Local Power

"…..all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed." The Declaration of Independence

What motivates people to change their habits? It is easy to forget that people don't adopt new technologies because they should. Change is painful. Even when you know it is good for you. Nobody experienced the pain of change more than our founding fathers who personally risked "our Lives, our Fortunes and our sacred Honor" for the Big Idea. The fear of change and the danger of inertia were so central to their experience that the idea made it into the Declaration of Independence.

I am on a quest for Acorn's next big idea. My search has been helped by two great books: Nassim Taleb's The Black Swan, The Impact of the Highly Improbable and Pip Coburn’s The Change Function: Why Some Technologies Take Off and Others Crash and Burn. The thesis of the Black Swan is that venture investors should be looking for opportunities with three characteristics: (1) totally unexpected (2) massive impact and (3) understandable in retrospect. Google was a Black Swan because nobody thought a search engine was a good business until its founders, Sergei Brin and Larry Page, linked searchers to advertising. Coburn's book helps shed light on why often just having the better technology doesn't matter. These two books offer good insights to how we at Acorn are going to "see around the corner" to the next Big Idea.

I think the next Big Idea might be linking electricity market deregulation to renewable energy and climate change to massively deploy energy efficiency and renewable energy systems under a system called Community Choice Aggregation.

Wall Street loves following the cow path. Lately, it has been rewarding developers of new energy technologies. If one solar energy cell company is well received by investors then Wall Street brings twenty five more. Coburn argues that investors are forgetting that technology, no matter how great and obvious, only gets adopted when the pain of a crisis exceeds the pain of adopting the technology. The Comverge load switch has been around for twenty five years. The recent breakthrough was the Virtual Peaking Capacity (VPC) contract that made it easy and compelling for the utilities to buy capacity not capital equipment from Comverge. Every commodity is a service waiting to happen. I think the really compelling "what's next" for energy is the implementers, more than the developers of new technology.

Really big crises like global warming, energy and water shortages can only be solved when public policy and consumer choice align to create a demand for technology. Wall Street is right that we need to reward the developers of great new technologies, but for the technologies to be deployed on a large enough scale to make an impact, the right public policy needs to be in place. I believe we have discovered a Black Swan at Acorn in our most recent investment, Local Power a pioneer in the deregulation of the $325 Billion US electricity market.

There is no more poignant example of necessary technologies needing support from public policy than the relatively recent adoption of the toilet and municipal sewer system. It is almost unthinkable to us today that until the 1850's it was common practice in cities like New York to dump bed pans off the balcony onto the street below. Finally the city fathers had to take action when persistent cholera epidemics were linked directly to the rise in population density and level of human waste in the streets. Toilets and indoor plumbing had been around since the time of King Minos of Crete but had not been adopted outside the palaces. Only a cholera epidemic in New York City forced the city council to mandate the installation of toilets and create the model for the modern sewer system which has been adopted around the world. It is important to note that this change came at the local, rather than the federal level. Cities lead and the Feds follow. The German city of Aachen pioneered the customer payback system that turned Germany into a solar powerhouse. The German federal government copied and helped spread Aachen’s success to other German cities.

Mankind is facing a perfect storm of unprecedented size. Global warming, massive underinvestment in our energy and water infrastructure, coupled with rapidly rising standards of living around the world are on a collision course. Just as a small group of influencers created the American Revolution, and mandated the first sewer system, we can expect a small group of visionaries will lay the foundation for the coming Global Energy Revolution. Whatever you think of his politics, Al Gore and a small group of savvy filmmakers deserve recognition for arousing the American conscience to the climate portion of the storm with their An Inconvenient Truth.

Another less well known but no less important revolutionary is Paul Fenn, the creator of Community Choice Aggregation (CCA) and founder of Local Power. There is a terrific video on CCA on Google made by an independent environmental action group, EON. CCA is a law that has been adopted by five US states and over one million industrial, commercial and residential consumers. CCA is a new model for energy markets that puts cities in charge of their energy future. San Francisco adopted CCA on June 29th in their bid to build the largest renewable portfolio of any city in the world. San Francisco's adoption of CCA is no empty unfunded mandate. As part of adopting CCA, they have authorized a $1.2 Billion H Bond authority to fund a public private partnership to support the achievement of a 51% Renewable Portfolio Standard (RPS) by 2017 that was authored by Local Power.

