A national laboratory of the U.S. Department of Energy

Office of Energy Efficiency & Renewable Energy

National Renewable Energy Laboratory 

Innovation for Our Energy Future 

Enhancing Commercial 

Outcomes from R&D 

A Framework for a Public–Private 

Partnership to Increase the Yield of 

Federally Funded R&D Investments and 

Promote Economic Development 

L.M. Murphy 

Manager, Enterprise Development Programs 

National Renewable Energy Laboratory 

P. Jerde 

Executive Director 

Robert H. and Beverly A. Deming Center for 

Entrepreneurship, Leeds School of Business 

University of Colorado, Boulder 

L. Rutherford 

Venture Partner 

Vista Ventures 

R. Barone 

2008 MS/MBA Candidate 

Department of Environmental Studies and Leeds School 

of Business 

University of Colorado, Boulder 

Technical Report 

NREL/TP-110-40463 

May 2007 

NREL is operated by Midwest Research Institute ● Battelle Contract No. DE-AC36-99-GO10337 
National Renewable Energy Laboratory

1617 Cole Boulevard, Golden, Colorado 80401-3393 

303-275-3000 • www.nrel.gov 

Operated for the U.S. Department of Energy 

Office of Energy Efficiency and Renewable Energy 

by Midwest Research Institute • Battelle 

Contract No. DE-AC36-99-GO10337

Technical Report 

NREL/TP-110-40463 

May 2007 

Enhancing Commercial 

Outcomes from R&D 

A Framework for a Public–Private 

Partnership to Increase the Yield of 

Federally Funded R&D Investments and 

Promote Economic Development 

L.M. Murphy 

Manager, Enterprise Development Programs 

National Renewable Energy Laboratory 

P. Jerde 

Executive Director 

Robert H. and Beverly A. Deming Center for 

Entrepreneurship, Leeds School of Business 

University of Colorado, Boulder 

L. Rutherford 

Venture Partner 

Vista Ventures 

R. Barone 

2008 MS/MBA Candidate 

Department of Environmental Studies and Leeds 

School of Business 

University of Colorado, Boulder 

Prepared under Task No. 1100.1000 
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recommendation, or favoring by the United States government or any agency thereof. The views and 

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Preface 

This paper investigates an endemic problem facing technology transfer organizations (TTOs) 

such as those within the U.S. Department of Energy (DOE) and its national laboratories, as well 

as those within universities and state organizations: The level of technology maturation, product

conceptualization, market validation, and human capital required to raise private sector financing 

and drive commercialization is often too high for technical founders to reach without an industry 

veteran as a partner.

Although our focus in this paper is on clean energy technologies, the same problems exist for a 

wide range of other technologies. Moreover, these problems are also often apparent and vexing 

for many of the private sector R&D partners of these laboratory and university organizations. 

Most solutions focus on further R&D without directly engaging private sector financiers and 

markets, or more recently, on “beefing up” current technology transfer efforts to help technology 

founders and innovators make their enterprises resemble, and therefore connect with venture 

capital organizations. We believe however that the best answer may be a paradigm shift in how 

we think about closing the gap between ideas and commercially feasible opportunities. We 

present a solution framework for a public-private partnership, which we believe can ultimately 

be quite robust in addressing the problem while being easily adaptable to the specific needs of 

various financiers and market forces. This belief is based not only on our own assessment of the 

situation but on many discussions with venture capitalists and other financiers. 

Unlike other public-private partnerships, we have focused on early and seed ventures, which 

correspond more closely to both the technologies coming out of the labs and the clean energy 

venture community’s need for more robust early-stage company development. Thus, the 

proposed framework helps to reduce risk for the private sector investor while both enhancing 

commercial outcomes and increasing the yield of federally funded R&D investments. 

L.M.(Marty) Murphy 

Paul Jerde 

Lisa Rutherford 

Rich Barone 

 iii
 iv
TABLE OF CONTENTS 

List of Figures........................................................................................................................................................... vii

List of Tables............................................................................................................................................................. vii

List of Acronyms...................................................................................................................................................... viii

Executive Summary.....................................................................................................................................................1

Introduction .................................................................................................................................................................5

The Funding Gap.........................................................................................................................................................7

Characterizing Needs within the Gap.......................................................................................................................7

Investor Perception of Risks in the Valley, Including the Gap .................................................................................9

Should More Companies Really Get Through This Gap Region? ..........................................................................12

Understanding and Matching up with Investor Needs Is Crucial...........................................................................13

Upward Trends in Clean Energy Funding – Though Not Focused on Start-Ups...................................................15

What is Being Done Now by the States and the Federal Government ....................................................................16

Filling the Commercialization Pipeline & Creating Value ....................................................................................17

A Framework for a Novel Public-Private Partnership ...........................................................................................17

Framework Overview .............................................................................................................................................17

The EIR Role...........................................................................................................................................................18

Resource Network ...................................................................................................................................................18

Management and Governing Roles.........................................................................................................................19

Funding...................................................................................................................................................................20

Technology Access/Filling the Pipeline..................................................................................................................20

Synopsis of ESIC Benefits.......................................................................................................................................20

A Special Opportunity...............................................................................................................................................21

Conclusions ................................................................................................................................................................23

Glossary......................................................................................................................................................................25

References ..................................................................................................................................................................26

Appendix A: Getting from Discovery to Commercial Success ..............................................................................28

Appendix B: Key Characteristics & Perspectives of Public and Private Sector (primarily VCs) Investors.....30

Appendix C: The Clean Energy Alliance. Incubator Survey Summary...............................................................31

Appendix D: The NREL Industry Growth Forum. Summary of Investment Results for Presenting Companies 

at the NREL Industry Growth Forums 14-18.........................................................................................................33

 v
Appendix E: Public-Private Partnerships to Reduce Risk.....................................................................................36

State Initiatives .......................................................................................................................................................36

University Initiatives...............................................................................................................................................38

Federal Programs for Technology Maturation.......................................................................................................38

Hybrid Venture Funds. ...........................................................................................................................................40

Looking Beyond the United States..........................................................................................................................41

Appendix F: Case Study of Successful Gap Funding in Wisconsin.......................................................................42

Appendix G: Other Transactions Authority and EPACT 2005 ............................................................................43

Appendix H: A Brief Survey of EIR Programs in Practice ...................................................................................45

Appendix I: Example Key ESIC Participants and Corresponding Responsibilities ...........................................48

 vi
List of Figures 

Figure 1. A novel public-private partnership for early-seed and seed ventures focused on 

technology and product maturation, and market validation.......................................... 3 

Figure 2. The cash flow valley of death as a function of development stage (time) with typical 

investors shown for the various stages.......................................................................... 7 

Figure 3. US Energy VC Investments, 1995 – 2005 in Millions of US Dollars. 

Source: Nth Power...................................................................................................... 15 

Figure 4. A novel public-private partnership for early-seed and seed ventures focused on 

technology and product maturation, and market validation........................................ 17 

Figure 5. A Robust Resource Network with both traditional and non-traditional financial 

partners........................................................................................................................ 18 

Figure 6. ESIC and its Advisory and Director Boards............................................................... 19 

Figure 7. Total Investments Received........................................................................................ 33 

Figure 8. Investments by Technology Type............................................................................... 34 

List of Tables 

Table 1. Typical Rates of Return Sought by Venture Capital Investors..................................... 9 

Table 2. Qualifying Requirements for the Next Round of Financing and Key Processes 

Involved for Specific Financing Rounds .................................................................... 11 

 vii
List of Acronyms 

ANT Albany NanoTech 

ATDC Advanced Technology Development Center 

ATP Advanced Technology Program 

BOD Board of Directors 

CAB Capitalization Advisory Board 

CalCEF California Clean Energy Fund 

CE clean energy 

CEA Clean Energy Alliance 

CEC California Energy Commission 

CIA Central Intelligence Agency 

Collaboratory a cooperative effort between NREL, CU, CSM, and CSU 

CRADA cooperative research and development agreement 

CSM Colorado School of Mines 

CSU Colorado State University 

CU University of Colorado at Boulder 

DARPA Defense Advanced Research Projects Agency 

DoD U.S. Department of Defense 

DOE U.S. Department of Energy 

DU Denver University 

IRR internal rate of return 

M&A mergers and acquisitions 

MTC Massachusetts Technology Collaborative 

NASA National Aeronautics and Space Administration 

NDA non-disclosure agreement 

NREL National Renewable Energy Laboratory 

PG&E Pacific Gas & Electric 

SBIC Small Business Investment Corporation 

SBIR small business innovation research program 

SSBIC specialized small business investment corporations 

STTR Small Business Technology Transfer Program 

TSAB Technology and Sponsor Advisory Board 

TT technology transfer 

TTO Technology Transfer Office 

T&PMV technology & product maturation and market validation 

USDA U.S. Department of Agriculture 

VC venture capitalist 

 viii
Executive Summary 

Purpose. The purpose of this paper is to explore a new model for public sector (i.e., federal and 

state) investors to further enhance the productivity of their clean energy (CE) research and 

development (R&D) investments by accelerating the commercialization of these technologies. In 

addition to moving valuable technologies into products, a robust commercialization program can 

enhance economic and community development by establishing a clean energy infrastructure in 

the CO front range region. 

Thus, the intended audience is primarily forward-thinking public sector financiers [e.g., U.S. 

Department of Energy (DOE) and states, in particular CO] who sponsor R&D in the national labs 

and universities. 

 

Background. CE technologies are increasingly becoming of interest for a rapidly growing 

number of applications. Within the public sector, energy investors (e.g., federal and state) are 

attracted to the potential opportunity to spur economic development and job creation, provide 

improved energy security, and help alleviate environmental concerns. 

At the same time, the private sector is demonstrating increased demand for novel CE solutions. 

According to the research firm New Energy Finance, total investments in clean energy 

technologies topped $70.9B in 2006, with $7B coming from private equity and venture capital 

investments. This private sector interest is excellent news for public sector groups hoping to see 

their R&D efforts turned into commercially-available products. 

In addition, concern about the environmental impacts of conventional energy sources, coupled 

with a growing outcry for “energy security” has hastened the alignment of interests among the 

public sector, research laboratories, and entrepreneurs with regards to CE. Further, public 

support has driven favorable state and federal legislation promoting CE and entrepreneurs 

sensing new opportunities have begun to take notice. On the other hand, R&D laboratories and 

their public sector sponsors are now being challenged to improve their technology transfer 

processes and commercialization rates to take advantage of the associated opportunities. 

The Challenge. A challenge remains in how to transition technologies from labs to fundable 

enterprises. Currently, there is good support for R&D, and there is plenty of private sector money 

(e.g., venture capital) available. Ironically, however, there is a relative dearth (and gap where 

technologies can be stranded) of resources available to attract private sector financing for 

transitioning technologies out of the lab. Solving this problem will enable public sector investors 

to enhance the productivity of their CE R&D investments and generate an increased number of 

lower-risk/higher-quality opportunities for the private sector investment pipeline. 

Private sector financiers invest in market-focused businesses first and foremost, not in 

technology per se, and they have a number of risk-reducing early prerequisites that are strong 

indicators of potential market success. For venture capitalists (VCs), the key ingredients for 

success include an exemplary management team, robust markets, clearly demonstrated superior 

technology, market-driven products, and finally, good liquidity and returns for the investment. In 

 1
today’s CE environment, the biggest needs are for technology and product maturation as well as 

market validation (T&PMV). If these key risks remain unaddressed properly private sector 

investors (even sophisticated angels) will be reticent to fund the commercialization of these 

technologies. 

One common theme that is addressed in a number of different ways is the need for 

entrepreneurial businesses (and their R&D sponsors), to tailor their companies from inception 

toward the type of capital investment they anticipate needing, whether it is venture, angel, 

strategic industry, project, or any other type or combination within the financing food chain. To 

whit, using an integrated approach that pays particular attention to the anticipated full spectrum 

of requirements from investors for the venture, even in the early-seed and seed stages, is 

particularly important. Engaging the anticipated private sector partners early on1

 for these 

entrepreneurial ventures, as well as obtaining preferable financing and market trajectories, will 

help reduce risks in many important ways, including preventing poorly thought out early 

financing rounds from adversely affecting the ability to obtain necessary financing in later 

stages. 

What Is Being Done Now to Bridge the Gap. Resources are available from a number of 

valuable state and federal programs, which are described in the report. These programs address 

some of the key stumbling blocks in this funding gap area. However, state and federal programs 

are often only sporadically available, and the amounts of funding available for investments are 

small, especially when the wide range of technologies they address are considered. 

Additionally, research laboratories and universities have Technology Transfer Offices (TTOs), 

but these offices are not adequately staffed with the expertise to start companies. It is also the 

case that their incentives are not aligned with the practice of starting a company; more often, the 

objective of such an entity is focused on generating intellectual property for licensing rather than 

commercializing the technology through the creation of a new entity. 

The Public-Private Partnership Model. While we have not seen a public-private partnership 

model that specifically addresses the early stage funding gap, we can look at other successful 

models that have been set up to promote innovation at other parts of the commercialization 

chain. What none of these groups has been able to do is show a robust track record of spinning 

out successful technologies from government or academic labs. 

Our early strong success with quality business incubators and the National Renewable Energy 

Laboratory (NREL) Industry Growth Forums2 indicates that given the right environment, the risk 

to investors can be reduced substantially, which enables more CE technology ventures to reach 

their market potential or at least assures an adequate opportunity. 

Our challenge is basically to create an earlier-stage public-private model—To draw from the 

existing public-private VC model, but also to pull from the best practices of firms and investors 

who focus on spinning technologies out of national labs. 

 

1

 See Stevens and Burley (2003), and Murphy and Edwards (2003). 

2

 See Appendices C, and D. 

 2
We propose an approach that is strongly driven by private sector investor requirements and 

insights (e.g., their often excellent innate sense of markets). By building on and leveraging the 

expertise of the private sector early in the commercialization process, technologies with high 

commercial potential—which might be stranded when leaving the lab due to a lack of funding 

opportunities—can be identified and aligned more appropriately with the full range of needs for 

the anticipated investors. 

A Novel Public-Private Partnership, to Address T&PMV. To best meet the needs for 

T&PMV, as described above, we propose a novel, public-private partnership that builds on best 

practices already established in prior government, non-profit, and private sector investment 

processes. However, we propose a model that is not unique by is designed to specifically meet 

the needs of the CE sector: Getting good ideas out of labs and universities, and getting them to 

the stage where they can be commercialized. 

