The Long Tailpipe - Shai Agassi's Blog

Synthesizing Transformation

On January 21st 2008 we set the first step towards getting an entire country off its addiction to gasoline. Why is the Israeli announcement so meaningful? Almost a year in the making, and three years in thinking, the transformative power of yesterday’s announcement is not immediately obvious to people. Sure, most people feel in their gut that something big happened but very few could put their finger on the real transformative news of the day. So let’s run a Monday morning quarterback session (for those who are not into football, the reference is to the analysis run by commentator the morning after a football game is over…for those of you from the UK, football is a game played using a strangely shaped ball, using your hands, covered in protection, with lots of TV oriented stoppage time).

We had a country, Israel, announcing its intent and actions towards a strategic shift from oil as the main source of transportation energy towards clean electricity (mostly solar) as the source of energy powering cars. The announcement was made at the visionary leadership level – by President Shimon Peres – who has been one of the driving forces behind Project Better Place for the last year. The Prime Minister, Ehud Olmert – who promised and delivered relentless backing across all government branches, and executive power through his own PM office General Manager, Ra’anan Dinur, drove the vision into policy.  The Ministry of Finance, converted the policy into green taxation law, in the making for more than 2 years, by a team in the finance ministry, which made sure there is a great starting run for zero-emission vehicles, but more importantly – long term visibility for the law. It will now convert into working regulatory bodies headed by ministry of energy and infrastructure, with minister Ben-Eliezer present and speaking yesterday; other efforts led by ministry of transportation and of course ministry of environment are all working through a coordinated effort across the entire government. Finally, to convert this transformation into an economic growth The ministry of Trace, headed by minister Eli Ishai, commerce and labor which owns the chief scientist of Israel will start creating economic growth packages, R&D programs and trade incentives that will attract the emerging EV supply chain into Israel. This was demonstrated by a signing ceremony of the first umbrella agreement between Renault and the Chief Scientist of Israel at the President’s house.  That is the kind of comprehensive plan that is required for a country to convert itself off fossil fuels – strong coordinated force that can provide enough momentum to turn away 100+ years of inertia in this industry.

We had a car-maker, the forth largest one in the world, that committed to Pure Electric Vehicles (EV) as a mass-market product. Not only are they committed, they have allocated the funds required to develop such vehicle, for the needs of the country where we will start. In their alliance with Nissan, they are developing the next generation of batteries that can drive the vehicle, and provide significant economics advantage for EV over gasoline, diesel or hybrids. Carlos Ghosn, the legendary CEO, who runs two car companies headquartered in two different continents (who is the only man I personally know that flies more miles than I do), is known for being conservative and always delivers more than he promises. He promised us a great car, a fun car to drive, a good performance full three-box sedan, a better car TCO than internal combustion engine, and he promised it will be delivered in volume within approximately three years. Ghosn, Patrick Pelata and Renault-Nissan alliance do not promise lightly, and when he looked me in the eye, I knew he will deliver.

The third ingredient we had yesterday was funding, as we had some of our investment group present in person - Idan Ofer braved the day with high fever and I was really glad to have his father Sami share the event with us; we also had Mike Granoff, representing our angels (some of them like Sass Somekh were there in person), while others like Alan and Bill and the rest of the VantagePoint team and Morgan Stanley were with us through the webcast. For the first time, a company raises the money required not to make the sexy electric car – for that we have Renault-Nissan committing more Development resources than any startup could in the EV industry. This capital is the money that will be leverage to build the infrastructure so much missing from all the previous attempts at this EV market - $200M in equity, goes a very long way when matched with project financing for long term infrastructure investment. I am glad to share with you that we not only signed the funding agreement, we also passed all due diligence on our plans and closed our financing by all parties (which proves to some people that we did have financial plans after all…not a pipe dream).

As the integrators, Project Better Place were the fourth ingredient. Our job starts now (although I must admit we did play some part in bringing all the other parties together to see this tremendous opportunity). We are building the infrastructure framework; we are sourcing the grid elements; we work with the electric company to connect a virtual grid across the country (think of VPN for electrons, instead of bits); we are securing the installation across the country’s parking lots, homes and curbside parking in every major and minor city in Israel; we are educating the drivers and fleet managers as to how EVs work and feel; we design and redesign the EV experience – in our definition of what a car means to us;  we work with the car makers to define the car requirements and how they work with the grid; we integrate and build the software that manages everything for charging the cars to charging the credit cards; in short – we put it all together – and we turn this concept into a replicable business for Israel and other countries.