Community Choice is spreading to other cities across California like Fresno. A public private partnership between Cleantech Inc. and the city of Fresno have agreed to build a solar farm seven times the size of the world's biggest plant and double the largest planned farm. In a interview with CNN, Bill Barnes, CEO of Cleantech, said the scale of the Kings River Conservation District Community Choice Solar Farm will change renewable energy and make California the global leader for huge solar projects and replace Germany as the solar energy hub of the world. "We're pretty confident that solar farms on this scale are going to have an industry-changing impact," Barnes said. "We think it's the wave of the future. This scale of project, I think, creates a tipping point for renewable energy. We think the impact for it will be similar to the impact of the computer chip," which gained computing power once made on a large scale, Barnes said. "So too will economies of scale like the Community Choice farm drive down the cost of solar," Barnes said.

The single most important problem we face is the lack of institutions and incentives to change. We have the technologies today to improve the efficiency of our energy and water systems and to reduce our environmental footprint. Wall Street continues to pay huge multiples for better alternative energy technologies but they are failing to ask what is going to cause their adoption on a massive scale. Solar technology represents much less than 1% of total US electricity supply and relies on federal subsidies that have only been legislated for the next two years. Technologies like solar, biofuels and smartgrid solutions are disruptive and we know that entrenched monopolies never adopt disruptive technologies. The incentive for utilities has been to sell more electricity. To date they have no motivation to push technologies that make their networks smarter or help consumers consume less electricity. They don’t want to adopt renewable technologies because they don’t have any experience with these new assets. The regulators believe their job is to keep a lid on electricity prices, therefore they fight utilities putting in more capacity that will swell the rate base. The unintended consequence is that the average age of the equipment of our electric grid is over 40 years. We need to add new, competitive institutions and incentives like CCA to avert the worst effects of the inevitable perfect storm.

Paul Fenn and his partner John Cutler have convinced me that the solution to the perfect storm exists locally. Local Power's goal is to establish a new institution, an Energy Service Bureau, to help cities adopt CCA and implement intelligent systems that result in the implementation of energy efficiency technologies and foster renewable resources. A lot of smart people are calling for an Apollo program for energy technology by the Federal government. This is a really bad idea because energy is a local issue. The Midwest has coal and corn therefore they want clean coal and ethanol. The west has solar and geothermal. Why should Santa Fe or Tucson subsidize a broad ranging ethanol policy they won’t benefit from? Each locality should be free to make the decisions that match its local interests and assets.

This is an exciting time. Bill Galvin, former CEO of Motorola recently said "Electricity today is where telecom was thirty years ago. This is where the Motorola’s of tomorrow will come from."

The “Magic Trenton Moment” Finding the Formula

What is More Important? A Great Business Idea or a Great Jockey?

I believe investing in the right Jockey is more important than investing in the right business idea. I think there is a common misconception that entrepreneurs succeed because they have the “right vision.” Vision is essential - it gives you the energy and incentive to get started - but it is determination to succeed that creates happy endings. I believe the principle of determination is the most critical factor of success in business, sports or war.

As an investor you will improve your returns, and be a more valuable supporter of the Jockey if you view setbacks as inevitable learning experiences and invest incrementally as they find the correct formula. Consequently, I like to fund businesses with just enough cash to give the Jockey a fighting chance. I am always mentally prepared to make additional investments.

The Two Vital Qualities of the Jockey are Determination and Flexibility

When I invest in a new business I have learned to assume from the start that while I can be compelled by the entrepreneur’s vision to make an initial investment, we will probably not be successful executing on his first business plan. Most entrepreneurs are barely able to raise enough money to support their first product launch. Naturally, there is a huge amount of learning once they actually call on customers to generate revenues. There are very small differences between success and failure and that means the Jockey has to be capable of “broken field running.” This is a football term that describes a leader’s ability to improvise and act quickly in the split seconds after the snap, as they watch their game plan dissolve. It is the determined Jockey who can continue to believe in the business and muster resources after the inevitable multiple setbacks (aka learning) that ultimately rewards investors. It is the ability to attract incremental capital, combined with the determination to persist, that decides whether a business gets all the chances it needs to try and fail until ultimately, success is achieved. As Soichiro Honda, the founder of the car company so aptly said, “Success is 99% failure.”