The ESIC Model. In particular, we propose a model where a not-for-profit investment 

corporation is formed and funded by government and other sources through a variety of 

mechanisms such as grants and the EPACT’s3

 “Other Funding Authority,” as well as state 

allocations such as the recent 

prototyping legislation in CO.4 The 

investment corporation will be focused 

on forming and nurturing new forprofit companies based on promising 

innovative technology platforms 

coming out of the labs and u

The early seed investment corporation 

for clean energy, called ESIC, would

support T&PMV in newly formed 

profit companies which are being led 

and directed by highly qualified 

entrepreneurs-in-residence (EIRs).

niversities. 

for-

 

he ESIC will essentially be a portfolio of start-ups, each of which is developed, led, and 

ly 

ir 

SIC, as explained more fully in the body of this report, provides a way to engage federal, nones. 

 

Figure 1. A novel public-private partnership for early-seed and 

seed ventures focused on technology and product maturation, 

and market validation.

T

matured by a separate individual, largely autonomous, EIR. Any profits that would normal

accrue to ESIC through cashing out equity positions by the EIR companies, or EIR-Cos (at the

later stages), will be reinvested in new EIR-Cos with the goal of ultimately making ESIC self 

sustaining. Oversight and guidance will be provided by a board of directors and an eclectic 

capitalization advisory board, along with a technology and sponsor advisory board. 

E

federal, and laboratory investors, as well as a host of private sector partners and investors (via a 

robust resource network) in the commercialization of laboratory and university technology 

innovations. It can also build on and leverage laboratory and university expertise and faciliti

3

 Title X of the Energy Policy Act of 2005 (EPACT), Section 1007. 

4

 Reference Colorado HB 1322, 2006 

 3
Concluding Thoughts. The model discussed above is a public-private partnership that addresses 

an as yet unmet need for technology and product maturation, as well as market validation for CE 

technologies coming out of the labs and universities. The model builds on the success of the 

government-sponsored VC model, which has proven that public-private partnerships can provide 

an incentive for small technology companies to develop government-specific technologies, and 

moves that public-private partnership idea to an earlier stage in the development pipeline. 

We specifically mirror the best practices of firms that have spun technologies out of government 

and university labs, choosing an EIR approach that focuses on commercial markets and is wellmatched to these nascent technologies. This approach uses a robust resource network to bring a 

wide spectrum of expertise to bear on the unique problems with these very early investments. 

Moreover, the suggested approach puts investment decisions unambiguously in the hands of 

private sector investors and entrepreneurs, who are driven by marketplace success and will 

therefore have proper incentives to develop commercial opportunities, which in turn, benefits the 

public. Additionally, this approach builds additional CE technology expertise within the financial 

community which the public sector can more easily access. 

The recommended EIR/ESIC approach provides a unique way for the national labs and 

universities to improve their technology transfer and most importantly to enhance regional 

economic development by creating CE-based jobs and businesses, as well as encourage a CE 

economic cluster in the CO Front Range. 

Finally, the ESIC model represents a new paradigm in engaging, leveraging, and integrating 

private sector investor insights and feedback, especially those related to market readiness and 

relevance of the various technologies that are being created by the labs and universities. It has 

the potential to be a powerful commercialization tool for use by a much broader range of public 

sector technology programs as well as for individual technology innovations. 

 4
Introduction 

CE technologies are increasingly becoming more market competitive in a rapidly growing 

number of applications; and their costs are still coming down, while conventional sources are 

increasing in cost. In addition, the high cost volatility for conventional energy sources enhances 

the value of alternatives. As a result, CE technology-based companies, which have a strong 

market focus, are becoming increasingly attractive to investors. Further, albeit starting from a 

small base, CE is one of the fastest growing areas in the investment community. Not only have 

the number of investments and dollar volume increased rapidly, but also recent investment 

forums have highlighted the fact that very strong and experienced management teams are being 

recruited and formed around CE technology-based ventures. 

Still, while technology innovation remains one of the key catalysts behind sustainable energy 

market growth, public sector financiers (both at the state and federal levels) know that only a 

very small fraction of the technologies coming out of the lab5

 is being embedded in products that 

reach the commercial marketplace. Also, the number of deals financed in the private sector is 

still relatively quite small. Although we discuss this issue more fully in Appendix A, an 

introductory review of available government and private data indicates that as many as 3,000 

ideas, leading to about 100 patents can be needed to attain one commercial success. 

While there will undoubtedly always be a relatively small number of commercial successes 

compared to a much larger number of new innovations, there is clearly is room for improvement, 

and public sector investors would like to see the yield on these technology investments 

increased. Moreover, to sustain the growing investment interest in CE, public sector investors 

know that a sufficient pipeline of good deals must be made available. Here “good” means that 

the risk-adjusted returns on such investments are at least comparable to other investment 

opportunities that they may have. Our sense is that both of these issues need attention and that 

they can be adequately addressed while reducing risk to private sector investors, specifically by 

providing significant value through technology and product maturation, along with market 

validation. 

As a prelude to this discussion, one final contextual issue should be mentioned. There are major 

differences in perspectives and objectives between public and private sector investors.6

 These 

differences impact significantly where and how these investors allocate the bulk of their 

resources, and these differences greatly influence how the two sectors can work together. For 

instance, public sector investors have a strong technology focus7

 while private sector investors 

have a strong business and market focus—they invest in businesses with market-driven products, 

not technology. Moreover, even within the spectrum of private sector investors, differences must 

 

5

 Here “lab” refers to organizations like NREL, the California Energy Commission, and to universities, as well as 

other research labs. 

6

 See Appendix B to get a clearer picture of these different perspectives, for example, when looking at public sector 

investors and in this case VCs. 

7

 However, the public sector does keep there eyes on macro-level markets in meeting public good needs. 

 5
be considered; e.g., each investor type along the pathway to commercialization will have a 

different risk tolerance.8 

We use the term entrepreneurial company (or venture), to mean an early-stage business entity 

that has a strongly focused intent to embed its technology within a market-focused product and 

business, and to ultimately attain success in the marketplace. Without the marketplace success, 

public sector technology investments lie fallow. 

Where do these entrepreneurial ventures come from? In some cases, such an entity already exists 

in its early formative stages and has worked with the labs as a collaborative R&D partner [e.g., 

with NREL, the California Energy Commission (CEC), or Albany NanoTech (ANT) at the state 

level]. In other cases, small entrepreneurial companies may be formed around key licenses, 

which were created and owned by the labs.9 In our subsequent discussion, we assume that such 

a market-focused business entity exists or will be formed around the technology coming out of 

the lab as a first order of business. 

 

8

 For example while VC’s accept some technical risk, project financiers will accept none. See Goldman et al. (2005). 9

 Of course direct licensing from the lab or university is possible in some cases with an existing, well-established 

company for exiting or new product lines. 

 6
The Funding Gap 

Only a very small fraction of early-stage technologies are embedded in products that reach the 

commercial marketplace. One of the problems, as depicted in Figure 2,10 shows that early in the 

process, public sector funds may be available,11 and that later in the process private sector 

investment becomes available if the business continues to evolve effectively. Further, after the 

business becomes cash-flow positive, project and other forms of debt and equity (e.g. expansion 

capital) become more available. However, after the technology leaves the lab, but before it can 

qualify for traditional venture funding, there is typically a “gap” in equity and venture capital 

funding availability as depicted by the cross-hatched area. 

Characterizing Needs within the Gap 

Part of the problem is that there are major differences between the perspectives and objectives of 

public and private sector investors.12 These differences impact significantly where and how these 

investors allocate the bulk of their resources. For instance, public sector investors have a strong 

technology focus13 while private sector investors have a strong business and market focus. As 

such, when technologies leave the lab and enter this gap region, the key stumbling blocks to 

accessing capital are market risks 

associated with underdeveloped (and 

often poorly defined) commercial 

plans. Thus, there’s a need for 

technology and product maturation as 

well as market validation. More 

specifically, these needs can be 

described as follows: 

03206803

Cash Flow

“Valley of Death”

Cash flow

Time

Technology

Creation

Market Focused

Biz and Product

Development

Early 

Commercialization

Venture Stock owners

Capitalists

Entrepreneur, Seed

Angel Investors

DOE/NREL

and States

Public sector Private sector

Typical,

primary

investors

Gap

Project

Financiers

Expansion 

Capital

• Technology maturation – the need 

to have both scale-up and 

performance verification 

information on the technology that 

will make investors and other 

strategic partners more comfortable 

with the concept and its ability to 

Figure 2. The cash flow valley of death as a function of perform as it did in the lab. 

development stage (time) with typical investors shown for 

the various stages. 

 

10 Figure 2 is for illustrative purposes and depicts the situation that many CE companies face. Details in terms of 

timing and kinds of investors can vary quite a bit; for example, with different kinds of technologies, or even from 

deal-to deal. 

11 Product development and marketing efforts are specifically not allowed, particularly in federal R&D efforts. 

12 See Appendix A to get a clearer picture of these different perspectives, for example, when looking at public sector 

investors and in this case VCs. 

13 However, the public sector does keep their eyes on macro-level markets in meeting public good needs. 

 7
• Market validation – the need to understand and demonstrate that there is, or can be, strong 

markets for the technology, along with a strategy for reaching those markets, may require a 

number of staged markets including beachhead markets (where technology validation and 

market credibility are established). These beachhead markets will often look considerably 

different from the long-term markets, and they are crucial in gaining market experience and 

acceptance for the technology. Clearly market awareness is needed before market-focused 

products can be developed. And an understanding of the competition in the marketplace is 

needed. 

• Product maturation – the need to transform the technology into early market-driven, marketready products including prototypes specific to initial markets and “whole product” solutions. 

This often requires significant time and money14 because market-focused products based on 

technologies emerging from the labs are typically insufficiently developed / demonstrated to 

attract commercial investment. Full scale-up and manufacturing issues also need to be further 

addressed. Finally, to meet user needs, a product may require certification (e.g., through the 

UL [Underwriters Laboratories] process) consistent with industry practices. Strategic 

partnerships can be crucial here, especially for building and manufacturing prototypes as well 

as providing verification testing for specific markets. 

Concurrently, in this process of developing more mature technologies and early market-focused 

products, it is important to develop an understanding of, and address the likely interface 

requirements of the essential, subsequent private sector investors and anticipated strategic 

partners. This includes the need for both the entrepreneur and the public sector sponsor to 

understand, for alignment and strategic positioning purposes, the needs of all anticipated 

investors. This is important whether the business plans to take the technology-based product to 

the market itself, or by forming an alliance and eventual merger or acquisition (acquisitions are 

the most common exit strategies for investors in small technology businesses, whether venture 

backed or not).15,16

Another important reason for the new venture to develop realistic financing expectations and 

alignment with future investor needs is to help prevent the early financing rounds from adversely 

affecting the ability to obtain later financing rounds. As a part of this interactive process, 

entrepreneurs (and their early-stage sponsors) should recognize the rigorous tests that later 

investors will put them through before writing checks. And each investor type along the 

commercialization path will have different requirements and lower tolerance for potential risks. 

 

14 See Moore 1995. 15 Considering both mergers and acquisitions (M&A) together, an M&A is about 5-10 times more likely to occur 

than an initial public offering. 

16 The British use the term agency risks, where incomplete alignment between investor and investee interests exists. 

At least one writer cites this as a major risk for high technology investments. See Reid and Smith (2001). 

 8
Investor Perception of Risks in the Valley of Death, Including the Gap 

It is interesting to see how investors view the risks in the valley, while noting that they must be 

compensated more for taking on more risk. Thus for earlier-stage businesses, they will require a 

commensurately higher internal rate of return (IRR). In this regard, Table 1 below provides the 

level of IRR sought by venture capital investors as a function of the business development stage. 

Referring back to Figure 2, the gap we are discussing corresponds to the seed and very early-start 

up stage where the required IRR is 50%-100%.17 Many investors believe that they have not yet 

seen the required returns (there are some exceptions of course) to justify these early stage 

investments. 

Table 1. Typical Rates of Return Sought by 

Venture Capital Investors 

Note that most VCs want to hold their investments 

for between three and seven years, which would 

correspond to second stage in this table, and a 30%-

40% IRR on their investment.18 First-stage investors 

are the so called early-stage VCs. High risk and the 

need to require very high discount rates are why 

venture folks typically don’t want to invest at the 

seed stage, and why it is often prohibitively risky for 

most entrepreneurs as well (they risk losing way too 

much of their business in a short amount of time). 

Moreover, it can easily be seen that a small amount 

of patient investment in technology and product 

maturation can potentially have a big impact while 

helping the company preserve ownership. 

Stage Annual 

IRR,%

Typical Expected Holding 

Period (yrs)

Seed and 

Startup

50-100% 

or more

> 10

First stage 40-60 5-10

Second stage 30-40 4-7

Expansion 20-30 3-5

Bridge and 

mezzanine

20-30

1-3

LBOs 30-50 3-5

Turnarounds 50+ 3-5

Table I – Typical Rates of Return Sought by 

Venture Capital Investors 

(Timmons. 1999, p465)

Given the stage entrepreneurial ventures are at when their technologies leave the lab, and the fact 

that the sweet spot for VC investors is the late first stage and second stage, it is imperative that 

the technical and initial product risk be reduced as much as possible.19 Finally, as shown in 

Table 1, it is important for entrepreneurs and their public sector sponsors to remember that the 

returns cited are what investors seek for each element in their portfolio. The portfolio as a whol

very rarely reaches these levels (Zider 199

e 

9). 

 

We can gain more perspective on the very early stages (including early-seed which is not 

addressed by Timmons [1999] or other VC publications), by combining our work with that of 

Jolly (1997), and Murphy et al. (2002). The early-stage key processes, requirements, and players 

are provided in Table 2 below, where the requirements column lists milestones typically required 

for each financing stage. Unlike Timmons (1999), the seed and start-up stages are represented in 

separate rows, and there is an additional row corresponding to the early-seed stage, called 

Technology and Concept Generation. The Technology and Concept Generation stage 

17 These high discount rates account for risks that cannot be addressed through portfolio diversification and 

uncertainties such as the risk that the company will go out of business. See Hellman (2001). 

18 One often hears that VCs like to get 10 times their money in at most seven years—this corresponds to about a 

39% IRR. 

19 Table 1 also shows why it is important to align with future investors.

 9
corresponds to where most technologies are in their development stage as they come out of the 

labs. 

