NYT: Venture Capitalists Return to Backing Science Start-ups #energy #venture

It’s good to see capital coming back into energy and industrials. This time around, the money is smarter—focusing on smaller pilot projects, leveraging software, and partnering strategics with different return expectations:

After years of shying away from science, engineering and clean-technology start-ups, investors are beginning to take an interest in them again, raising hopes among entrepreneurs in those areas that a long slump is finally over. But these start-ups face intense pressure to prove that their science can turn a profit more quickly than hot tech companies like Snapchat and Uber.

Overall, industrial and energy start-ups attracted $1.24 billion in venture capital financing in the first half of 2014, more than twice as much as in the period a year earlier, according to statistics from the National Venture Capital Association. Still, investment remains well below peaks reached in 2008, when industrial and energy start-ups attracted $4.64 billion.

The full article can be found here.

R2 Companies—The Way We Work is Changing

I’ve always been interested in real estate and architecture. My original major was Civil Engineering, but after taking the introductory course and discovering that I’d have to learn way more about concrete than I ever wanted to know, I switched to Electrical Engineering. Ever since then, though, I’ve been trying to find ways to be involved—bought a rental during the boom (bad idea), built out our offices, and was super involved in building our house, which was a ton of fun.

Early in 2011, I was going back and forth between companies and wishing everyone could be in the same space. I was working with Matt Garrison and Marc Muinzer on Energy.Me already, and they had an extensive knowledge and great track record in real estate, so we started to look at buying a building for our companies and projects. We ended up settling on a building in Chicago’s West Loop neighborhood and moved everyone into the space—it was open plan with 18-feet ceilings, bright, and well designed. (It took some work, though, including the extraction of a giant fish tank supported by steel beams.)

With the success of our first property, we began to look at similar buildings. We’ve been lucky on timing, but there is a logic to our strategy. Our belief was—and is—that there is limited supply of loft office buildings, particularly open spaces with high ceilings and good windows. Often, you can buy these buildings at far below replacement costs—no one is going to build a brick and timber loft building today; it’s way too expensive. Thus, you’re buying with a margin of safety in a market with limited supply. Also, from a timing standpoint, by 2011 the banks had finally written down the values on these assets to a point they were ready to transact—most of what we bought was from banks or through bankruptcies.

I believe the spaces you live and work in have a significant effect on you mentally. Big, open, bright spaces make you happy and feel more creative, versus a dingy, dark office that makes you want to leave. There is no better problem to solve than your own, and this is probably the easiest way to find an opportunity—be a user and design for yourself. I knew what kind of office we wanted and figured if we want it, other people do as well. We’re nearly fully occupied everywhere we own and can’t find much else to buy, which is the best indicator. Our portfolio has grown to more than 600,000 square feet of mostly loft office, and we’ve assembled an awesome team including leasing, property management, construction management, and acquisitions.

Recently, there has been a shift in how we work, moving from isolated private offices or high-walled cubes to open spaces with more room to collaborate. More and more, the office is where you collaborate, and home or a coffee shop is where you get heads-down work done. There’s also a major trend from the suburbs to the city with some high-profile companies moving back to the city—we think this trend will continue. It feels like every week, someone launches a new co-working space or incubator, which admittedly makes me a little nervous. However, the trends are strong towards the city, towards our neighborhoods (mostly River North and the West Loop), and towards open, more collaborative spaces.

To me, Chicago’s West Loop feels like NYC’s Chelsea did ten years ago, and if it becomes anything close to that in the coming years, it will be a premier neighborhood. And if by some miracle the highway actually becomes a park, the neighborhood will be all the more desirable. From here, we think you’ll see these types of assets become more of an institutional-level asset class as the credit quality of the tenant mix slowly improves.

As for our office—finally—after three moves in the last couple of years, we’ve settled into a great new building (at least semi-permanently) at 1130 W. Monroe. The 35,000-square-feet concrete loft building used to be a manufacturing facility and has a 45-feet-tall atrium that is stunning. We’ve moved our companies there, filling the third floor, and have some exciting new companies moving onto the second floor within the next few months. Over the next year, we’ll build out the rest of the building into a large co-working space filled with companies whose work we admire and whose people we are excited to work with.