What happened yesterday was much like photosynthesis – one of the most intriguing processes in nature, where four electrons make it to the same spot in the leaf at the same time, and convert energy from photons to molecules bonded by chemical bonds. Before photosynthesis happens, all you have is energy. After photosynthesis happens what you get is a physical molecule which can be stored for ever. By putting all four elements together in PBP, we will convert vision (neurons firing in one crazy brain) into reality - physical manifestation of the energy of the entire Project Better Place team manifesting itself forever hopefully.

January 21st changes the balance in this industry – if we are right about the business model of PBP, and given the cars will be insanely great (as Renault promised us), there is a possibility of market tipping first in the test markets but very rapidly in the entire car industry worldwide. The industry, and other countries can no longer sit on the fence and wait to see what happens – the first mover advantage here is just too big to overcome – see what happened to Toyota with the Prius. Countries that depend on oil today are hurting at $100/bbl (and $88/bbl is not helping much…but let’s hope the price stays lower as long as possible). Waiting for the economy to break before investing in an alternative is like running a “Thelma and Louise” on your economy – you all know the scene, where you see a canyon approaching and you don’t stop, just pres the gas peddle harder and fly off the cliff. While a memorable ending to a movie, it is an unpleasant jump when 6 billion people are in the car with you.

Let me make a bold prediction – Israel will not be alone on the road to electric transportation. By the end of this year there will be at least 5 countries supporting the same policies and on the same framework. As to the car industry – In the words of Lee Iaccoca - It is time to lead, follow or get out of the way.

Oil at $100 a barrel – the halfway point

When I started developing Project Better Place as a white paper for the World Economic Forum, oil was hovering around $50 a barrel. I predicted in my calculations that by the end of the decade we will reach $100 a barrel. That point was very contentious at the time, as most people predicted that we are in a cyclical industry. One of the industry experts even told me that I do not understand oil (a correct statement at the time), and that “…Oil is cheap and abundant…whenever an alternative solution will show up the price will go down till the alternative is not viable”. On the flip side, sometime early this year, I had made a bet with my friend and co-conspirator Andrey Zarur, who claimed that Oil will reach $100 before the end of the year – I won that bet by a narrow margin of 3 days.

“…Oil is cheap and abundant.." - oil expert

At any price under $30, oil is practically not a factor in governmental decisions. During the Clinton days we had oil at $10 bbl and the total daily import cost of oil to the American trade balance added up to roughly $100M. Even when we add it up across an entire year the cost is $30B, not easy to swallow for most country budgets, but negligible for a super power. On Jan 3rd 2008 the cost of importing oil to the US was $1.3B a day – roughly 2 weeks worth of oil in 1999 – and if the price point stays where it is the US will see another $500B disappearing from its trade balance in 2008. Adding in the cost of subsidies for the domestic oil industry, the delivery and refining costs of gasoline, the healthcare cost of using it, and the cost of securing oil sources around the world and we are looking at probably the same amount in “externalities” of oil which the US budget loses every year. The combined sum is a staggering ANNUAL Trillion US dollars – roughly the Chinese federal cash reserve.

Oil, we found out, is neither cheap nor abundant. It is dwindling and hard to extract. The issue at hand is not whether we have enough reserves, but rather whether we have enough of a pipe out of the current reserves to feed the global addiction. We have moved from supply side constraints to demand based pricing. As another oil expert explained to me we are at the mid point of oil prices as they move from an equilibrium at $50/bbl to a new level at $150/bbl. He had a chilling analysis for the two sides of the oil price spectrum. “…At $50/bbl governments invest in demand; At $150/bbl they secure supply…”. I see that statement as one of the most profound statements I had heard about the oil market and the role government plays in it.