The last column, key processes, refers to the multifunctional and interlinked processes that are 

needed for each stage. Note that each stage of private-sector financing, including the early-seed 

stage, includes a distinct market component—though the requirements of the market component 

will vary as the business evolves. For example, in the early-seed stage, the entrepreneur must 

define the market need and attempt to roughly quantify it. In the seed stage, markets must be 

carefully quantified, competition characterized, and initial customers identified with letters of 

intent to purchase if possible. In the start-up phase, the customer base must be growing rapidly 

to obtain the next round of financing. 

Because many lab entrepreneurs develop their enterprises in an uneven fashion, focusing almost 

exclusively on technology development and engineering, they often assume they are ready for 

seed or start-up financing when, in reality, they have not satisfied basic market and business 

planning milestones required by most seed financiers. For example, they may have secured key 

patents, but they often lack initial commercial feasibility and prototype demonstration. Thus 

these businesses should be considered early-seed stage. Moreover, it can be seen from Table 2 

that the early-seed and seed stages require technology and product maturation as well as market 

validation. 

 10
Table 2. Qualifying Requirements for the Next Round of Financing and Key Processes Involved for 

Specific Financing Rounds (Adapted from Jolly (1997) & Murphy (2002)) 

 Financing Round Who Typically Plays Typical Qualifying 

Requirements for 

Next Round 

Key 

Processes 

Technology and 

Concept Generation 

Entrepreneur, 

Friends/Family & 

Public Sector 

 Exciting technology concept, linked 

to a market need 

 Applications identified 

 Research 

 Development 

 Marketing 

Technology & Product 

Creation & Maturation 

Early-Seed: 

Technology 

Development

Personal / Public 

Support (e.g. 

DOE/ATP 

/SBIR/States) 

Believer Capital 

 Key patents applied for/secured 

 Technical feasibility and initial 

commercial feasibility with 

prototype demonstrated 

 A plan for taking the business 

forward is available 

 Substantial market need quantified 

and competition identified 

 Development 

 Engineering 

 Marketing 

Seed: Prove a 

concept qualifies for 

start-up capital

Individual Angels 

Angel Groups 

Early-stage Venture 

Capitalists 

Believer Capital 

 Business/commercialization plan 

available; 

 Specific markets, including 

competition, well characterized; 

and initial customers identified 

 Attractive market-ready products 

/or processes available. 

 Management team identified 

 Development 

 Engineering 

 Manufacturing 

 Marketing

Start-up: Complete 

product 

development and 

initial marketing

Select Individual 

Angels 

Angel Groups 

Early-stage Venture 

Capitalists 

 Launch of commercial product 

and/or process 

 Strong management team in place 

 Rapidly expanding customer base 

 Manufacturing 

 Marketing

Market Focused 

Business Maturation 

First: Initiate fullscale manufacturing 

and sales

Venture Capitalists  Large customer base, and still 

growing by new constituents 

 New products and new processes 

 Research 

 Development 

 Engineering 

 Manufacturing 

 Marketing

Table II. Typical Qualifying Requirements for the Next Round of Financing and Key 

Processes Involved for Specific Financing Rounds 

 11
Should More Companies Really Get Through This Gap Region? 

Investors (e.g., many VCs) sometimes say the best ideas are the ones that get through the valley 

of death, and subsequently, they don’t concern themselves with the problem. While there is some 

truth in this assumption, it also is likely true that a lot of the best ones don’t get through the 

valley due to a host of reasons that tip the balance towards selection of less innovative, and in 

many cases less capable (in terms of ultimate cost and performance) technologies. They are often 

products and technologies that are able to enter the marketplace more quickly, and which can 

more effectively meet the other major requirements of most VCs.20 While VC insights are 

always valuable regarding business fundamentals such as strategy and market viability, it is also 

important to note that just because a VC may not have an interest in a business, this does not 

automatically mean that the business and/or its products are not sound. It could also mean simply 

that the business does not meet the model used by the VC community, at least in its current state. 

Several examples of this kind of disconnect are described below. 

To be fair, it is true that the ideas that best fit the required investment criteria (based largely on 

risk) at a given moment in time are most likely to be funded, but ultimately there may be even 

better technologies left on the table. Moreover, our experience confirms that with appropriate 

mentoring and alignment with the appropriate investor types, many more good ideas can emerge 

from the gap; but it generally won’t happen without additional work and resources. Most 

importantly it won’t happen without the stewardship of a good management team that has a clear 

market focus. For instance, a great many investors readily admit that they will often take an “A” 

management team (the first priority with most investors) with a “B” technology, but never the 

opposite—of course they always look for “As” in both categories. 

Given the disconnect in focus, needs, and priorities between the federal/state sector and private 

sector investors like VCs,21 it is not surprising that a smooth transition between public investors 

(and the entrepreneurial ventures they support) and private investors is difficult to achieve. In 

fact, Reid and Smith (2001) note that the lack of alignment between investor and investees is a 

major source of risk with high-technology investments. We think joint participation in product 

and technology maturation can greatly enhance and align the interfaces between public and 

private sector investors and entrepreneurial ventures.22 Finally, we frequently hear VCs state 

that if a technology was developed a little further, they would have significantly heighten

interest—the technology and market potential seem promising, but the risk associated with the 

current state of technology development is too high. 

ed 

 

In some cases, technologies coming out of the labs may not align with market needs. For 

instance, they may have been created for an application or market that is not the best for entering 

the marketplace early on; other applications and markets may be much more promising for 

beachhead markets. Also, in some cases, the public sector interest in a technology that has been 

20 Clearly, it is to be expected that a good portion of the public sector portfolio of R&D innovations is not going to 

be commercially viable. Taking this initial high risk has been the traditional role of government participation in 

R&D.

21 See Appendix A for more information on the different perspectives. 22 Such alignment of the interfaces might be looked at, in the parlance of system integration, as investment system 

integration where engineering the interfaces between key system elements is always a key concern. 

 12
created may be quite good but may not best meet, on a priority basis, the objectives for the public 

good as originally defined by the entities funding the technology development programs. 

Public sector investors at both the state and federal level have always focused on reducing earlystage technology risks, and by many measures they have done a very good job with this. 

However, private sector investors want other types of risk to be reduced even further for their 

involvement and investment. We 

believe that through sharing risk in this 

gap region, more technologies can 

ultimately be commercialized, thus 

creating significant value for both the 

public and private sector investors. 

What Venture Capitalists Look For (From Murphy & 

Edwards, 2003) 

There are several key elements that venture investors look for in 

the ideal investment. More specifically (in order of importance) 

these are: 

• Management. Personal qualities should include integrity and 

adherence to a set of concrete, constructive principles. 

Management should be highly motivated and focused. 

“Renaissance” individuals who can deploy many skills while 

remaining creative and flexible are preferred. Successful 

entrepreneurial experience of the CEO is a major advantage. 

• Market. To attract venture capital, the market and growth 

opportunities should be huge. The larger the investment the 

larger the market should be. Venture investors play in a highrisk, high-reward arena, and they generally will only look at an 

investment opportunity offering potential returns of at least 10 

times their initial investment within a three- to five-year period. 

This target may be relaxed somewhat for later-stage enterprises.

Ideally the company is selling product in the marketplace. For 

early stage investors, the company should be in the marketplace

within two years of the initial investment. 

• Technology. The company should have a technology that is 

significantly better than that of all known competitors; will 

provide the company with a competitive advantage for at least 

as long as it will take the company to hit its high-growth 

period; is proprietary to the company; and that is legally 

protected, preferably with worldwide patents. 

• Liquidity. Venture capitalists and other private financiers must 

be able to get their money out of a company either in the form 

of cash or marketable securities. This generally occurs when 

the company goes public or is acquired. If a company has no 

likelihood of going public or being acquired for cash or 

marketable securities, investors will generally not invest in it. 

• Company structure. Ideally the investee company should be a 

corporation rather than a partnership or LLC. There should be 

one class of stock–common stock–immediately prior to the 

venture investment. Except in rare circumstances the 

company should own all the core technology outright rather 

than being a licensee, even if it is an exclusive licensee. 

• The company should not be too dependent on the success of 

another entity for their success; investors prefer stand alone 

opportunities. 

Understanding and Matching Investor 

Needs Is Crucial 

As noted above, the risks associated 

with many technologies/companies 

coming out of the labs are just too great 

to attract private sector capital. It is 

interesting to take a closer look at the 

characteristics of these companies and 

see how well they match up with 

investor requirements. For a point of 

reference and comparison, we will again 

use the VC perspective; see the sidebar 

for a quick summary. The important 

message is that entrepreneurs should 

tailor their companies from inception 

with the kind of capital investment they 

likely anticipate needing, whether it be 

any combination of venture, angel, 

strategic industry, project, or other kind 

of financing. 

It is also important that public sector 

investors set realistic expectations for 

themselves based on their own publicgood missions, when sponsoring and 

guiding these companies in developing 

the technologies. To set realistic 

expectations, public sector investors 

should engage private sector investors in 

a dialogue as soon as feasible during the 

commercialization process, even while 

the technology is in the early R&D 

stage. Private sector investors—

 13
including strategic corporate, angel, venture, and others—can provide a wide range of insights 

(e.g., market identification) in this early commercialization stage, which can be extremely 

important as new ventures move forward. 

While the very early nature of these businesses and the need for technology and product 

maturation as well as market validation are most apparent for technologies coming out of the lab, 

some of the businesses in which the public sector (e.g., DOE and states) invests may never fit the 

venture capital model even though the entrepreneurial firms may have businesses based on highquality technologies. 

The sidebar on page 10 shows why companies may not fit the VC model. For instance VCs 

generally don’t like to invest in licensing deals or service businesses, since the returns are lower 

than what they usually target and the exits are not well defined. Likewise, commodity businesses 

often don’t provide sufficient returns to justify the risks that will have to be taken. Additional 

examples include: 

• Many demand-side technologies are not attractive to VCs since they often represent a small 

piece of a bigger system (e.g., a controller in a much larger and more costly air-conditioning 

system). VCs prefer stand-alone systems and businesses where they don’t have to accept 

risks with system elements/components they don’t control. The risk asymmetries are readily 

apparent here.23

• Some technologies that are most likely to be adopted by utilities, such as energy efficiency, 

often are also difficult to finance by private sector investors such as VCs. Utility business and 

investment structures often do not favor small capital outlays or energy efficiency 

investments, which will reduce the amount of the energy (and revenue from) that they sell. 

Moreover, utilities are typically very conservative, and in a lot of ways this is appropriate, 

since they must protect a large infrastructure. The risks, though small, are unacceptable, and 

the staff is not paid to take risks. Such businesses are often not attractive to many types of 

investors, since the markets are uncertain. Even if one utility adopts them, other utilities may 

not, and so the markets can be quite constrained. Yet smart public-good policy, which 

protects the adopters and the public from downside impacts, is appropriate if the technologies 

show strong long-term potential. The good news on this front is that some forward-looking 

utilities are now addressing this issue. 

• Many companies based on technologies coming out of the lab often require strategic 

partnerships that include licensing, marketing, manufacturing, and/or distribution. These 

partnerships, if not structured correctly, can make a deal unattractive to VCs, resulting in 

returns that are quite a bit lower than those typically targeted. Further, exits are often difficult 

and not well defined—again leading to the perception of unacceptably high risk by a VC.

• Additionally, the public sector invests in many small companies that simply don’t want to 

carry out all that is required to build a stand-alone business with all the other key elements 

(e.g., manufacturing). In such cases, an early buyout is frequently sought. 

• Also, some entrepreneurial ventures, in their desperation to obtain early financing, develop 

and/or accept complex and poorly thought out ownership and other relationships with angel 

or other independent financial investors (e.g., friends and family), which make it quite 

 

23 Similar asymmetrical risk considerations can occur with strategic industrial partners as well when they consider 

these technologies in their existing products. 

 14
difficult for VCs to unwind the deal so that it is attractive to them. For instance, early on, 

non-dilution clauses can turn away future investors. 

• Finally, small publicly held companies, which may want to raise money from VCs, often find 

it difficult due to the complexity of ownership as well as regulatory compliance issues (e.g., 

Sarbanes–Oxley rules). 

Upward Trends in Later Stage Clean Energy Investments 

While there has been a good deal of recent interest in CE by private sector investors, their 

investments are not addressing the early stage funding gap described in the previous sections and 

this has specific implications for the CE sector. 

Over the past few years, there has been a dramatic increase in the amount of capital that has 

flowed into energy-focused venture funds. EnerTech Capital, for example, claims that 80% of its 

$290M under management ($232M) is in clean energy; moreover, DFJ Element, a CE-specific 

fund, had raised $120M by the end of 2005.24 However, this capital has not necessarily been 

leveraged into startup companies. Data from Nth Power, shows (see Figure 3) that $917M was 

invested in CE in 2005, representing 4.2% of total VC investments last year (preliminary 

information for 2006 indicates that these numbers will be close to $2B and 9%, respectively). 

Unfortunately, at just under $11M per investment, this equates to roughly 85 investment 

opportunities in 2005. So while this increased interest has been evident, the number of attractive 

opportunities is still rather small. Taken a step further, this has led to increased investment 

competition. 

U.S. Energy VC Investments, 1995 - 2005

(in Millions of US Dollars)

$15

$68

$128 $161

$468

$1,329

$932

$566 $547

$716

$917

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Annual Energy VC

Investments

% of Total US VC

The fundamental problem 

driving this scenario is that, 

unlike other mature sectors, 

the CE industry is still in its 

nascent stages. The lack of 

an existing or legacy 

industry means that 

investors are flying blind, 

without the benefit of 

existing companies they 

typically rely on for new 

ideas and entrepreneurs. 

Conversely, this dearth of 

companies from which to 

mine ideas and talent 

creates an opportunity for the lab and university systems. Given that the next great ideas cannot – 

and will not – come from within a large company, they will have to come from research 

institutions. History demonstrates, however, that research institutions do not typically possess the 

expertise necessary to wrap marketable business models around these great ideas. 

Figure 3. US Energy VC Investments, 1995 – 2005 in Millions of US 

Dollars. Source: Nth Power 

 

24 The End of Oil? Venture Capital Firms Raise the Profile of Alternative Energy. 

 15
As such, the CE industry is uniquely primed for a gap-filling solution that is designed to identify 

and extract technologies from labs and pair them with the entrepreneurial expertise to wrap an 

intelligent business model around the technologies. 

