Innovation and Entrepreneurship in Renewable Energy

Ramana  Nanda; Ken  Younge; Lee  Fleming

Chapter | The Changing Frontier: Rethinking Science and Innovation Policy | 2015

Innovation and Entrepreneurship in Renewable Energy

by Ramana Nanda, Ken Younge and Lee Fleming

Abstract

We document three facts related to innovation and entrepreneurship in renewable energy. Using data from the U.S. Patent and Trademark Office, we first show that patenting in renewable energy remains highly concentrated in a few large energy firms. In 2009, the top 20 firms accounted for over 40% of renewable energy patents in our data. Second, we compare patenting by venture-backed startups and incumbent firms. Using a variety of measures, we find that VC-backed startups are engaged in more novel and more highly cited innovations, compared to incumbent firms. Incumbent firms also have a higher share of patents that are completely un-cited or self-cited, suggesting that incumbents are more likely to engage in incremental innovation compared to VC-backed startups. Third, we document a rising share of patenting by startups that coincided with the surge in venture capital finance for renewable energy technologies in the early 2000s. We also point to structural factors about renewable energy that have caused the availability of venture capital finance for renewable energy to fall dramatically in recent years, with potential implications for the rate and trajectory of innovation in this sector.

Keywords: entrepreneurial finance; energy; entrepreneurial management; Energy; Finance; Entrepreneurship; Energy Industry;

Format: Print

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Citation:

Nanda, Ramana, Ken Younge, and Lee Fleming. "Innovation and Entrepreneurship in Renewable Energy." Chap. 7 in The Changing Frontier: Rethinking Science and Innovation Policy, edited by Adam Jaffe and Benjamin Jones, 199–232. University of Chicago Press, 2015.

Based in Portola Valley, California, Western Technology Investment (WTI) specialized in a hybrid form of debt and equity financing for early-stage companies. Like traditional venture capital and private equity firms, WTI raised funds from institutional investors and evaluated deals. However, instead of making initial investments in the form of equity, WTI focused primarily on lending money to start-ups, charging them interest and receiving warrants that could later be converted to stock in the case of a liquidity event. Most initial investments—usually in the range of $3–$5 million—were made in tandem with or following a company’s early rounds of venture capital equity financing. In addition, like more traditional venture capital investors, WTI hoped to participate in follow-on debt and equity investments in its successful portfolio companies.

Young, and particularly high-growth ventures often need to raise significant external finance, since their internal cash flow is usually insufficient to support the investments needed to grow. Although raising equity from venture capital or angel investors is the most well-known source of external finance for high-growth ventures, many entrepreneurs, particularly small business owners, rely on debt and other non-equity sources of capital to finance their ventures, either because equity capital is not available to them or because they want to avoid the ownership dilution and governance constraints associated with equity investments.

This note focuses on these non-equity sources of financing for entrepreneurs, paying particular attention to how the emergence of new technologies in risk assessment have expanded their availability for young firms.

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Innovation and Entrepreneurship in Renewable Energy

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