If you’re interested in an innovative, entrepreneurial, creative environment and are in the West Loop, hit us up, and we’ll give you a tour.

Price is what you pay; value is what you get. —Warren Buffet

Thiel: What Happened to the Future?

An excellent look at venture investing and technology. This along with Blake Masters’s course notes from Peter Thiel’s CS 183 class are a must read.

We wanted flying cars, instead we got 140 characters.

What Happened to the Future?
CS 183 Course Notes

Information vs. Real Assets—Linear vs Exponential Growth

I’ve been thinking about the difference between investing in information assets (computers, information) and investing in real assets (land, oil). There seems to be a fundamental difference between the two, and the effects are starting to manifest themselves in real ways.

The easiest way to understand the difference is to think about two investments. If I invested $2500 in a computer, I could get a really nice machine for that much today. I would have bought the ability to compute and share information. Fast forward 24 months, and that computer, according to Moore’s Law, would be worth half of what I paid for it (i.e., twice as powerful computers would be available). In essence, I bought a deflationary asset—that same $2500 would now buy me twice as much computing power. Compare this to what would happen if I bought $2500 of land, which is about an acre of pasture land in the US. At the end of 24 months, if history is any indicator, I would have modest appreciation (land has appreciated roughly 4% annually in the US). Thus investing in technology (as a store of value) is deflationary, and investing in real assets is inflationary (as a store of value). This is why Buffet won’t buy technology stocks—it’s a bad store of wealth over the long term.

What’s interesting is that the VC industry appears to be breaking along these two lines. Broadly speaking, looking at energy and technology, the venture industry is starting to break into two camps, as Paul Kedrosky recently showed. (Land in some ways is a good proxy for energy—it represents the ability to convert sunlight into calories—i.e., energy). What’s happened on the software side is that the cost of starting a software company has deflated so much that it’s virtually free, and thus the need for large capital investments in software has collapsed. In fact, if you need $10 million to start a software company right now, something is wrong—your scope is too big, or your architecture is bad. When the cost of starting a company is the same as a car, you don’t need venture capital, you need a couple of friends (preferably smart, strategic ones). So what we see is the emergence of “super angels,” or micro-VCs, and incubators that add a lot more value than capital. You take the investment from them because of their focus, their network, and their strategic value. Thus the future of the VC industry seems to be two camps—the Y-Combinators (boot camp and network) or IA Ventures (Big Data sector focus) versus the traditional large ($10-100 million investment) hard science investments.

So why this line between software and energy? And why can’t we take what we’ve learned and apply it to energy (information vs. real assets)? As Bill Gates has said, we’ve been fooled by the rapid success in IT:

But, as Gates put it last week, we’ve been fooled by the rapid success of IT, and “there are things that just don’t move forward.” The pace of chips and IT innovation “is rare,” said Gates. Unfortunately, some of those “things that don’t move forward” are fundamental platforms for the energy industry. For example, as Gates pointed out: batteries. “Batteries have not improved hardly at all. There are deep physical limits,” to this technology, he said.

There seem to be two reasons for this: miniaturization (potentially solvable) and physics (not so much). As Kurzweil outlined in Law of Accelerating Returns, one of the prerequisites for acceleration is the ability to miniaturize the technology. As both Vaclav Smil and Gregor Macdonald have written, all of our energy transitions to date have been one of increasing energy density—wood to coal to oil were all movements to more dense fuels. None of the current transitions and technologies are movements to a denser energy source. Maybe through better nuclear or sparked by open source biology we’ll have thousands of hackers attacking these problems, but anyway you cut it, rapid miniaturization seems unlikely. From Gregor Macdonald:

And here we find the largest hurdle of all. For, in humanity’s last two transitions, from wood to coal and then coal to oil, the trajectory each time was to a higher power density energy source. Energy transition is disruptive enough, but much less so when you are gaining energy density. And how do you suppose transition will be this time, going in the opposite direction, to lower density sources?

