changes (as Clayton Christensen details in The Innovator’s
Dilemma). In energy, it is even significantly more challenging because those controlling the
infrastructure are notoriously (and appropriately) conservative beyond what would be seen in
other industries. While renewable and energy efficiency entrepreneurs might complain about
utilities (sometimes with justification), they don’t have an option but to deal with them. Building a
parallel grid is not a viable option. They must find extremely creative ways of working with the
controllers of the infrastructure. Likewise, to be a player in the massive oil and gas industry,
entrepreneurs usually need to find a way to work with those who control that infrastructure. The
costs of the infrastructure are just so high in energy that having multiple options is much less
likely than in other industries. It is not simply a barrier that was created because someone “built a

8. brand”—there are huge costs required to build the infrastructure which cannot be overcome with
a marketing program.
In Summary, Thoughts and Action on the Solution
As Albert Einstein said, “seek simplicity and distrust it.” The model I am proposing is not relevant
for all energy startups, but it is for the majority of impactful new ventures that should and need to
be created. The energy entrepreneur has to be able to manage significant technical resources to
address the multidimensional science, engineering, and systems challenges which alone would
exceed the entrepreneurial requirements for any other industry. If that were all, it would be
enough—but it is not.
Like the most elite high-tech entrepreneurs, the Renaissance Energy Entrepreneur must have
these multi-disciplinary science and technology skills like an elite high-tech entrepreneur,
represented in the “Seed Innovators” circle in the model to the right. These include understanding
and building innovative business models to optimize monetization, as well as a keen awareness
of the standard successful new venture creation process. This must be managed over a long
period of time while simultaneously addressing the other two circles shown in the diagram—the
“Government” (policy and public relations) circle and the “Big Players” circle (representing the
need to diplomatically and effectively “massage the existing controllers of the infrastructure”). This
combination is what makes this an exponentially more difficult task. The Energy Entrepreneur
today who can do this is very rare indeed and in huge demand.
First, we need to openly recognize the challenge in front of us and not believe there are simple
solutions. I recently heard a very smart venture capitalist say that he plans to “take successful
entrepreneurs from other industries who want to give back now and put them in energy.” In
general, I find this approach sorely lacking. For a sports analogy (which is a bit of a stretch I
know, but it makes my point), transferring Michael Jordan’s extremely prodigious mental and
physical athletic talents from basketball to baseball didn’t really work—nor will it generally work in
energy entrepreneurship. The idea of transferring entrepreneurs from other industries and putting
them in energy may be our only option in the short term, but they risk getting whiplash as they
seek to master steep learning curves in multiple dimensions.

9. At MIT, starting in our “Energy Ventures” class, we seek to build this new renaissance energy
entrepreneurship capability by having multi-disciplined teams working off the model above. We
have selected a number of the most talented and passionate students at MIT from multiple
science disciplines and coupled them with top policy graduate students and MBAs with significant
energy background and put them into teams to work on building new energy companies. We are
watching the experiment with great interest. The full results are not in, but we do know that it is
much different and much harder than most people realize.
There are many other efforts to cultivate energy entrepreneurship in organizations such as the
MIT Energy Club, MIT Enterprise Forum, TIE (The Indus Entrepreneurs), and the like. We plan to
create a unified competition platform (the MIT Energy Prize) with significant support for
prospective energy entrepreneurs inside and outside our community to help audition and improve
their skills in a highly constructive, networking environment. It will be a learning process for
everyone.
While there is still much to learn, we do know that in time, through these efforts (and many
others), a new breed of entrepreneurs, the energy entrepreneurs, will arise to meet the
challenges of the energy sector. When that day comes, another major bottleneck to resolving the
energy challenge will be removed. But until then, we must recognize the limit in the system and
act appropriately.
Bill Aulet is a senior lecturer at MIT’s Sloan School of Management and Entrepreneur in
Residence at the MIT Entrepreneurship Center. He is currently teaching a new class at MIT
called Energy Ventures.
Reprinted with permission for classroom use from Xconomy, October 15, 2007. On the web at
www.xconomy.com/
© Xconomy, Inc. XCONOMY is a registered service mark of Xconomy, Inc. All rights reserved.
Permissions license #XCO-14830-CNG