Hilda Duffy


Lesson 1 

 the 6th Technology offerup phoenix Revolution

analysts at BofA Merrill Lynch





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    We're at risk of missing out on some of the most profound opportunities offered by the technology revolution that has just begun.


    Yet many are oblivious to the signs and are in danger of watching this become a period of noisy turmoil rather than the full-blown insurrection needed to launch us into a green economy. What we require is not a new spinning wheel, but fabrics woven with nanofibers that generate solar power. To make that happen, we need a radically reformulated way of understanding markets, technology, financing, and the role of government in accelerating change. But will we understand the opportunities before they disappear?


    Seeing the Sixth Revolution for What It Is


    We are seven years into the beginning of what analysts at BofA Merrill Lynch Global Research call the Sixth Revolution. A table by Carlotta Perez, which was presented during a recent BofA Merrill Lynch Global Research luncheon hosted by Robert Preston and Steven Milunovich, outlines the revolutions that are unexpected in their own time that lead to the one in which we find ourselves.


    1771: Mechanization and improved water wheels

    1829: Development of steam for industry and railways

    1875: Cheap steel, availability of electricity, and the use of city gas

    1908: Inexpensive oil, mass-produced internal combustion engine vehicles, and universal electricity

    1971: Expansion of information and tele-communications

    2003: Cleantech and biotech

    The Vantage of Hindsight


    Looking back at 1971, we know that Intel's introduction of the microprocessor marked the beginning of a new era. But in that year, this meant little to people watching Mary Tyler Moore and The Partridge Family, or listening to Tony Orlando & Dawn and Janis Joplin. People would remember humanity's first steps on the Moon, opening relations between US and China, perhaps the successful completion of the Human Genome Project to 99.99% accuracy, and possibly the birth of Prometea, the first horse cloned by Italian scientists.



    According to Ben Weinberg, Partner, Element Partners, "Every day, we see American companies with promising technologies that are unable to deploy their products because of a lack of debt financing. By filling this gap, the government will ignite the mass deployment of innovative technologies, allowing technologies ranging from industrial waste heat to pole-mounted solar PV to prove their economics and gain credibility in the debt markets."


    Flying beneath our collective radar was the first floppy disk drive by IBM, the world's first e-mail sent by Ray Tomlinson, the launch of the first laser printer by Xerox PARC and the Cream Soda Computer by Bill Fernandez and Steve Wozniak (who would found the Apple Computer company with Steve Jobs a few years later).

    Times have not changed that much. It's 2011 and many of us face a similar disconnect with the events occurring around us. We are at the equivalent of 1986, a year on the cusp of the personal computer and the Internet fundamentally changing our world. 1986 was also the year that marked the beginning of a major financial shift into new markets. Venture Capital (VC) experienced its most substantial finance-raising season, with approximately $750 million, and the NASDAQ was established to help create a market for these companies.


    Leading this charge was Kleiner Perkins Caulfield & Beyers (KPCB), a firm that turned technical expertise into possibly the most successful IT venture capital firm in Silicon Valley. The IT model looked for a percentage of big successes to offset losses: an investment like the $8 million in Cerent, which was sold to Cisco Systems for $6.9 billion, could make up for a lot of great ideas that didn't quite make it.


    Changing Financial Models


    But the VC model that worked so well for information and telecommunications doesn't work in the new revolution. Not only is the financing scale of the cleantech revolution orders of magnitude larger than the last, this early in the game even analysts are struggling to see the future.


    Steven Milunovich, who hosted the BofA Merrill Lynch Global Research lunch, remarked that each revolution has an innovation phase which may last for as long as 25 years, followed by an implementation phase of another 25. Most money is made in the first 20 years, so real players want to get in early. But the question is: Get in where, for how much and with whom?


    There is still market scepticism and uncertainty about the staying power of the clean energy revolution. Milunovich estimates that many institutional investors don't believe in global warming, and adopt a "wait and see" attitude complicated by government impasse on energy security legislation. For those who are looking at these markets, their motivation ranges from concerns about oil scarcity, supremacy in the "new Sputnik" race, the shoring up of homeland security and - for some - a concern about the effects of climate change. Many look askance at those who see that we are in the midst of a fundamental change in how we produce and use energy. Milunovich, for all these reasons, is "cautious in the short term, bullish on the long."


    The Valley of Death


    Every new technology brings with it needs for new financing. In the sixth revolution, with budget needs 10 times those of IT, the challenge is moving from idea to prototype to commercialization. The Valley of Death, as a recent Bloomberg New Energy Finance whitepaper, Crossing the Valley of Death pointed out, is the gap between technology creation and commercial maturity.


    But some investors and policy makers continue to hope that private capital will fuel this gap, much as it did the last. They express concern over the debt from government programs like the stimulus funds (American Recovery and Reinvestment Act) which have invested millions in new technologies in the clean energy sector, as well as helping states with rebuilding infrastructure and other projects. They question why the traditional financing models, which made the United States the world leader in information technology and telecommunications, can't be made to work today, if the Government would just offerup phoenix get out of the way.


    But analysts from many sides of financing believe that government support, of some kind, is essential to move projects forward, because cleantech and biotech projects require a much larger input of capital in order to get to commercialization. This gap not only affects commercialization, but is also affecting investments in new technologies, because financial interests are concerned that their investment might not see fruition - get to commercial scale.


    How new technologies are radically different from the computer revolution.


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