What is Being Done Now by the States and the Federal Government 

While acknowledging the challenges above, there are a number of efforts that are beginning 

(albeit in a piecemeal way) to address the above problems, specifically to help reduce the real 

and perceived risk to private sector investors, especially early on. We give a brief overview of 

some of the key state and federal efforts in Appendix E. Most of these efforts help to reduce 

technical and related early product risk; e.g. some are specifically focused on technology and 

product maturation as well as market validation. When taken as a whole, the state and federal 

efforts indicate recognition of the problem and the need to engage both public and private sector 

participants to reduce risk. 

For example, the total combined resources from the states for commercialization are now greater 

than the federal government can currently deploy, and they are not quite as constrained as their 

federal counterparts in commercialization efforts. Most state programs are ,however, 

uncoordinated and are typically small in size and their availability is geographically limited. 

Yet large states such as California, Connecticut, New York, and Texas have wide ranging efforts 

that help in the commercialization process in a number of ways. 

The federal government also has a number of very valuable resources focused on technology 

maturation, including the Advanced Technology Program (ATP) and the Small Business 

Innovative Research (SBIR) Program. ATP and SBIR, though quite significant, cannot 

adequately address the technology spectrum that they cover. Further, federal programs such as 

ATP and SBIR don’t directly engage the private sector financiers in the ways that we envision 

are necessary to adequately abet commercial success and they not do a sufficient job of fostering 

the understanding of, and addressing the interfaces with anticipated investors. 

That said, the federal government has demonstrated that it can be quite innovative when 

priorities are aligned [e.g., In-Q-Tel Venture Fund and similar funds in several groups within the 

armed forces (DoD) and NASA]; though these tend to have a venture capital focus and have an 

emphasis on government markets. Another problem with many federal programs is that they can 

be too focused on solving the problems of one government agency, often limiting market 

applicability and perspectives. 

 16
Filling the Commercialization Pipeline & Creating Value 

While we discussed several effective examples of public-private partnerships in an earlier 

section, none of these models are appropriate templates for matching the unique gap-filling needs 

of the CE industry. Given the need for T&PMV, we propose an innovative model that combines 

the best practices already established in successful public-private partnerships with the private 

industry’s best practices for spinning early-stage technologies out of university and national labs. 

A Framework for a Novel Public-Private Partnership 

We propose a model where a not-for-profit early seed investment corporation (ESIC) is formed 

and funded by government and other sources through a variety of mechanisms such as grants and 

the EPACT’s “Other Funding Authority,” 25 as well as state allocations such as the recent 

prototyping legislation in CO26 (see Figure 4). The investment corporation will be focused on 

forming and nurturing new for-profit companies based on promising innovative technology 

platforms coming out of the labs and universities. This will thereby accelerate the 

commercialization of CE technologies, enhance technology transfer from the labs and 

universities, and promote local economic development and jobs, as well as provide a key element 

in the formation of a CE economic cluster in the CO front range. 

Framework Overview 

The investment corporation will provide early seed financing to address T&PMV in newly 

formed companies led and directed by highly qualified entrepreneurs-in-residence (EIRs). 

The ESIC will essentially be a portfolio of 

start-ups, each of which is developed, led, 

and matured by a separate individual, 

largely autonomous, EIR. Any profits that 

would normally accrue to ESIC through 

cashing out equity positions by the EIR 

companies, or EIR-Cos (at their later 

stages), will be reinvested in a new EIR-Cos 

with the goal of ultimately making the ESIC 

self sustaining. Oversight and guidance will 

be provided by a board of directors and 

eclectic capitalization advisory board, along 

with a technology and sponsor advisory 

board. 

Figure 4. A novel public-private partnership for early-seed 

and seed ventures focused on technology and product 

maturation and market validation. 

 

25 Title X of the Energy Policy Act of 2005 (EPACT), Section 1007. See also Appendix G 

26 Reference Colorado HB 1322, 2006 

 17
The EIR Role27

Within the ESIC, the EIRs will focus on forming and evolving newly created (or existing 

emerging technology-based) businesses to the point where they qualify for private sector 

funding; e.g. knowledgeable angel, early venture, or possible other funding such as strategic 

business partnering through an acquisition or merger. As part of this process, the EIRs will also 

position these nascent companies to effectively engage the other important participants in the 

down-stream portion of the financial food chain. 

Candidate EIRs will primarily be successful serial entrepreneurs looking for technologies from 

the labs and universities to build a business around (and their next big deal that they can lead, 

manage and profit from), and /or emergent small technology-based businesses that need to grow 

into market-focused businesses. Principals from existing small technology-based companies 

generally would not be candidate EIRs unless they have a proven successful track record on the 

business side of forming early stage start-ups. 

EIRs will need access to the labs’ technology portfolios, and the corresponding technology 

champions, with the goal of matching them (based on mutual interest, congruent needed 

expertise, and other criteria) with key technology platforms coming out of the labs. The EIRs 

will be responsible for defining successful commercialization and funding paths and creating 

business plans that will lead to the creation of market-focused products and businesses. 

EIRs will present their plans, which must have clearly defined technical, business, and market 

milestones, for approval by the Capitalization Advisory Board (CAB) and then the Board of 

Directors (BOD) (discussed below). Once a plan is approved by both CAB and BOD, the EIRCo will receive funding (anticipated to be no more than $750-1000K) from the ESIC’s pool of 

capital (defined below). 

The EIR will then be responsible for 

implementing the plan and seeking additional 

syndication and other funds from a range of 

sources to form and mature the EIR-Co. As part 

of their compensation, each EIR will receive a 

founder’s equity stake in their respective 

companies to complement their modest salaries. 

Thus, the EIRs provide stewardship for resources 

from the not-for-profit government partners that 

will be applied to early stage technology and 

product maturation as well as market validation. 

Resource Network 

ESIC will be complemented and supported by, a 

robust resource support base network including 

access to angel investors, entrepreneurs, industry 

Figure 5. A robust resource network with both 

traditional and non-traditional financial partners 

 

27 See Appendix H for a short summary of selected current EIR programs and references. 

 18
strategic partners, technical, market information, and due diligence expertise to stimulate the 

development of innovative CE technology based businesses, especially those within ESIC. 

The resource network will provide value to the fund and its supporters by providing a more 

robust resource base of information, potential strategic partners, expertise, and resources to 

support the fund and develop the economic development cluster. The network will also add value 

by making available an off-ramp for technologies and products that can appeal to investors other 

than venture and angel investors (e.g. utilities and industry strategic partners as discussed in the 

sections above). 

Management and Governing Roles 

The ESIC and its EIR-Cos will be guided by a small management team (e.g. an anticipated 

manager and two administrative people), the BOD, and two complimentary advisory boards–a 

Capitalization Advisory Board (CAB) and a Technology and Sponsor Advisory Board (TSAB). 

Figure 6. ESIC and its advisory and director boards 

The BOD will be made up of angels, VCs, and representatives from the government-sponsoring 

partners, to provide oversight to ESIC. and will play a major role in forming the other two 

advisory boards. This group will also play a key role in identifying, developing, and accessing 

other funding. 

The Technology and Sponsor Advisory Board (TSAB), consists of government investor program 

participants, along with technology experts whose interests are aligned with sponsored research 

investments. This group will advise the BOD on programs and related technology issues. 

The Capitalization Advisory Board (CAB) will be composed of professional investors, with an 

emphasis on VCs, some of whom may choose to serve on the boards of individual EIR-Cos. The 

CAB’s main purpose will be to help prioritize and select proposed deals coming from the EIRs. 

In addition, the CAB will also help identify and select candidate EIRs with proven track records. 

Further, CAB members may potentially support EIR salaries for an equity position in specific 

 19
EIR-Cos. Example key ESIC participants and corresponding responsibilities are presented in 

Appendix I. 

Funding 

Direct funding for the management and operation of the ESIC, as well as for seed investments in 

individual EIR-Cos is anticipated to come from a pool of money raised from government sources 

such as USDOE, USDA, and the state.28 Though EIR salaries may potentially come from CAB 

members, the salaries would otherwise most likely be paid from this funding pool. 

For each EIR-Co, additional funding will be raised by the EIRs from a range of sources as they 

nurture and grow their businesses. These potential sources include, but are not limited to: equity 

investment syndication from VCs, angels (including members of the CAB and resource 

network); grants from SBIR and DARPA; and Cooperative Research and Development 

agreements (CRADAs) sponsored, for instance, by the organization that generated the original 

R&D. In addition, another source of support might also come from the exchange of IP and 

CRADA support from labs and universities for equity stakes in the form of warrants. 

Technology Access/Filling the Pipeline 

Deal flow from NREL, affiliate labs, universities, and technology-based businesses will provide 

deal flow to the ESIC and its EIR-led emerging businesses; key universities include, but are not 

limited to, the University of Colorado, Colorado School of Mines, and Colorado State University 

who along with NREL form what is called the COLaboratory. In addition, leads from the 

various boards and the resource network will be evaluated and pursued as appropriate. 29

Particularly relevant to the front range is the Colorado Clean Tech Initiative, which is actively 

identifying and mentoring, incubating, and growing existing Colorado businesses. 

Synopsis of ESIC Benefits 

Summarizing the unique features of ESIC relative to the VC fund models mentioned in the above 

sections of this report, we note that all have non-profit limited partners, while our proposed 

approach includes a focus on: 1) early seed and seed investments to best address the T&PMV 

needs; 2) putting the responsibility for making investments clearly, and unambiguously in the 

hands of professional, private sector investors and business entrepreneurs (in a market driven, 

technology pull approach)30; 3) using an entrepreneur-in-residence approach; 4) providing 

returns to the professional investors that are commensurate with private sector opportunities – 

thus assuring the involvement of quality investment professionals and organizations; and 5) 

access to a robust resource network that also supports the fund and the development of a wide 

range of CE and related infrastructure businesses. 

 

28 E.g. from DOE’s “Other Transaction Authority” a la EPACT 2005, Section 1007. See Appendix G 

29 Particularly relevant to the CO front range is the Colorado Clean Tech Initiative, which is actively identifying and pursuing 

mentoring, incubating, and growing existing Colorado businesses. 30 With minimal intervention by the government sector – primarily to prevent unwarranted technology push, and so that public 

sector program needs do not trump real market needs and opportunities. This will also probably require that the limited partner

funds be escrowed to assure that they will be available for a capital call when an investment is required. 

 20
A Special Opportunity 

A public-private model with a CE focus, such as the one we are proposing, can take advantage of 

an opportunity that is unique to today’s social, political, and economic dynamics. What is special 

about this opportunity is that there is an alignment of interests among the public sector, research 

laboratories, and entrepreneurs. Specifically, with increased concern about the environmental 

impacts of conventional energy sources, coupled with a growing outcry for “energy security,” 

CE technologies are gaining public support. This support has caught the attention of public 

officials, which has resulted in favorable state and federal legislation promoting CE. 

Entrepreneurs sensing new opportunities have increasing awareness and interest in this space. 

Research laboratories have been plagued by the barriers between the development of new 

technologies and commercialization. And since they have a wealth of technical expertise, 

innovations, supporting facilities, know-how, and a desire to see their innovations 

commercialized., the ESIC/EIR approach should be an attractive option. 

For fledgling companies, the EIR model offers all of the necessary resources to help successfully 

build a company and enable the new endeavor to transcend the hurdles – including financial, 

management, strategic, and technological – that are encountered by most early stage companies. 

State and federal agencies benefit not only from their responsiveness to the aforementioned 

public support for CE, but also from economic development (jobs, tax base) resulting from the 

establishment of CE companies. Furthermore, these Government investors will care because 

EIRs will be commercializing lab and university innovations (they would be commercializing 

someone else’s technology somewhere else), with access to a bevy of highly talented investors. 

Organizations supplying technologies (e.g. DOE/NREL and universities) benefit in that they 

want to accelerate their technology transfer and improve the speed and return on its R&D 

investments. Also, beyond a new commercialization path for their R&D efforts, they have an 

opportunity to showcase emerging technologies that are being developed in their labs. They will 

likely also have additional licensing opportunities, as their technologies, whether or not they are 

selected by the EIRs for commercialization, will have greater exposure and more active strategic 

placement than is currently enjoyed. 

Investors – specifically VCs – benefit in a variety of ways from this model. VCs tend to focus 

exclusively on “VC-like” deals and their attendant characteristics. And while VCs are a very 

important part of the financial food chain, the ESIC/EIR approach that we propose is better 

matched (especially with the early focus on knowledgeable angels and serial business 

entrepreneurs) to the very early stage development of the technologies and products coming out 

of the labs and universities. These “raw” technologies, as well as the many nascent technology 

focused start-up businesses the partnership will work with, are clearly not VC-like deals. The 

good news is that these opportunities will not compete with VCs for deal flow, but rather they 

will be a source of attractive next generation deals for VCs to engage with, and invest in, as the 

market-focused businesses are formed and matured. 

 21
Moreover, the EIR model is not only better matched to the very earliest stages of business 

formation - along with the associated risk tolerance - it also does a better job of aligning 

incentives and attracting the best people available. To this point, most VCs don’t have the time 

or sufficient resources for forming companies and the corresponding risk profiles are too great31

for this very early stage. In addition, paying well enough to hire the best VCs is problematic,32

since their salaries are relatively quite high. Further, in the case of government-sponsored 

venture funds (such as the In-Q-Tel genre) noted above, they are expected to deliver the 

government market which often takes large resources33 resulting in high overhead.34 This in-turn 

will inhibit the fund from ever becoming self sustaining. Hence, successful entrepreneurs that 

have built other companies and have more directly applicable experience in many cases, and who 

are looking for their next big deal to develop, will often cost much less early on as they have an 

expectation that their equity stake will more than make up the difference. Thus they are better 

aligned with the needs we are addressing in this paper. 

EIRs have more investment personally in making the business a success, and they are looking to 

ultimately partner with talented VCs as the business matures. This, along with the close 

coordination with a robust resource network (described below) that addresses promising 

technology platforms from universities, NREL, and other national labs should make for a much 

more cost effective approach. 

Finally, as mentioned in the above sections there is the need for entrepreneurial businesses (and 

their R&D sponsors) to tailor their companies from inception toward the kind of capital 

investment they anticipate needing, whether it is venture, angel, strategic industry, project, or any 

other type, or combination, within the financing food chain. The ESIC, with its advisory boards, 

uses an integrated approach that pays particular attention to the anticipated full spectrum of 

requirements from investors for the venture. This is particularly important in the early-seed and 

seed stages. 