“…At $50/bbl governments invest in demand; At $150/bbl they secure supply…” -Another Oil Expert

What he meant is that governments at $50 bbl have enough time to invest in finding alternatives that will reduce their demand for oil. Dependence on a scarce and expensive substance is called an addiction. We are all addicts. We value our freedom to drive more than many other freedoms that have a specific amendment in the constitution. We wasted the good years, when we could take the time and research alternatives. We wasted them on hydrogen research and ethanol subsidies. Don’t take me the wrong way, it wasn’t all waste – fuel cells will give us solid electric drive trains (only no need for hydrogen), and ethanol might buy us some precious time until we get completely off the need to burn something in an inefficient engine. But hydrogen is never going to be an efficient way to distribute electric energy (wrong package for an electron), and ethanol will never scale to provide us enough liquid fuel without destroying the food markets (oh, and run out of water). We were enamored with ideas that solved a technical solution but didn’t scale.

"We will not reduce our use of oil until it is significantly more expensive. Hence oil is bound to become very expensive" - Smart man about oil

The other side of the spectrum is best demonstrated by a scenario-planning event run by SAFE in DC two months ago. During the event staffed by former cabinet members advised a president (not present, nor identified by gender) what to do whenever the price of oil reached a new high (increased by $10/bbl through external events). To make a long story short, at $150 bbl the president was left with two alternatives – (a) instruct all Americans not to drive on Sunday or (b) take over the Persian gulf. You guessed it right, Football games were not suspended. At the same time, The US is not the only country which cannot afford the implications of $150 bbl, China’s economy depends on cheaper Diesel, and at $150 bbl, they have no choice but to raise Diesel prices to roughly $4.50 a gallon – implying a significant inflationary pressure on all basic commodities. Will we have a timeshare agreement with China and the US over oil sources?

"Given the choice between driving on Sundays and our military securing oil sources we will prefer our freedom over others" - Unfortunate reality

The question that remains open in many people’s mind is which statement to believe regarding state of oil in the world – “cheap and abundant” or “apocalyptic scenario”. The hidden factor in all of this assessment is the negative feedback loop the oil market has entered over the last two years. Countries that sit on reserves are smarting up – and had become very reluctant to extract and sell it at any price. If you are a leader of a country that is lucky to have extracted oil for the last few years, your reserves do not require a cash infusion any more. What you do is the same as any driver does in times of shortage - you store some oil for rainy days. Countries on the verge of running out of their reserves in the next decade or so, decided to stop exporting oil (smart planning). On the other hand, countries that are importing oil, but have fields are shifting the ownership on the new fields to the national oil companies. Some of those companies (not Saudi Aramco or Petrobras), do not have the same technology that global-oil is using, so their pipes move oil a bit slower than the big guys can – hence the constraint is now on the width of the pipe, not the size of reserves (although that will be an issue soon enough).

What do we have to do – we have to put our money into easing demand before it is too late. Addicts who wait for the crisis do not recover in the same shape as they were before a stroke or heart attack hit them. In the world of oil a heart attack is a global recession, and a stroke is probably global war. We can’t afford either. Only solution to addiction is drying up on the substance. We may be too late, but we still need to try – putting more money into oil without putting any money into oil independence will make us dream of days when oil was cheap and abundant – at only $100 a barrel.

Oil Prices

On the day we launched, oil hit its all time (non-adjusted) high - $92.5 a barrel. I got asked to speak at Fox, right after a panel of oil “price experts” finished a very heated dialog. The guy shouting the hardest was the anti-green guy. He made a very bold claim that the price point of $92 is over inflated by speculation in the market and that there is at least $20 of speculation in the price of the barrel. The reason for that projection – national reserves data for all countries around the world, and in particular US showed higher reserves than past numbers. That meant the US had 57 days or so of crude oil reserves in its disposal and wasn’t using them – in other words the federal governments were behind some of the inflation since they were “over-buying oil”.

I couldn’t interrupt him, as they wouldn’t let me sit in the same studio with the panel (I was pushed to a side room camera – not enough room next to the panelists). What I would have reminded him, had I had the chance is that going back $20 is merely one or two months in calendar terms. The interesting thing was the fervor with which he spoke, as if to say that oil at $70 a barrel is a cheap commodity that makes everyone happy.

Sure enough I wake up on Wednesday morning in Washington DC, to find the next headline – “Oil prices tumble to $90 a barrel”. Just the thought of the combination of $90 and the descriptor “tumble” threw me into a long laugh the entire day. Oh, by the way, by the time I took my flight out of DC on the same afternoon, the price of the barrel un-tumbled (I just can’t find a better descriptor) to $96, as we all learned that reserves in the US hit a low not seen since the post-Katrina shut down of the Louisiana refinery belt. Mind you, that $96 a barrel price, still does not factor in a single potential disaster like a Hurricane turning North-west instead of North in the Gulf of Mexico, let’s see, within the next 48 hours?