George Washington Demonstrates the Rebels Can Win

Nobody had a bigger vision than America’s Founding Fathers. Yet General George Washington had a poor record of winning battles in the American Revolution. He does, however, rate among history’s best strategists for his dogged focus on his ultimate goal. Arguably the greatest test of his leadership was simply keeping his Continental army viable. It took charisma, cajoling and conviction to convince his hungry, cold, unpaid, dispirited troops to extend their enlistments. The crushing loss in the fall of 1776 at the Battle of Long Island left the viability of the Continental Army hanging by a thread as they retreated to the discomfort of Valley Forge. On Christmas Eve, 1776, George Washington made a decision to risk everything for a chance to turn the tide of the American Revolution in a surprise attack on the Hessian forces at Trenton. In his moment of desperation he found his formula. Instead of pitched land battles against the numerically superior and better-trained British forces, he used guerilla surprise techniques to win. As if God was throwing down the final gauntlet to test his determination, a severe winter storm came up as the troops were preparing to cross the river. General Sullivan sent word that the men's muskets will not fire due to being exposed to the storm all night. Washington sent word back to rely on the bayonet-"I am resolved to take Trenton." He knew what would happen if he failed to take Trenton. His army would dissolve and he would be captured and hung as a traitor to King George.

We all know what happened next. The battle was the first decisive American victory of the Revolution and would shortly be followed by another victory at Princeton. Washington turned the tide from desperate, waiting for the “axe to fall,” to aggressive victor, chasing the British forces from the Delaware River. It was the vital victory the colonials needed to see them through to the “day the world turned upside down” at Yorktown. (Source:http://www.doublegv.com/ggv/battles/Trenton.html)

Finding the Formula to Win

All successful entrepreneurs have their Magic Trenton Moment where everything clicks and they find their formula with which to succeed. What is not obvious to most inexperienced investors and entrepreneurs is that the Magic Trenton Moment takes longer to find than you could ever dream. Here are some interesting examples….

One of my greatest mentors, Gerry Rimer, the founding partner of Index Ventures www.indexventures.com, always told me “The secret to financial success is to find a profitable operation and repeat it as many times as possible.” I have learned that finding the formula of the profitable operation is as vital as it is elusive. Even Gerry found it elusive as he struggled (between golf games) for over a decade to find the formula for turning his marginal bond trading business into the number one performing venture fund in Europe, managing over $1 Billion. His formula was to partner with his sons to leverage his financial contacts with their vision of the potential of the Internet economy and their knowledge of California style venture capital to fill a need for providing capital to European entrepreneurs like the founders of Skype.

Safeguard Scientific invested $50 million trying to make Novell a viable portable computer company to help migrate its successful “One Write” manual accounting system to computers. They failed miserably. In a last ditch effort to save the company, Safeguard’s Board allowed the engineers several months of operating capital to market NetWare, their pioneering computer networking solution. At the “final” Comdex trade show in 1982, a retired computer industry executive, Ray Noorda, saw the importance of the development and convinced Safeguard’s Board to allow him to take over as CEO and invest $300,000 [of his own money] for a 30% stake in the Company. Within two months of Noorda’s taking the helm, the business was profitable and Safeguard ultimately realized a return of over $1 billion from their “failed investment.”
Source: http://www.whiteworld.com/novstory/surf00.htm

Steve Jobs bought Pixar from George Lucas in 1985 for $10 million. Over the course of a decade he sunk tens of millions of dollars into the company only to fail repeatedly. At first, he tried to make it a success as an animation hardware company, then a software business and failed. Jobs was desperate from personally being bled by losses at Pixar and Next. He was down to his last few million. He was determined to show the world his success at founding Apple was not a fluke. Finally, the brinksmanship paid off with an unexpected deal with Disney to produce “Toy Story,” the first full-length computer animated picture. Producing full-length animated pictures was not in any of Pixar’s business plans for the first ten years - it was the result of the desperate need to find a winning formula. In the process Pixar invented computer animation as an industry, eventually holding their partner Disney hostage, forcing the resignation of Michael Eisner, Disney’s CEO, and ultimately the acquisition of Pixar for $7.4 Billion by Disney in May 2006.
Source: iCon: Steve Jobs, The Greatest Second Act of the History of Business by Jeff S. Young and William L. Simon

I don’t want to underestimate the value of vision - it is crucial to getting started, staying motivated and capturing people’s imagination. However I am convinced that most investors and entrepreneurs would benefit from understanding these lessons from history demonstrating how long and how much it takes to actually achieve the “Magic Trenton Moment”.

I invite you to post any other great stories of determination snatching victory from the jaws of defeat.