 

31 See side bar on p 13 – “What Venture Capitalists Look For.” 

32 Any chosen approach should not have even the appearance of someone getting rich off of the government dime... this is 

difficult since VC compensation is very high. 

33 Government can be an important market for energy, especially for beach-head markets. However energy (a commodity) 

markets, are much broader and diverse than many other markets. 

34 According to the 2001 BENS Report of the Independent Panel on the CIA In-Q-Tel Venture, as of March 31, 2001, In-Q-Tel 

had received $62M in funding, of which, $15.75M was used for operational costs over two full fiscal years ($12.5M for G&A, 

$3.25M for market research and portfolio management), and only $2.7M was used for equity investments. When compared to a 

normal VC fund, which typically operate at 2-2.5% per year, it is reasonable to assume that In-Q-Tel will not be able to 

overcome its cost basis to reach self-sustainability, even if the fund returns in the top 5% of all funds. 

 22
Conclusions 

Recapping from the above discussion, key stumbling blocks that increase risk and inhibit earlystage private sector investment include high technology and product risk, underdeveloped (and 

often poorly defined and understood) markets for the technology, and long times to markets. 

Thus, there’s a need for technology and product maturation as well as market validation 

(T&PMV). Further, the funding gap (from when the technology comes out of the lab until the 

company developing the market-focused product is appropriate for private financing) associated 

with CE investments can be much more difficult to deal with than some investments, like 

software. For instance, not only are the times–to-market longer, but the size of the investment 

needed is often quite a bit larger and the commodity nature of energy can inhibit investor 

interest.35 

The Early Seed Investment Corporation (ESIC) proposed in this report is designed with a focus 

on T&PMV to bridge the funding gap by engaging and aligning well with the private sector 

investment community and by applying strong business formation and market related disciplines 

to the commercialization process. ESIC, which uses Entrepreneurs-In-Residence (EIRs), which 

have been shown to be highly cost-effective in accelerating the transfer and commercialization of 

technology from the lab to the marketplace, thus serves the interests of both the private and 

public sector investors. In addition, ESIC is well designed to, build on and leverage state and 

federal resources36 where, and when available. In addition, this approach will not only increase 

the yield on the public sector technology R&D investment, it will enhance the volume of market 

attractive deals and technology innovations in the investment pipeline which are needed for 

sustaining the growing investment interest in CE. 

More specifically, ESIC/EIR is a public-private partnership that gets investment decisions 

unambiguously into the hands of real private sector investors, who will both inform and drive the 

process in the marketplace. This is primarily because the ESIC/EIR also promotes partnerships 

with a spectrum (or portfolio) of investors, including angels and strategic industry partners early 

on, with both the entrepreneurs and public sector sponsors. This is important since these 

partnerships can lead to more effective financing which involves sharing and allocating risks 

with those best prepared to accept (and understand) those risks.37

In this regard, ESIC/EIR helps fledgling companies, and their R&D sponsors, understand and 

address how investors view risk and the nature of the risks with which private sector investors 

are most concerned. Specifically, ESIC/EIR helps entrepreneurs define and tailor the preferred 

funding and commercialization trajectories for their companies from inception, for the kind of 

capital investment they anticipate needing, whether it be (any combination of) venture, angel, 

strategic industry, project, or other kind of financing. Moreover, it helps entrepreneurs and their 

public sector sponsors develop an understanding of the most strenuous tests that investors will 

put them through before writing checks. This is important since investor needs will vary from 

 

35 The much smaller amounts needed often let start-ups in software preclude the need for venture, and sometimes 

even angel financing. 

36 This includes a range of mechanisms such as the Other Transaction Authority described above. 

37 For instance, while VCs are willing to take some technology risk, project financiers will not take any. 

 23
one investor type to another, as will the venture’s needs depending on where the venture is in the 

commercialization process. 

A key reason that the ESIC/EIR approach has the potential to increase the speed and application 

rate of innovation coming from the labs and universities, is that the market insights from private 

sector investors can be more rapidly absorbed by the EIR led companies; ESIC/EIR emphasizes 

market driven, technology pull from labs and universities. Thus we believe that success will 

breed success at the participating labs and universities as well as at the public sector sponsoring 

organizations, and encourage a growing support base for more effective R&D that is tightly 

coupled to viable commercialization and financing trajectories. 

Moreover, the entrepreneur-in-residence (EIR) approach, aligns the needs and objectives of labs, 

lab sponsors, and private sector investors, along with those of the marketplace quite well. For 

example, it will assure the involvement of quality investment professionals and organizations by 

ultimately providing returns to the professional investors that are commensurate with private 

sector opportunities. In addition, ESIC will have access to, and the ability to align with a robust 

resource network that also supports the development of a wide range of CE and related 

infrastructure businesses. 

Also, the ESIC/EIR model can provide a direct connection and contribution to local economic 

development including the creation of jobs associated not only with the EIR companies, but also 

with the additional infrastructure businesses that will result.

Finally, we believe that the ESIC/EIR model will provide a much needed and quite valuable new 

paradigm for moving market attractive technologies and innovations from the lab to the 

marketplace. The approach does this while much more effectively engaging the private sector 

financial community with entrepreneurs, and public sector investors, as well as serving a whole 

range of local economic development, energy security, and enhanced environmental quality 

needs. 

 24
Glossary

Angel or Angel Investor - An individual who provides capital to one or more startup 

companies. Unlike a partner, the angel investor is rarely involved in management. Angel 

investors can usually add value through their contacts and expertise. 

Carried Interest - A share in the profits of a private equity fund. Typically, a fund must return 

the capital given to it by limited partners plus any preferential rate of return before the general 

partner can share in the profits of the fund. The general partner will then receive a 20% carried 

interest, although some successful firms receive 25%-30%. Also known as "carry" or "promote." 

General Partner (GP) - The partner in a limited partnership responsible for all management 

decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the 

limited partners (LPs), and is fully liable for its actions. 

Incubator - A company or facility designed to foster entrepreneurship and help startup 

companies, usually technology-related, to grow through the use of shared resources, management 

expertise, and intellectual capital. 

Investment Banking - The practice of raising money for companies. Common methods of 

capital raising are IPO's, private placement of stock, bond offerings, and other methods. 

Investment banks assist public and private corporations in raising funds in the Capital Markets 

(both equity and debt), as well as in providing strategic advisory services for mergers, 

acquisitions, and other types of financial transactions. Investment banks differ from commercial 

banks which serve to directly take deposits and make commercial and retail loans. 

Limited Partner (LP) - An investor in a limited partnership who has no voice in the 

management of the partnership. LP's have limited liability and usually have priority over GP's 

upon liquidation of the partnership. 

Mezzanine Financing - Late-stage venture capital, usually the final round of financing prior to 

an IPO. Mezzanine Financing is for a company expecting to go public usually within 6 to 12 

months, usually so structured to be repaid from proceeds of a public offerings, or to establish 

floor price for public offer. 

Mezzanine Level - Mezzanine level is a term used to describe a company which is somewhere 

between startup and IPO. Venture capital committed at mezzanine level usually has less risk but 

less potential appreciation than at the startup level, and more risk but more potential appreciation 

than in an IPO. 

Warrant – A security that entitles the holder to buy or sell a certain additional quantity of an 

underlying security. This transaction takes place over an agreed-upon price, exercised within a 

period of time and at the holder's discretion. The right to buy the underlying security is referred 

to as a call warrant; the right to sell it is known as a put warrant. In this way, a warrant is very 

similar to an option. When a warrant is exercised, a new share of stock is created, whereas when 

 25
an option is exercised, the owner of the option receives an existing share that is delivered by a 

counter party (except in the case of employee stock options where new shares are created and 

issued by the company upon exercise). 

References 

Bonvillian, William B. (November / December) 2006. Power Play. The American Interest. Vol 

II, Number 2. 

Deangelis, M. (July 2005). Private communication. Sacramento Municipal Utility District. 

Funk, K. (July 2005). Private communication. Massachusetts Technology Collaborative. 

D.P. Goldman; J.J. McKenna; L.M. Murphy (Oct. 2005). Financing Projects That Use CleanEnergy Technologies: An Overview of Barriers and Opportunities. NREL/TP-600-38723.. 

Golden, CO: National Renewable Energy Laboratory. 

Hellman, T. (March 2001). A Note on Valuation of Venture Capital Deals. Graduate School of 

Business, Stanford University. p. E-95. 

Jolly, V.K. (1997). Commercializing New Technologies: Getting from Mind to Market. Boston, 

MA: Harvard Business School Press. pp. 15-17. 

Lerner, J. (1999). “The Government as Venture Capitalist: The Long-Run Impact of the SBIR 

Program.” Journal of Business. (72:3); pp. 285-318. 

Lerner, J. (February 2000). “The Problematic Venture Capitalist.” Science. Vol. 287; pp. 977-979. 

“Model.” In-Q-Tel Web Site, http://www.in-q-tel.com/about/model.html. Accessed July 21, 

2006. 

Moore, G.A. (1995). Inside the Tornado: Marketing Strategies from Silicon Valley’s Cutting 

Edge.” New York, NY: HarperCollins. 

Markham, S.K. (November/December 2002). “Moving Technologies from Lab to Market.” 

Research Technology Management. (45:5); pp. 31-42. 

Murphy, L.; Edwards, P. (May 2003). Bridging the Valley of Death: Transitioning from Public 

to Private Sector Financing. NREL/MP-720-34036. Golden, CO: National Renewable Energy 

Laboratory. 

O'Hara, T. (August 15, 2005). “In-Q-Tel, CIA's Venture Arm, Invests in Secrets.” Washington 

Post. P. D01. 

 26
Reid, G.C.; Smith, J.A. (2001). Investor and Investee Conduct in the Risk Appraisal of High 

Technology New Ventures in the UK. University of St. Andrews. Downloadable at 

http://www.st-andrews.ac.uk/crieff/papers/dp0205.pdf. 

Stevens, G.A.; Burley, J. (1997). "3,000 Raw Ideas = 1 Commercial Success." Research 

Technology Management. (40:3); pp. 16-27. 

Stevens, G.A.; Burley, J. (2003). “Piloting the Rocket of Radical Innovation.” Research 

Technology Management (46:2); pp. 16-25. 

“Title X, (e) TECHNOLOGY COMMERCIALIZATION FUND.” (2005) Energy Policy Act of 

2005. Washington, DC: U.S. Congress. p. 339. Downloadable at 

http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=109_cong_bills&docid=f:h6enr.txt.pdf. 

Timmons, J. (1999). New Venture Creation – Entrepreneurship for the 21st Century, 5th Edition.

Boston, MA: Irwin/McGraw-Hill. 

US Department of Energy (April 2006) “Annual Report on Technology Transfer and Related 

Technology Partnering Activities at the National Laboratories and Other Facilities, Fiscal Year 

2005”. Office of Policy and International Affairs. U.S. Department of Energy. 

Zider, B. (November-December 1998). “How Venture Capital Works.” Harvard Business 

Review. pp. 131-139. 

Cook, J. “Venture Capital: VCs Call on Heavy Hitters for Help.”

Seattle Post-Intelligencer Reporter. September 5, 2003. 

Wilson, L. “Great Work ... What it Takes to Become an Entrepreneur in Residence, the Best Job 

You Can Never Apply For.” San Francisco Business Times. August 20, 2004. 

“The Valley: Long Live the EIR.” Red Herring. January 30, 2006.

Santiago, W. “On the Inside Track in Venture Capital.” New York Times. January 15, 2003. 

Schwarzkopf, J. Closing the “Equity Gap” in Startup /Seed Investment for ICT Ventures (Israeli 

Experience). Case Western Reserve University. January 2006. 

 27
Appendix A: Getting from Discovery to Commercial Success 

The US DOE laboratories and facilities have a heavy emphasis on licensing to, and helping 

existing businesses by providing technology and other know-how support, as well as making 

facilities available rather than creating businesses. DOE has recently published (2006) a good 

amount of data on its technology transfer processes and results. 

For example, the 2006 report provides macro-level data for FY05 from its 22 labs and major 

facilities; this includes data on invention disclosures (1776), patents issued (467), active licenses 

(5677), and the resulting revenues ($25M). Moreover, though the DOE does track and provide a 

good number of anecdotal success stories, and the level of success of its innovations can be 

inferred from the revenues, it in general does not directly track the commercial success of the 

resulting licenses or the licensees. A similar situation exists for many university organizations. 

Stevens and Burley (1997 and 2003), however, do provide data on getting from idea to 

commercialization for new product development within industry as well as on project and 

venture capital results. They note that it takes about 3,000 ideas for one commercial success 

(.033%). Of these 3,000 ideas about 112 (~3.7%) are patented; and the percentage of commercial 

successes based on the number of successful patents is about 1% (1 out of 112 patents, which 

they describe as “crown jewel patents”). In addition, their analysis of government patents 

indicates a similar result; e.g., about 1% are clearly economically successful.38 

When looking at venture capital investments, Stevens and Burley (1997) indicate that of these 

3,000 ideas, about 120 would receive serious evaluation (e.g., ~ 4 hours of analysis by the VC 

firm). And of those 120 ideas (all of which must have a reasonably good business plan), nine will 

receive funding and one will be a commercial success, which is consistent with the industry data; 

that is 1 out of 120, or somewhat less than 1% is a “crown jewel.” In addition, Zider (1998) 

provides data that show that about 10% of VC investments have very strong returns; this 10% is 

close to the 1 out of 9 or 11% cited by Stevens and Burley for what they call “crown jewels.”39 

References: 

Stevens, G.A.; Burley, J. (1997). "3,000 Raw Ideas = 1 Commercial Success." Research 

Technology Management. (40:3); pp. 16-27. 

Stevens, G.A.; Burley, J. (2003). “Piloting the Rocket of Radical Innovation.” Research 

Technology Management (46:2); pp. 16-25. 

 

38 Using a parallel analogy to the Stevens and Burley analysis, and for our purposes here, one can assume that the 

technologies coming out of the labs will have successfully received patents; and correspondingly about 1% will be a 

commercial success. 

39 Zider (1998) and others indicate that VCs look at about 100-150 business plans for each one they fund, while 

about 60% of their investments have negative or nearly zero returns. 