Continuing on the strong “weak signals” theme from Sunday

• China had the first gasoline direct casualty – a person in line for gasoline in a town gets beaten by people who are constrained by Diesel shortages. This is not a China problem - it is going to become a very ubiquitous problem around the world - so take the image of a man beaten for Gasoline and scale it out by 6 Billion people…you see the point.

• As result of the shortage of gasoline, China raised the price of Gasoline at the pump by 10%. This is really big news, and if the trend of oil crude continues at the same pace, more increases are on the way soon.

• The CEO of Total, the French upstream and downstream company, breaks rank from the rest of the industry and tells FT that “while reserves are still found in the ground, reaching production capacity of over 100 million barrels a day is difficult”. The reason is fairly simple, new reserves are going to the national oil companies (NOCs) and not to the major global companies any more. Countries are asking the majors who want to come into their country to focus on the “heavy oil sources” those are not only harder to get, they also have a higher carbon impact on the world. By not letting the oil majors tap into the easy oil the countries are hoping to keep those reserves for themselves for a rainy day.

If you were wondering what the oil majors were predicting on the future production targets, well check the following data out:

• We are producing 85m barrels a day (b/d) right now (that’s the great sucking sound you hear in your sleep as we gulp our planet’s scarce natural resources that took us 300 million years to convert from living matter into carbon based energy
• Oil companies predict 118 m b/d by 2030.
• We are already at virtually $100 per barrel, today at 85m. What happens as we approach 100 m b/d to the price  of oil and gasoline. This is queue theory at its best. The clog that comes as result of the last buyer for a barrel of oil is just the same as the slow down of cars on a highway – the last 10% slow down the road by 50%. Yet just like on the road, the last 10% set the price higher not just for themselves but for everyone in the market.

What does it all mean – we are $4 from the inevitability of $100 per barrel of oil. There is 0% short-term market elasticity in the price of oil. We consume it the same at $1 a gallon and $3 or $7 a gallon. Why? Because our short-term decision is always one for $100 or so – should I fill up my car or stop driving from now on. When the decision for car energy is less than 1% of the cost of the car, you can never wean away from the addiction to oil. It will be interesting to see what happens in Europe, when Gasoline prices hit $8 per gallon across the entire continent (not just London) as result of this recent crude oil increase.

To illustrate, an average clunker across Europe, and there should be 100M or so cars in Europe over the age of 8, is probably worth less than $5,000 to buy. Refueling it for a year at 20 mpg, which is where the European fleet was on performance 10 years ago requires an average of 600+ gallons. As a result the average used car owner will pay more than $5,000 for car energy supply for one year – more than the car is worth. As Europe urbanization and salary diversity pushes more people into suburban and beltway living, at least 30% of the population drives 30,000 km a year. Those people, who are the ones that cannot afford the expensive living in the city, now need to either stop driving private cars or pay upwards of  $7,000 for gasoline every year. Only we never make that decision ahead of time, we take the hit 50 times a year at the pump – death by a thousand credit card cuts…

The cost of the average used car in Europe is now cheaper than the cost of gasoline to drive it for a year– talk about razor and blades businesses. Big oil still can’t supply the global demand for this concentrated energy liquid, yet the US prices gasoline less than its other concentrated energy liquid – Red Bull – when we compare on a gallon-to-gallon basis. [If you are like me you now wandered into the "how much is a gallon of Red-Bull" part of your brain...at $2 for a can of 8.3 ounces it costs $30 for a gallon...if you buy it at a club for $6 a can you are looking roughly at $100 a gallon - or 30x more than Gasoline...but then again, where do you find a gasoline that would give you the buzz-worth 15 cans of Red Bull?]

The oil companies are not evil, they merely supply our craving for freedom of drive. The bigger the population growth, the farther we are from our centers of work and culture, simply because we cannot afford the houses that require no driving in the middle of our big cities. If the oil companies would not exist, we will all run for cover as our economy would stall and our markets truly tumble. They are not a magic liquid industry – they are in reality transportation energy companies. We need to find a better transportation energy platform for them to jump to, bridge to this future, one that does not depend on magic liquids bubbling up from the bottom of our oceans and spews the carbon so neatly stored in the ground back into the atmosphere.

check out our white paper at  Project Better Place

shai

What I did during my summer vacation...