The second reason comes from the first law of thermodynamics—energy cannot be created or destroyed, only transformed. We can produce more information, we can only transform energy sources (we do have a nice stream from the sun each day though). From an interview with Vaclav Smil in the FT:

I have named this delusion Moore’s curse because (unlike the crowding of transistors on a microchip) it is fundamentally (that is thermodynamically) impossible for the machines and processes that now constitute the complex infrastructure of global energy extraction, conversion, transportation and transmission to double their capacity or performance, microchip-like, every 18-24 months. It’s a zero sum game… (can not be created or destroyed unlike information) – In other words, you can’t create energy, you simply move it around (fossil fuels, for example, simply release energy that has been stored and concentrated over millions of years); you can’t avoid wasting some energy when you move it around; and you can’t stop using energy altogether.

So let’s look at two technologies that are often talked about: the smart grid and algae. In the case of the smart grid, we’re talking about moving energy around more efficiently—there will be gains in robustness and availability, but it doesn’t create any energy. What’s more applicable is Metcalf’s Law (i.e., the strength of a network is proportional to the number of nodes), so we’ll have a better network and may save energy, but it won’t lead to magnitudes more energy.

Algae gets a bit more interesting because we can apply information technology to the engineering of the cells now through biotech. So we can leverage information technology to sequence, test, and even write the DNA for new cells that can produce fuel. The issue will be one of scale—when you cross the threshold from a cell to scaling it in any size, you are constrained by all the messy real world laws of thermodynamics. It seems cellulosic technologies, algae, and various other technologies all break down when it comes to scale because of this. The challenge for all these technologies seems to be crossing from an informational asset to a real asset.

Investing in real assets—land and energy projects—then is fundamentally different than investing in software. One seems to inflate while the other deflates, one is constrained by physics while the other seems to be unbounded but full of outliers. This isn’t to say one is a better investment than the other, just that they are fundamentally different, and it appears that the venture industry is breaking along these lines. Technology certainly isn’t a bad investment, but when you make such an investment, you better run and run fast because it deflates. The corollary is don’t expect a Google in energy anytime soon—it’s not going to scale like information technology. To put it another way, technology investments have fat tails, but it’s unlikely that energy will.

This isn’t bad at all—as a consequence of the deflation in information technology (or flattening), we’re seeing a shift in focus. On the software side, networks have basically deflated to the physical floor of the speed of light, and each of us has more computation power then we’ll probably ever need just on our desktops, and thus start-ups are attacking the problems of visualizing and processing this massive data set. If the venture industry turns back to more traditional researched-based hard science—biotech and energy—this seems like a good thing. This is where the big challenges and opportunities are, but they are fundamentally different problems.

Maybe a more accurate way then to describe the world is that it is informationally flat and physically lumpy.

O’Reilly: Stuff That Matters (2009)

Tim O’Reilly on working on Stuff that Matters:

Some of you may end up working at highflying companies. Some of you may succeed, and some of you may fail. I want to remind you that financial success is not the only goal or the only measure of success. It’s easy to get caught up in the heady buzz of making money. You should regard money as fuel for what you really want to do, not as a goal in and of itself. Money is like gas in the car — you need to pay attention or you’ll end up on the side of the road — but a well-lived life is not a tour of gas stations!

Whatever you do, think about what you really value. If you’re an entrepreneur, the time you spend thinking about your values will help you build a better company. If you’re going to work for someone else, the time you spend understanding your values will help you find the right kind of company or institution to work for, and when you find it, to do a better job.

Don’t be afraid to think big. Business author Jim Collins says that great companies have “big hairy audacious goals.” Google’s motto, “access to all the world’s information” is an example of such a goal. I like to think that my own company’s mission, “changing the world by sharing the knowledge of innovators,” is also such a goal.

Don’t be afraid to fail. There’s a wonderful poem by Rainer Maria Rilke that talks about the biblical story of Jacob wrestling with an angel, being defeated, but coming away stronger from the fight. It ends with an exhortation that goes something like this: “What we fight with is so small, and when we win, it makes us small. What we want is to be defeated, decisively, by successively greater things.”

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