 28
U.S. Department of Energy (April 2006) “Annual Report on Technology Transfer and Related 

Technology Partnering Activities at the National Laboratories and Other Facilities, Fiscal Year 

2005”. Office of Policy and International Affairs. U.S. Department of Energy. 

Zider, B. (November-December 1998). “How Venture Capital Works.” Harvard Business 

Review. pp. 131-139. 

 29
Appendix B: Key Characteristics & Perspectives of Public and 

Private Sector (primarily VCs) Investors40

Public Sector Investors Private Sector Investors 

Key goals • Develop promising technology options 

that meet public sector needs by reducing 

early technology risks that private sector 

investors would otherwise not assume 

• Profitable investments in technology-based 

businesses that address real market needs—

technology neutral within the context of meeting 

customer needs 

Investment focus • Technology focused development of high 

quality innovations: 

o Early, high risk RD&D 

o Technology performance 

o Technology certification, and 

performance verification 

• Early, prudent investments in market focused 

businesses that emphasize: 

o Strong management teams 

o Products - not technologies 

o Market development and access to these 

markets; customer driven 

Biggest 

concern 

• Technical show stoppers • Customer and market showstoppers 

Other key 

contributing 

investor insights / 

expertise / 

strengths 

• Technology based perspectives on: 

o Capabilities, benefits, and 

applications 

o Technical competition 

• Macro market perspectives on energy and 

trends 

• Perspective on public policy and public 

good needs & trends, as well as the 

potential to impact 

• Standards development 

• Business and Financial perspectives on: 

o Market driven, customer benefits 

o Broader (beyond energy) sets of industry 

applications 

o Market competition 

• Specific market perspectives and trends for energy 

and other applications including market, 

beachhead, and entry strategies 

• Ability to factor public policy impacts into 

investment and business formation decisions 

effectively 

Key constraints 

on collaborations 

• Investment collaborations must abide by 

governmental regulations including 

fairness of opportunities, and not 

compete with the private sector 

• Commercialization viewed as 

responsibility of private sector 

• Investment collaborations should reduce the risk 

and improve the profitability of investments 

Key enablers 

needed 

• Collaborations that accelerate the 

deployment and use of the technology in 

which the public sector invests; private 

sector exercises their option to invest 

• Access to the information, people, knowledge, and 

data necessary for sound investments 

• Entrepreneurs that are predisposed to, and/or 

already focused on market /customer product and 

business development issues 

Differences in 

funding process 

• Competitive written proposals judged 

mainly by a technology focused review 

team; decisions sometimes appealed 

• Non-Disclosure agreements (NDAs) not 

unusual 

• Final decisions base on oral presentations by 

management team; supported by extensive due 

diligence; non-recourse decisions 

• NDAs never used 

 

40 From Murphy and Edwards (May, 2003) 

 30
Appendix C: The Clean Energy Alliance Incubator Survey 

Summary 

The yearly incubator survey tracks several quantitative figures that help paint the picture of how 

successful the program is. The number of companies, 

employees, revenue totals, and capital raised describe how the 

entire program is functioning and the impact it is having on the 

development of the clean energy industry. 

The Clean Energy Alliance41 is dedicated to helping startup and developmental clean energy 

businesses grow. Clean Energy Alliance Incubators help client companies refine their business 

cases and develop their enterprises, thus making them more attractive to private sector investors. 

Through this, the Alliance helps provide a larger source of lower risk investment opportunities 

for private sector financiers, while simultaneously providing jobs and economic development for 

local regions, providing higher yield on R&D investments made by public and private sectors, 

and providing more rapid and certain commercialization of clean energy technologies. 

The 102 commercialized technologies developed within the Alliance are proof that businesses 

based on perceived high risk clean energy technologies and innovations can become successful 

in the marketplace if they are 

provided the appropriate 

guidance and resources to better 

align them with private sector 

investors and marketplace needs. 

There are currently 104 clean 

energy companies from all over 

the country participating in the 

Clean Energy Alliance. 

Participation ranges from 

companies that are physically 

located in the incubator to 

companies who receive 

assistance and guidance via a 

virtual relationship. 

These 104 companies employ 

2,378 workers dedicated to the 

development of clean energy 

technology. There are also 69 

graduate companies that no longer require incubation services and are self-sufficient. And since 

we don’t track the number of employees in these companies once they leave the incubator, the 

employment picture is considerably stronger than presented here. 

Achieved Results*

A DOE/NREL investment of about 

$2.5M, in a select group of 

the nation’s top incubators,

has catalyzed:

* As of 12/06

•69 Graduate companies *(c)

•102 Technologies 

commercialized (c)

•2378 employees (Jobs!!) 

in the companies

•$173 million in capital 

raised by companies (c)

•$254 million in revenues (c)

•$10.8 million in state money (c)

•$21.6 million in other 

leveraged funds (c)

•104 Clean Energy company

clients now in Incubators

*(c) = cumulative results 2002-2006

•The Alliance is Growing! – 7 new Incubators 

(home to more than 20 companies) join for `07 

 

41 The Clean Energy Alliance, was recently formed as a not-for profit 501(3)c corporation, based on what was called the National 

Alliance of Clean Energy Business Incubators (NACEBI). 

 31
More than $173 million in capital has been raised by clean energy startups over the four-year 

period. This includes both public and private capital in the form of angel, VC, SBIR, grants, and 

other unique investment forms. For all their work, these clean energy startups have generated 

over $254 million in revenue – inclusive of royalties on technologies. 

Another important factor is the money leveraged by the incubators. Over the three years that 

have been tracked, incubators have received $39.2 million from federal sources (usually passed 

through state level initiatives and organizations), $10.8 from state sources, and $21.6 million 

from other sources (private, city, county, etc.) This money helps to facilitate the incubation 

process and provide an additional catalyst for the profitable commercialization of clean energy 

technology. 

The mission of the Clean Energy Alliance to provide clean energy technologies, emerging from 

both public and private research facilities, the necessary expertise, network, and support to make 

the leap from the laboratory to the market. Having supported the commercialization of 102 

technologies in the last three years, the Clean Energy Alliance is confident that an even greater 

number of technologies will emerge from a growing list of incubators in the coming years to 

bring systemic change to how energy is created, utilized, and understood. 

Beginning in 2007, the Clean Energy Alliance will welcome 7 new incubators. Spanning the 

country, these new incubators already house over 20 promising clean energy technology 

companies that will soon reach commercialization and contribute to the growth and impact of the 

clean energy space. These incubators include: 

Blue Hill Partners, LLC of Philadelphia, Pennsylvania 

Clean Energy Innovation Center of Denver, Colorado 

CleanStart – McClellan Technology Incubator of McClellan, California 

Enterprise Center of Johnson County, of Lenexa, Kansas 

Ignite Technology Ventures, LLC of Boston, Massachusetts 

Northwest Energy Technology Collaborative of Seattle, Washington 

Rutgers EcoComplex of Bordentown, New Jersey 

 32
Appendix D: The NREL Industry Growth Forum—Summary of 

Investment Results for Presenting Companies at the NREL Industry 

Growth Forums 14-18 

PROCESS 

In order to paint a better picture of the success stories resulting from 

NREL’s Industry Growth Forums, we began tracking the financial 

investments received by presenting companies at each forum, from 

the 14th onward. While many criteria can be used to gauge the 

growth and effectiveness of the forum, the total investment received 

by presenting companies reveals interesting characteristics about not 

only the forum itself, but also the current financial climate in which 

clean energy entrepreneurs operate. As a result, it continues to be the most requested and 

popular measure for forum success. Investments into presenting companies are comprised of 

both those made by the “private” sector (including private equity financing, mergers, 

acquisitions, and IPOs) and those made by the “public” sector (including government grants, 

subcontracts, and relocation incentives). 

We used an eclectic process of gathering information which included strong reliance on press 

releases, company Web sites, and other electronic media. We recorded and documented 

investments only if supporting documentation could be found to confirm the existence of such 

funding. References to these supporting documents are included in NREL’s database of forum 

metrics. In an effort to deduce significant information regarding the average duration between a 

company’s presentation and the time at which it received funding, the $USD amount of 

investments received by presenters was recorded for each company receiving an investment and 

the number of months since 

that presentation duly noted. 

Investments made in 

companies presenting at more 

than one forum were attributed 

to and recorded for the earliest 

forum at which the company 

presented. Aggregate 

investments only are reported 

for all presenters at each of the 

14th, 15th, 16th, 17th, and 18th

forums. The total amount of 

investment recorded since the 

14th forum is also reported. 

14th - 18th Forum Presenters: 

Total Investments Generated

$4

$126

$218 $240

$73

$660

$0

$100

$200

$300

$400

$500

$600

$700

14th 15th 16th 17th 18th Total

Forum

Total Investment 

(millions)

Figure 7. Total investments received 

 33
RESULTS 

As of November 1, 2006, we have accounted for a total of 85 distinct investments, totaling 

approximately $660M (million), in the companies that have presented at NREL’s 14th through 

18th Industry Growth Forums (see Figure 7). 

Of this $660M, approximately $571M, or 86%, was raised from the private sector, while the 

remainder was raised from public sector sources. NREL recorded 44 distinct private sector 

investments, including 39 private equity raises and 5 IPOs, indicating the majority of presenters 

remain early- to mid-stage companies prior to the infusion of additional capital. The average size 

of these private sector investments is $12.97M and the median investment is $3.5M, indicating 

the distribution is skewed by a few large investments). The mean and median of the 41 public 

sector investments are $2.18M and $750K (thousand), respectively, also indicating a positively 

skewed public sector distribution. 

It is encouraging to note that a wide variety of technology types have been represented among 

those companies receiving investments. 29 of the investments reported were made into 

photovoltaic companies, 11 into fuel cell or hydrogen technologies, and 8 into companies 

developing communication and control technologies. Fewer investments were made into 

ocean/wave energy, biomass, and energy efficiency and storage companies. Only four 

investments were made into 

wind power, indicating the 

mature nature of the wind 

industry for large turbines 

from an investment 

perspective. The remainder 

of the investments were 

distributed among a wide 

range of other technologies 

including advanced m

design software, Stirling 

engines, and other energy 

conversion technolo

Figure 8). 

14th - 18th Forum Presenters: 

Investments by Technology

4

29

5 8 4

6

2

11

16

Wind

PV

Biomass

Wave/Ocean

Communication and Control

Energy Storage

Energy Efficiency

Fuel Cell/Hydrogen

Other

aterials, 

gies (see 

Figure 8. Investments by technology type 

The investment raised by presenters at the 14th forum totaled approximately $4M, while that 

raised at the 15th, 16th, 17th, and 18th forums summed to $126M, $218M, $240M, and $73M 

respectively. It is important to note that only 17 companies presented at the 14th forum, which 

was held October 31st, 2001 at the height of the post-tech bubble, U.S. economic recession. 

Shortly after the 14th forum, NREL initiated a major effort to upgrade the presentation and 

mentoring process of the event. Subsequent forums witnessed at least two times as many 

presenting companies. Limited data received for the 14th, 15th, 16th, 17th, and 18th presentations 

indicates the average duration of time between the date of funding and that of a company’s 

presentation is approximately 14 months. 

 34
We, therefore, can extrapolate that investment in companies presenting at the 16th forum should 

peak by late calendar year 2005. In light of the fact that average time to investment for the 14th, 

15th, 16th, 17th, and 18th forums was 22 months, 22 months, 15 months, 8 months, and 5 months 

respectively, we have reasonable reason to believe that the duration of time between a 

company’s presentation and subsequent funding may be decreasing. 

One of the clearest indicators of entrepreneurial success, of course, is the successful navigation 

of a company through an IPO, a merger, or an acquisition. Five companies presenting at 

NREL’s forum have benefited from major IPO events. Most notably, Clipper Windpower 

recently closed a public offering totaling $135M on London’s AiM stock exchange in October of 

2005. Daystar raised approximately $10.5M in February of 2004 and ZBB Energy raised over 

$4.5M in March of 2005. While IPOs are typically well-documented by the press, our 

understanding of mergers and acquisitions subsequent to forum presentations is less clear. We 

know, for example that Mesofuel, which presented at the 16th forum, was purchased by 

Intelligent Energy, though the price (while unconfirmed at $10M) is uncertain. Similarly, 

Unisun, which presented at the 14th forum, was purchased by Nanosolar, though no price has 

been given. Later reports indicate Nanosolar raised some $20M after this deal. It is not clear 

just how much of this raise is attributable to Unisun. Additionally, Chameleon Optics was 

acquired by Micron Optics for an undisclosed sum, Solectria was acquired by Azure Dynamics 

for an alleged $20M and MicroPlanet merged with HF Capital for an alleged $8.1M (see Figure 

6). The characteristics of mergers and acquisitions are often difficult to define given the nature 

of their complex terms and often varying structure which can include intricate equity and capital 

exchanges, rapidly shifting stock prices, and non-disclosure safeguards. 

 35
Appendix E: Public-Private Partnerships to Reduce Risk 

As noted above it also turns out there is a lot that can be done (and a good deal that is being 

done) to help reduce the real and perceived risk to the investor, especially early on. First and 

most importantly, by sharing the risk through joint resources (both expertise and financial) as 

appropriate, risk to all participating parties will be reduced. This includes making specific 

investments around technology and product maturation. It also includes doing a much better job 

of understanding and addressing the interfaces with anticipated subsequent investors. Though 

these efforts are somewhat piecemeal; taken in total, they indicate recognition at both the state 

and national level of the problem. Further, all of these engage public and private sector 

participants to reduce risk. 

We provide a sampling of key examples from the states and from the federal government; most 

of which help to reduce technical and related early product risk. 

State Initiatives 

A number of states have recognized the need for technology maturation, and have created 

mechanisms to address this issue. They all vary in size of efforts and focus, as well as degree to 

which they engage private sector investors and small technology businesses trying to 

commercialize their technology. They also vary in the level of coordination with the federal 

sector efforts. States, it turns out, often have much more flexibility in their commercialization 

efforts vis-à-vis the federal sector. Moreover, the state initiatives are often focused on job growth 

and economic development. One common feature among the state programs is that they are 

relatively new, often having been created in the last five or so years. 

For instance, the Massachusetts Technology Collaborative (MTC) has created a Sustainable 

Energy Economic Development program to make direct investments in companies that have yet 

to demonstrate commercial viability. It helps bridge the gaps between innovation, seed, and 

venture investments. It is currently an $8M initiative with $2M in the FY 2005 round. It provides 

low-interest, $50K-$500K convertible loans (to equity). Another MTC program is the Green 

Energy Fund. MTC has committed $15M, as a lead limited partner in a $25M fund with VCs; 

investments up to $500K have been made (Funk 2005). 