I hate to destroy the illusion that I spent this entire summer at the Galapagos (although I would have loved to…). I also have to fess up that Steven Addis and my wife took the pictures I used for my little Galapagos blog entry, so they deserve all the credit!

In any case, I got some homework today to revive the blog by sharing some of the stuff I have done over the last few months, without telling you too much about what is really going on in our little “project Better Place”…

I figured that the best sharing I can do is to put up my reading list from this summer, to prove I wasn’t totally goofing off. All books are extremely interesting and every one of them is highly recommended reading on their own. Put together with the weak signals I collected this summer they make for a very interesting picture.

So, On the boat in the Galapagos I read Blue Ocean Strategy by Chan Kim and Renée Mauborgne, which is a fantastic business strategy book, guiding the reader through a methodology for examining markets by looking at them with a fresh view. It could probably be considered a prequel to both Innovators dilemma (by Clayton Christiansen) and Crossing the Chasm (by my dear friend Geoff Moore), two of my favorite business books ever. In other words, the best way to disrupt a market is by looking at an adjacent (even if not yet existing) market and defining the complete product through new glasses. As a general observation, the book is much better read in the middle of a blue ocean, but that is not a mandatory requirement…

I read a couple of great car books, one of which is a rare find – Billy, Alfred and General Motors by William Pelfrey (who was the head of GM’s corporate communication till recently). I bet you most of you don’t know who founded General Motors, but all of you know who Alfred is in the title of the book. And no, the answer to both answers is not the same person. Read the book! I always find that these books about what happened at the beginning of an industry to be extremely inspiring, as we all now take this $1.5 Trillion industry for granted, with its rules, inertia, winners and losers. We buy the cars but don’t know each name stands for a great engineer or an inspiring entrepreneur, who failed or succeeded, but whose name became immortal in the car brand they spawned.

Speaking of formation of industries, I re-read one of my all time favorites - Empires of Light by Jill Jones. If I have not yet convinced you to get that book and read through it’s time you do. What a master piece, describing an industry that changed all of our lives, through so many imperfect technical solutions some of which still stand. To think of the fact that incandescent light-bulbs are still dominant more than a century after Edison, and are still wasting 995 of the energy they get in the form of heat…yet they carry so much inertia that they are still ubiquitous even in countries where electricity and emissions are problems. Not to mention, Edison’s fight against Alternating Current (AC) which no one even thinks of replacing as the standard today… Yet we all seem to think that Tesla was a sports-car guy now that Tesla Motors generated the much-deserved excitement with their roadster. 

The other car book is the new one, Zoom by the two economist columnists - Vaitheeswaran and Carson. I love the historic perspective, the conclusion that the car market is about to be disrupted, although I don’t agree with the openning remarks about how Hydrogen is the solution (although I am not through the entire book yet, so there might be a great twist to the story towards the end). The book is extremely thoroughly researched, very colorful in its detail of the car industry, and feels almost like it takes over where Billy, Alfred book concluded… so consider it an unsynchronized sequel…

Finally, a great book you should read to put the entire oil picture in perspective is Out of Gas written by David Goodstein of CalTech. The first chapter is fantastic even for people who are not versed in the science part of the issues. The rest if great if you really want to understand the fundamentals of the energy issue and not make the same mistakes as other people make routinely (like thinking that “oil producing countries” actually produce oil…).

I mentioned weak signals – which is something I picked up at the great session with my Young Global Leaders out in Dalian, China. The hospitality was as usual incredible, with China awe-inspiring in its continuous growth and enormity. I have a bunch of notes from the sessions, although the best part about YGL this time were the YGLs themselves and the free form discussions we all had, which I am not at liberty to share even if I could capture the magic of that week in our shared space. The YGL team and Professor Schwab asked us to bring a weak signal to the session – meaning some event or piece of data that tells us something about the future, not in a direct way.

The question caused me to start collecting weak signals this entire summer. The three that I would share with you are all related in fairly obvious ways though – The cost of a deep water exploration oil rig, this year’s Nobel Peace Prize, and the recent story about the reduction in ocean’s ability to absorb CO2.