In another example, Wisconsin, through a non-profit company - CleanTech Partners, Inc. – has 

sought to address the funding gap by providing investments, business expertise, and Wisconsin 

sales leads to companies that have developed new energy-saving technologies. Founded in 2003, 

CleanTech Partners, a $3.5 M investment fund, is supported primarily by the state’s Focus on 

Energy program. The fund has a variety of investment structures – equity, debt, and hybrids – 

tailored to a company’s need. CleanTech Partners-funded companies must show that their 

energy technologies will have an impact in the State of Wisconsin (among other places). See 

Appendix D for an example case study of a CleanTech Partner investment that benefited the 

NREL Growth Forum. 

 36
Another state, California, has created a number of mechanisms over the years to address the 

technology maturation problem. Beyond its current Public Interest Energy Research Program, 

which has many parallels with the NREL collaborative R&D process for developing new energy 

innovations, they have created a Small Grants Program for Energy Innovations operated by San 

Diego State University for CEC (Deangelis 2005). It can be used for technology maturation as 

well as creating new innovations. It has a $100K limit. 

More recently in California, the California Clean Energy Fund (CalCEF) was created in June 

2004 as a nonprofit public benefit corporation dedicated to making equity investments in CE 

technology and service companies. CalCEF’s initial endowment of $30 million comes from a 

utility bankruptcy settlement with the shareholders of Pacific Gas & Electric (PG&E), a 

California utility company. Other than providing this initial capital, PG&E has no control of or 

involvement with CalCEF. CalCEF was created with the goal of stimulating private sector 

investment in CE companies in order to provide market-based financial returns to shareholders 

and positive environmental and economic returns to the state of California. It is hoped that the 

fund will advance the commercialization of CE technologies and services within the state. 

CalCEF capitalizes on various unique attributes that position it to successfully meet its 

objectives. Its board of directors—composed of policy makers, investment professionals, 

entrepreneurs, and technology experts—champions an investment philosophy that is closely 

aligned with major policy drivers and recent advancements in energy technology. This enables 

the fund to more closely monitor emerging CE markets and to proactively make sound 

investment decisions. 

CalCEF has unique relationships with three well-established venture capital managers—

VantagePoint Venture Partners, Nth Power, and Draper Fisher Jurvetson—each which provide a 

unique and complementary perspective on energy technology markets. CalCEF has allocated 

$8.5 million to each fund. These managers also will match each dollar invested on behalf of 

CalCEF based on discretionary criteria typical of their individual management practices. For 

example, Nth Power typically likes to own 10%-15% of a company and aims for 5-10 times or 

even greater return on its investment from a company with a technology proven at the lab level 

and ready for a product launch. Funds are invested in private companies creating technologies or 

products that will lead directly or indirectly to decreased reliance on non-renewable fuels. Both 

early- and late-stage equity investment opportunities are eligible. 

CalCEF is also working to establish an angel network of investors to fund promising companies 

that might need additional to support before they can meet CALCEF’s investment criteria. 

Finally, CalCEF is an example of a U.S. trend to use a utility settlement of compliance payments 

to create new funding mechanisms for clean energy. 

States also support business incubation programs, primarily for job creation and economic 

development, and they increasingly see clean energy as a good focus area. Texas, California, 

New York, and six other states are part of the NREL-created NACEBI (which has now become 

the Clean Energy Alliance; see Appendix C) . And although these incubators cannot solve the 

technology maturation problem by themselves, they are quite valuable in helping bridge the 

valley of death in a number of ways. For example, these incubators often encourage their 

entrepreneur-client companies to take advantage of federal opportunities (described below), 

 37
often aggressively helping their client companies engage with these opportunities. Further, these 

and other quality incubators provide access to some of the best business development insights 

available, and they provide a wide range of contacts and connections to financial and other 

strategic partners. 

University Initiatives 

A number of universities have created technology incubation programs such as those at the 

University of Texas at Austin and the Venture Lab at Georgia Tech/Advanced Technology 

Development Center (ATDC) that nurtures and matures the technology within a start-up 

company to prepare them for business incubation. For example companies within Venture Lab, if 

they pass muster there, are expected to move into the ATDC Business Incubator as a next step in 

the commercialization process. Another example of technology maturation is in the state of New 

York at ANT which combines business incubation processes with extensive prototyping 

capability (primarily in the semiconductor and nanotech areas). ANT also works closely with its 

client companies to align them with other state funding resources that are designated to foster the 

growth of these companies in New York. 

Federal Programs for Technology Maturation 

DOE National Labs. DOE and its federal labs create a good deal of technology. And the DOE 

has a wide range of technology transfer programs aimed at moving their technology out of the 

laboratory; there is a heavy emphasis on licensing of intellectual property.42 In addition, some 

labs have a limited capability for technology and product maturation; but in most cases, as 

explained in the main body of the report, these labs are a source of technology, but not 

technology ventures that are ready for private investment. NREL is the one DOE (or federal) 

laboratory that is totally focused on CE technology development and in the past has used 

approximately half of its budget for collaborative R&D with groups of industry (both large and 

small) and university partners. Yet because of our mission directives and federal requirements, 

technology and product maturation funds are often not available; and there are no efforts focused 

directly on market validation. 

Also of note is that most of the labs have what is called entrepreneurial leave opportunities, that 

allow scientists to leave the lab for a period of time to help start up, or assist in a the start-up of a 

company; but to then return to the lab within a certain time period. These “leave” programs have 

various, names, and operational requirements, as well as return policies depending on the lab. 

Though some investors do not like folks on their team having such a safety net, this approach can 

however be a great way of transferring technology to the private sector, as well as bringing 

private sector perspectives back into the lab if the employee returns to the lab. 

 

42 US Department of Energy (April 2006) “Annual Report on Technology Transfer and Related Technology Partnering Activities 

at the National Laboratories and Other Facilities, Fiscal Year 2005”. Office of Policy and International Affairs. U.S. Department 

of Energy. 

 38
SBIR. The most common federal programs applicable to technology and product maturation that 

will lead to commercialization are the SBIR and the Small Business Technology Transfer 

(STTR) programs. They each allow two phases: up to $100K for phase 1 and $750K for phase 2 

proposals. In terms of dollar volume, these programs constitute the largest federal programs 

directly aimed at the commercialization of technologies developed by small businesses. 

Many government agencies have SBIR/STTR programs, and the calls for proposals are usually 

(not always) at periodic and regular intervals. These calls for proposals often focus on specific 

technology areas of most interest to the specific agencies. SBIR requires the lead organization to 

be a small business; though commercial and government partners in support of the small 

business are often part of the equation. STTR also requires the involvement of a federal research 

facility. The downside of these programs is that the cycles of interest and funding in particular 

areas can be fairly long. There is a wealth of information on the Web about these programs. 

ATP. Another important federal level program is the U.S. Department of Commerce’s Advanced 

Technology Program (ATP), which was established by the Omnibus Trade and Competitiveness 

Act of 1988 to fund early-stage, high-risk research that would likely be deferred if not for 

government support. Like Massachusetts' and California’s maturation funds described above, 

the mission of the ATP is to move new technologies from the laboratory into the marketplace by 

providing funding for navigation through the “valley of death,” often referred to as the period of 

time bridging successful laboratory demonstration and commercial feasibility of new 

technological concepts. 

The ATP serves as an excellent example of a maturation fund that has ironically received 

criticism for the potentially inappropriate use of public funds, primarily a result of its funding of 

late-stage research often conducted by large firms with seemingly adequate resources to advance 

their technology independently. Despite such concerns, the program continues to play an 

important role among federal investment in the development of science and technology. An 

independent study performed by the National Research Council found the ATP to be highly 

effective with significant beneficial impact to federal investment in basic science and 

technology. The ongoing budget battles illustrate the disagreement among our legislators on 

whether the federal government should sponsor later-stage R&D. The ATP budget has 

repeatedly been zeroed out and then restored.43 

To further the ATP’s impact, the U.S. Department of Commerce recently has suggested various 

reforms to the program. Among them, to specifically fund high-risk ventures and to help dispel 

the notion that the program supports only late-stage research, the Department hopes to encourage 

reinvestment of a percentage of revenues derived from past awards back into the ATP. Such 

reinvestment monies would result from royalty payments from previously successful investment 

recipients. The monitoring of program management activities is also recommended to prevent 

the support of product development and marketing efforts from ATP funds, as these fields are 

generally not the proper domain for government funding. Finally, a more thorough analysis of 

 

43 Aspects of the ATP have been used as the blueprint for designing high-tech industrial support programs in a 

number of competitor countries, including Taiwan, Australia, France, Germany, Japan, the Netherlands, 

Switzerland, and the United Kingdom. “So why, a reasonable person might ask, are we trying to kill what other 

nations are trying to copy?” asked Sen. Jeff Bingaman, D-NM. 

 39
product and market considerations is recommended during the review process used for selecting 

funding recipients. 

Dual Use: Another example of public-private partnerships evolved from the “dual use” 

requirement pioneered by the DARPA, (and now much more widespread) within the U.S. 

Department of Defense (DoD). The DoD looks for technologies that have commercial 

applications, as well as those meeting military requirements. Thus additional applications and 

markets for the technology are identified, making technology investments by the private sector 

less risky while providing relatively high-margin beachhead markets for entrepreneurial ventures 

and leveraging a much larger base of related commercial R&D—especially when the deals are 

syndicated. Of course, relatively few of these programs are focused on energy, but when they 

are, this is an additional opportunity for small CE companies. 

A recent article by Bonvillian (2006) describes the background of the Defense Advanced 

Research Projects Agency (DARPA), its history, and its “secrets” of its success in fostering 

innovation and filling the pipeline with breakthrough inventions – including DARPA’s 12 key 

organizing elements. Bonvillian also talks about, and endorses a DARPA spin-off concept called 

ARPA-E which would be focused on Energy; ARPA-E has been discussed recently in a number 

of venues including the National Academy of Science in a recent 2006 report Rising Above the 

Gathering Storm, and by various legislators, as well as by the popular press. 

Hybrid Venture Funds. 

An innovative public-private partnership concept that has gained ground with several 

government agencies is the government-sponsored VC fund, whereby public agencies fund an 

independent, private, nonprofit investment firm. The first such enterprise was In-Q-Tel, 

established in 1999 with backing from the CIA and later expanding to include additional, 

undisclosed, partners from other Intelligence Community agencies. The U.S. Army has 

structured a similar fund (On-Point), as has NASA (Red Planet). 

These hybrid funds blend equity investments and development funding for specific projects to 

young companies to create commercially-available products that also meet the particular 

technical needs of the sponsoring agencies. 

Another model of a public-private partnership is provided by Battelle Memorial Institute (BMI). 

BMI is a non-profit corporation and has a long history of commercializing technology. It also 

operates and /or shares in the management & operation of a number of DOE labs such as ORNL, 

NREL, and PNNL; i.e. they are a Management and Operations (M&O) contractor for the DOE. 

Several years ago, BMI created Battelle Ventures (BV), which is a for-profit Venture fund. BMI 

is the sole limited partner to Battelle Ventures (BV). BV operates like a traditional Venture fund 

and has a standard 80/20 profit sharing relationship with BMI; while BV gets a management fee 

and 20% share of net profits from the cash-out of their equity investments, BMI gets their 

investment back, and 80% of net profit which in turn is reinvested in laboratory in infrastructure, 

in a way that is consistent with their non-profit status. 

BV is an early stage venture fund, and is currently a modest sized fund of about 150M$; and it 

seeks syndication partners for all of its deals. BV has three technology foci; software, Bio 

 40
devices and energy, and they look at technologies coming out of the labs for potential deal flow, 

but are not limited to labs. In addition, BV have been exploring a number of innovative 

approaches for getting technology out of the lab and into the market place – such as building a 

company around a specific technology that they identified in one of the labs – in an approach 

which is consistent with the entrepreneur-in-residence approach described later in this report. 

Small Business Investment Corporations (SBIC) and Specialized Small Business 

Investment Corporations (SSBIC) are primarily lenders that borrow money from the Small 

Business Administration (SBA). These investment corporations, first created in 1958, are 

licensed by the SBA and offer another form of public/private partnerships. There is a large 

amount of money available (e.g. there is currently about $21B under management in 

approximately 400 SSBIC and SBICs). Also these investment corporations can borrow an 

amount up to 3X the amount of private money that they raise. In addition, though these 

investment companies and the SBA, have less stringent collateral requirements than commercial 

banks, the interest required by the SBA can be quite high to account for this extra risk. 

This type of debt funding44 can be quite attractive for expansion capital and later stage ventures 

that have solid cash flow to service a significant amount of debt though it does not appear to be 

particularly relevant to “cash flow poor” seed and other early ventures. Examples of Venture 

Capital firms that are licensed SBICs include: Chrysalix Energy LP, Rockport Capital Partners, 

and DFJ New England. In addition, SBICs are active in project financing such as within the 

Federal Energy Management Program, as well as with Brownfield and wind projects.45

Looking Beyond the United States 

While we have been following In-Q-Tel almost from inception in 2002 (Murphy and Edwards 

2003), along with others in the United States who are carrying out similar efforts, there are a 

good number of financial innovations occurring beyond the U.S. shores. These innovations are 

being driven by the both the desire and need to get a better return on the R&D investment, as 

well as the need to get them into the marketplace for solving specific problems, such as those 

addressed by CE technologies. For instance, Imperial College in London recently reported: 

“Imperial College London has joined with Amadeus Capital Partners, the European 

technology investor, in a GBP 250,000 project funded through the DTI's Knowledge 

Transfer Partnership (KTP), to research and commercialize new energy and 

environmental technologies emerging in the UK. This pioneering partnership is the first 

time that a KTP has been set up between a university and a venture capital firm.” 

 

44 Although, the investment corporations lend the money to their portfolio companies, they sometimes take partial repayment in 

the form of equity. 

45 There is a wealth of information on the Web; see for example: http://www.entrepreneur.com/article/0,4621,300803,00.html and 

http://products.cerc.com/brinfo.nsf/ALL/1626EA1B996564DB85256A8D004B5CA9?OpenDocument

 41
Appendix F: Case Study of Successful Gap Funding in Wisconsin 

CleanTech Partners (described above under State Initiatives) initially identified Spinworks as an 

investment candidate at NREL’s “Industry Growth Forum” in November, 2004 in Orlando, FL. 