• A new deep ocean rig costs upwards of $600M to buy and $500,000 to operate daily. It digs at the ocean floor which is 12,000 feet under the ocean surface, and goes in well over 20,000 feet to find oil. I learned about these numbers in a session where an expert on the topic mentioned that oil is “cheap and abundant”, which makes me wonder what happens when we need to find the “expensive oil” - if this is the cheap stuff. Did I mention the price of an oil barrel crossed $90 for a brief moment this week?

• Al Gore won the Nobel for his amazing work waking us up to the dangers of the “uncontrolled experiment” we’ve been running on the only habitable planet within reach. I still find some people’s reaction to the recognition he received incredible. In some newspaper I read the morning after the headline was “Al gore makes 9 mistakes in his movie”. Talk about denial.

• Finally, this last one from this week's news -  Oceans seen soaking up less CO2. This one is really troubling as the ocean is our global “hidden CO2 sink”. You see, a few years back scientists ran a calculation that predicted our Earth’s atmosphere should have about twice as many carbon atoms as we measured, so everyone was wondering where did the CO2 go? It ended up that the ocean was a very efficient CO2 sink. It also ends up that the sink is getting clogged…as we find out today that the speed of absorption went down by 50% over the last decade. As if we needed more bad news. Did I mention the caps were melting at an alarming speed?

When I put all these signals together I get an interesting picture – (1) we ran out of cheap new oil reserves, (2) we are running out of place in the atmosphere and the ocean to store the carbon atoms oil makes when we drive our cars, and (3) we are all much more aware today than we were three years ago of the implications of our actions and the predicament we found ourselves in, thanks to Al Gore. At the same time, we will not stop driving our cars – thanks to the freedom to roam we got used to since the days of Billy Durant, Henry Ford and Alfred Sloan.

Now, as I was writing this entry two strong signals flared up - Oil hit $92, and closed the week over $90 - as OPEC anounced they simply don't see a way to increase production short term. the second one was a strong rumor coming out of the blogosphere about China intending to raise the tax on Gasoline so as to get the price up to $5 per gallon. I am not sure there is a base to the rumor, but if it is true then the second largest car market in the world will be strongly inclined to shift away from liquid fossil fuels fairly rapidly.

What does it mean? I guess we’ll see in our collective behavioral changes…From government policy to individual choices. Is it time for a “blue-ocean” look at this greatest of industries...

Stay tuned - more on Monday

Galapagos Islands - The pictures

Now that I have been to the Galapagos I can tell you it is god's little piece of heaven. I believe that there is a reason why God put these islands far away from society, and for all the geological explanations we got, I still think it was set up that way so that God can take a vacation somewhere away from any human interference....

In any case, I got so many requests through email to share the pictures, so here they are...all stolen from my wife and from Steven Addis - who taught all of us on the boat how to take some serious nature pix.

You all know about the animals you see on the beach, like the friendly Iguanas...

...or the Giant Turtoises...

...but underwater you can find some close relatives, like the magnificant floating sea turtles...
...even better - the only pinguins surfing at the equator...
If you wonder why these pinguins swim so fast (they feel like a torpedo in the water)...well, if this guy was chasing you, wouldn't you run fast?

(They are really cute when they don't chase anything...)

And since we got pictures from the land and underwater, we should not forget the amazing birds you find everywhere...

And the photographers who are chasing them at any time (this is Steven taking a picture of frigates in a picture taken from the deck of our boat by my wife)...

We all lived on the Santa Cruz for the entire week (Thanks to the amazing crew!!!) - our favorite sport on the boat (Thanks to Bill Price, who convinced the captain none of us will do anything stupid) was boat jumping - performed here by Jonathan and his dad...

After which Jonathan and I jumped into the Jacuzzi and watched this amazing sunset...

...and Jonathan said - "Dad, we are finally retired on a boat!"

The best part of this trip was undoubtedly the 90 friends with whom we spent 7 magical days in the "islas Galapagos de Ecuador" - put it very high on your list of places to see before you die!

Scaling the Energy Mountain

I saw this great presentation from professor Nocera, at MIT, which you should truly download and watch on iTunes. If there is anyone who doesn’t get the scale of the problem we are facing, professor Nocera really knows how to punch you in the gut with the reality of our global energy crisis. We used to debate the flip angle of his worry – that of climate change caused by greenhouse gasses emissions. People still claim we don’t know what the scope of the problem is, or when will the glaciers melt (some even have the chutzpa to say they are waiting for it to happen so we can dig for oil in Greenland…), etc. Professor Nocera has a much simpler view on it – we are running out of energy – and the clean energy solutions we have don’t scale - with the exception of solar (did I mention he is working on solar solutions at MIT...in particular recreating photosynthesis).