Founded in 2001, Spinworks is located in Erie, PA. It had developed and started to market an 

energy-saving product, SpyroCor, for use by the heat-treating industry. The company 

predictably was unable to raise money from institutional venture capital firms. Its innovative 

technology does not have the potential to drive Spinworks to the $50-100 million valuation 

favored by VCs. Nonetheless, the technology will support a company with perhaps $5-10 

million in sales and save energy and reduce costs in the heat-treating industry. 

SpyroCor was developed in part using funds provided by the New York State Energy Research 

and Development Authority, with additional funding provided by two different Pennsylvania 

economic development agencies. The company also obtained an SBIR Phase 1 grant from DOE. 

Spinworks had six installs, all close to home geographically. There were no installs in 

Wisconsin nor in Pennsylvania and New York (the initial providers of research funding). In the 

case of Wisconsin, Spinworks had made no sales calls in the state, despite the fact that it is about 

the number 10 state in the country for heat treating and two of the four company founders were 

Wisconsin natives. 

Spinworks is a small company with solid, but relatively inexperienced management. It needed 

capital to expand its manufacturing operation and marketing efforts as well as to develop 

additional energy-saving products. Wisconsin heat-treaters were unaware of Spyrocors despite 

their initial sales, and with no independent verification of the technology or the vendor, 

Wisconsin firms were unlikely to try Spyrocors and put their processes at risk. 

While most states support technology development, very few support commercialization 

activities like Wisconsin. After extensive due diligence, CleanTech Partners elected to make an 

investment in the company. A $350,000 revenue-linked financing from CleanTech Partners is 

being used to hire a sales representative focusing on Wisconsin and to help Spinworks expand its 

business and product offerings. Once verification of energy savings was completed, Focus on 

Energy was also able to provide incentives to eligible industries that installed the technology. 

Spinworks plans to introduce two additional products (HeatCor and FireCor) over the next three 

years. HeatCor is a ceramic heat exchanger and FireCor is an entire tube replacement system. 

Combined, the SpyroCor, FireCor, and HeatCor products can reduce fuel consumption by over 

50%, with six to twelve month paybacks. As of July 31, 2006 there have been 15 installs in 

Wisconsin with more planned and Spinworks began making payments to CTP. 

 42
Appendix G: Other Transactions Authority and EPACT 2005 

EPACT 2005 has allowed for, and encourages the use of Other Transactions Authority (OTA)46

which could have a significant impact on supporting the technology and product maturation in 

particular of DOE sponsored innovations. This mechanism has been used quite successfully by 

the US DoD; specifically for prototype development. In particular, Marguth (Nov. 2004)47 has 

provided a summary that indicates that this authority has been shown to be considerably more 

effective than say the Cooperative Research and Development Agreement (CRADA) process for 

the DoD when applied to prototype development. 

The DOD Experience. In particular, the DOD has successfully used this authority to fund 

projects to develop prototypes that are directly relevant to weapons or weapons systems and are 

proposed to be acquired by the DoD. Cooperation between the prototype developers and the 

DoD is not only allowed, it is expected. And while project funding by DoD is not limited, the 

developer may need to fund up to one third of the 

cost. In addition the prototype proposal may 

include funds for a follow-on production run. 

Moreover, while the Government can pay up to 

50% for a research project it can potentially pay 

for more than 2/3 of the cost for a prototype 

development. In addition, the non-duplication of 

efforts for research-type OTAs do not apply.48

The use of this tool is shown as function of time 

in the attached figure; the dip, and subsequent rise 

in the ’99 time frame corresponds to when 

CRADAs came out of favor as a highly effective 

tool by the DOD. 

Benefits include the fact that research firms and developers of products who chose not to be 

contractors to the Government under Bayh-Dole acquisition regulations could be attracted as OT 

contractors. In addition the DoD has expanded its potential supplier and R&D base to include 

new parties who were reluctant to perform work under, say federal acquisition regulations 

(FARs). Given all the above, OTAs authority is now a valued T2 tool! 

OTA and ESIC. OTA, based on the successful DoD experience for prototype development, can 

meld effectively and productively with the Early Seed Investment Corporation (ESIC) concept, 

as a way to fund prototype development. In particular, it is well matched to the need to support 

technology and product maturation as well as market validation (e.g. using the prototypes to gage 

market acceptance and needed market adaptations). In essence OTA is another tool that ESIC 

and the Entrepreneurs in Residence can use to accelerate the movement of technology out of the 

 

46 See Section 1007 of EPACT 2005 (HR 6-339) 

47 See Marguth, Gib. (Nov. 2004). DOD Technology Transfer “Tools” and the Legal Issues. Proceedings, FLC E&T Training. 

TTIP Conference, pp 17-20. 

48 However, the developers financial records may be subject to examination for projects exceeding $5 million. 

 43
federal or private labs, and commercialize it; it is a more robust tool than say SBIR, which has 

both funding and temporal limitations. Thus, quite importantly, OTA, when applied with ESIC, 

can be an important and new paradigm for DOE programs that want to fast track the 

commercialization of key technologies that are created in partnership with R&D partners, by 

taking advantage of serial entrepreneur expertise that ESIC brings to the table. 

 44
Appendix H: A Brief Survey of EIR Programs in Practice 

The Re-emergence of EIR Programs: While it is true that some of the specifics of an 

Entrepreneur-in-Residence (EIR) program vary – where the EIR is recruited from, how much an 

EIR receives in compensation, the core competencies of the EIR, and contract length - EIRs as a 

concept have been accepted as a contributor to VCs for nearly 20 years. EIRs, also known as 

“Executives-in-Residence” or “CEOs in Residence” re-emerged largely as fallout to the failed 

incubators that were tailored to the rapid growth of dot coms, followed by the sudden collapse of 

the bubble. The streamlined EIR model is much more cost-effective, with a mentality that more 

encourages startups to grow up and move out. 49

In addition, both the VC firm and the EIR mutually benefit from an effective EIR model. The 

EIR establishes a relationship between herself and the fund. Moreover, the EIR can benefit from 

the myriad networking opportunities the role can provide, especially considering the fact that the 

EIR most certainly has greater exposure and credibility while affiliated with a respected VC 

firm. As a result of the above, the model has gained momentum in the past five years, but the real 

question becomes, “Do these programs work?” 

The numbers speak for themselves. VCs tend to invest in one out of every 350 deals they see 

(.03%). EIR program research indicates that EIR programs change the percentages to one out of 

two or three deals. This 30%-40% success rate suggests an improvement of 1,000 times or more, 

which drives a significant reduction in the screening and evaluation process costs for the VCs.50

The success of EIR programs is also evidenced by both the sheer number of notable VC firms 

that employ some form of an EIR model and the relative successes they have enjoyed as a result 

of these programs. Among the top VC firms that showcase the most ambitious EIR programs are: 

Accel Partners, Atlas Venture, Benchmark Capital, Bessemer Venture Partners, Earlybird, 

Mayfield, Mobius Venture Capital, and Redpoint.51 

Other firms, though not as extensively, also work in the EIR space. This includes Sequoia, 

Kleiner, Perkins, Caufield and Byers (KPCB),52 Ignition, DCM-Doll Capital, and Foundation 

Capital 

 

49 “The Valley: Long Live the EIR.” Red Herring. January 30, 2006.

50 Schwarzkopf, J. Closing the “Equity Gap” in Startup /Seed Investment for ICT Ventures (Israeli Experience). 

Case Western Reserve University. January 2006. 

51 Wilson, L. “Great Work ... What it Takes to Become an Entrepreneur in Residence, the Best Job You Can Never 

Apply For.” San Francisco Business Times. August 20, 2004. 52 Unfortunately, some firms such as KCPB do not typically publicize their EIRs, thus making it rather difficult to obtain much 

by way of historical information; e.g. one of KCPB’s most famous EIR was Peter Neupert of Drugstore.com. 

 45
Highlights from Selected EIR Programs: Of the programs mentioned above, Benchmark has 

set the bar by hosting in excess of 20 EIRs. According to Wilson, these EIRs have lead to 14 

"liquidity events" with more than $15 billion in market value. Noteworthy “graduates” from the 

Benchmark EIR program include “Mike Homer, Danny Shader and Keith Krach, who went on to 

found or lead Kontiki, Good Technology and Ariba respectively.” 

Mayfield Partners’ EIR model involves the EIR actively collaborating with general partners on 

business plans. Grant Heidrich, general partner at Mayfield, claims that the culmination of such 

an effort is "less risky than responding to a nicely packaged-up deal that walks in off the street 

with a bright shiny team of smiling faces."53 He hastened to add, though, that this is not a model 

for investing the entire fund because it is far too labor-intensive. 

One of the most aggressive VC firms implementing an EIR model is Mohr Davidow. According 

to one of their managing partners, Jon Feiber, the firm houses between four and six EIRs 

annually. Feiber added that almost one third of these EIRs create new companies. Of the 

remainder, there is a significant track record of them working at companies already in the firm’s 

portfolio. Feiber added that “[EIRs] have a tremendous impact on us, and I think we have a good 

impact on them. They get to be part of the fabric of the firm, help us look at products, and extend 

our networks.”54

Notwithstanding the presence of some of the major VC players in the EIR space, a newcomer to 

the VC arena, Ignition, may be the most active supporter of the EIR model. Ignition is a threeyear-old venture capital firm in Bellevue, WA that has seen three of its first 17 portfolio 

companies started by EIRs.55 The firm is currently supporting four other EIRs 

Menlo Park’s DCM-Doll Capital is yet another EIR player. Essentially, their model calls for one 

partner to mentor the EIR, escort him or her to events, assisting in networking efforts and aiding 

in the evaluation pf companies and ideas. David Chao, co-founder and managing general partner 

has personally overseen five EIRs. He notes that "The [EIR] program is net positive. Our first 

million in Recourse (Technologies) was 20-X -- that's ($20 million) magnitude."56 

Mark Saul, a general partner at Foundation Capital in Menlo Park since 1999, offers that "close 

to 30% to 50% of our projects start [with the involvement of an EIR].”57 According to Mr. Saul, 

all three of his first-round start-up investments have stemmed from an EIR’s involvement. 

 

53 Santiago, W. “On the Inside Track in Venture Capital.” New York Times. January 15, 2003. 

54 “The Valley: Long Live the EIR.” Red Herring. January 30, 2006.

55 Cook, J. “Venture Capital: VCs Call on Heavy Hitters for Help.” Seattle Post-Intelligencer Reporter. September 

5, 2003. 

56 Wilson, L. “Great Work ... What it Takes to Become an Entrepreneur in Residence, the Best Job You Can Never 

Apply For.” San Francisco Business Times. August 20, 2004. 

57 Santiago, W. “On the Inside Track in Venture Capital.” New York Times. January 15, 2003. 

 46
As far as the VC is concerned, it is common for the host VC to have first right of refusal on EIRdriven deals. Irwin Federman, general partner at U.S. Venture Partners reflects, "We don't ask 

them to give us first dibs; it just happens that way."58

 

58 Ibid. 

 47
Appendix I: Example Key ESIC Participants and Corresponding 

Responsibilities 

Key ESIC Participants Example Responsibilities 

Board of Directors (BOD) • Selects VC’s, angels, and others for Capitalization Advisory Board, and sets it 

up Capitalization Advisory Board (CAB) 

• Sets up Technology and Sponsor Advisory Board (TSAB) 

• Writes mission statement and gets agreement with CAB, and TSAB 

• Raises funds from Government and other Sponsors, and potential limited 

partners in EIR-Co’s 

• Hires Fund Manager, setting compensation, and appropriate incentives 

• Develops guidelines for investment selection 

• Approves, as appropriate EIR-Co investment recommended to it 

• Approves budget and other resources for operations 

TSAB Technology and 

Government Advisory 

Board ( e.g. from DOE, 

USDA, CO, other) 

• Assures that the ESIC meets mission for Government contributions. 

• Provides Funding to ESIC 

• Assures that agreed-to funds are available for capital call (e.g. through 

escrowing, Other Transaction Authority, or other) 

CAB Capitalization 

Advisory Board (CAB) 

• Assure that ESIC meets mission 

• Work with ESIC Manager to Identify EIR candidates, and matching 

technology 

• Members Potentially Support EIR salaries 

• Evaluates EIR plans for new businesses and recommends funding as 

appropriate to BOD - each EIR-Co have to be approved 

• Assists EIR in presenting plans to BOD. 

• Invest in portfolio EIR-Co’s as appropriate 

• Identify other syndication partners 

ESIC Manager • Overall management and operations of the fund process, including banking, 

legal, space, and other support (e.g. Information Services) 

• Develops Board of Advisors (CAB, and TSAB) working with the BOD 

• Writes specification for EIRs 

• Work with CAB, and TGIAB to identify, secure EIRs 

• Hire staff, and EIRs (for 1-2 year period) 

• Assists in identifying new deal flow from universities, labs, and other 

• Puts out call for EIRs and other resources (e.g. through the Resource 

Network) 

EIRs • Define the Commercialization and Funding Path Forward including needed 

and accessible IP, and required key success milestones 

• Get Approval from the BOD for the plan Implement the plan 

• Arrange for, and raise additional funding and syndication from (e.g. SBIR, 

STTR, CRADAs, etc.) 

 48
F1147-E(12/2004) 

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May 2007 

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Technical Report 

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5a. CONTRACT NUMBER

DE-AC36-99-GO10337 

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4. TITLE AND SUBTITLE

Enhancing Commercial Outcomes from R&D: A Framework for a 

Public-Private Partnership to Increase the Yield of Federally Funded 

R&D Investments and Promote Economic Development 

5c. PROGRAM ELEMENT NUMBER

5d. PROJECT NUMBER

NREL/TP-110-40463 

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1100.1000 

6. AUTHOR(S)

L.M. Murphy; P. Jerde; L. Rutherford; and R. Barone 

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National Renewable Energy Laboratory 

1617 Cole Blvd. 

Golden, CO 80401-3393 

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NREL/TP-110-40463 

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14. ABSTRACT (Maximum 200 Words)

This paper explores a new model for public sector investors to enhance and accelerate the commercialization of 

clean energy investments. 

15. SUBJECT TERMS

partnership; R&D; technology transfer 

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