To summarize his energy math –
1.    We will need 28 Trillion Watts as a planet in 2050 – 18 TW of which are not in existence today – even if we reduce our average level of consumption significantly below current US levels.
2.    If we convert every plant we have to fuel plants we will get 7 Trillion Watts (we do have to give up on all food crops in that case). I heard some people argue a different number on this point
3.    If we go Nuclear and figure out how to put a new safe nuclear plant every 36 hours we can get 8,000 nuclear facilities (we will each get a neighborhood nuclear plant) supplying 8 TW. In Israel, that will translate to roughly 5 new nuclear facilities…
4.    If we catch all the winds in the world (and with it the birds) we will get 2 more TW
5.    Finally, if we damn all the rivers we didn’t already put a damn on – we will get 1 trillion watt – putting us in a world without fish (which goes perfectly well with a world without trees, crops, birds, and your local nuclear facility).

On the other hand we do know that the sun pours 800 Trillion Watts on the planet at any point in time. Historically we lived entirely based on that energy – everything we grew, hunted and ate leveraged that energy source. Wind and waves resulted from the sun, we turned them to energy for transportation and mechanical drive through boats and windmills. What we didn’t use simply got into the ground and turned into fossil fuels over the years – that was our planet’s battery – and we filled it up over 300 million years. The battery held its energy in complex C-H bonds, until we became smart enough to figure out we can burn that bond and make things go faster, bigger, farther and spread our Icarus wings to get closer to the sun.

Well, the news flash is that we have used half of that battery in the last 100 years or so. At the rate we are going, we won’t have 100 more years to go, we probably have closer to 50 as we accelerate the burn rate. If we do not revert back to using the sun, and being very efficient at doing it, well we might simply need to figure out how to have less people or less burn. Neither option leads me to the comfort that we will peacefully figure out whose turn it is at the decision table when we decide on who owns the remainder of the global battery.

The urgency of that battery drain pace is daunting to me. I hear people telling me that the energy problem is solvable (on its own -  was the claim) within 10-20 years for each of the issues we are facing. My view is that we have to do whatever we can to solve any aspect of it, as soon as possible, or we will simply drain what’s left before we have time to let the problem solve itself. 8 years of doing nothing amount to almost 20% of the time we have left on the most urgent global clock, it is ticking loudly and we cannot afford 8 years of doing nothing.

What we need is a portfolio approach, most of which should be focused on two time axis – long term focus on the disruptive solutions that can scale to meet our real needs; and short term solutions that drastically reduce the energy consumption of our  current technology set. Some of the people, in particular VC backed companies, should focus on the short-term cycles – as the VC implicit impatience (and I do say that with the most positive sense – they have to be impatient to sieve out the bad ideas quickly and redirect the money towards the successes.) The long-term solutions need to get different kind of money – patient money that does not want short-term returns, but is looking for long term mega-profits, with big social impact. I call it “mission money”.

I am glad to tell you that as I am going through the funding process I am more than impressed with finding the “money missionaries”, they are around, they are smart, they want to do good and they sign up. If the world splits the efforts – VCs will buy us more time, missionaries will buy us a way out – I believe there is a way to address all these points at scale and allow us all to keep going faster, bigger, farther, only this time not at the expense of our children.

Driving Economies - IVA Continued

In continuation to the discussion about growth through innovation, I took a look at the economic drivers that drive the baseline of an economy. Normal growth curves can take small states, like Israel, into pretty much cruise mode – GDP will sustain as long as three cost ratios remain stable:

• Demographics, as represented by health care costs and social security ratios, both manifesting the retired population to working generation size ratios
• Education, as measured through the ratio between what an 18 year old knows when they come out of school with compared to their parents at 18.
• Security costs, counting military spending and internal crime rates.

Interestingly the US is reversing ratios on all these indicators in recent years. The demographics in the US, as result of significant improvements in medicine grows a much larger aging population than native working population. We have seen a significant slide back in the knowledge ratio (son/father knowledge ratio has been declining since the late 80s) – which is amazing given all the technology we are able to use for educating kids these days. Finally, we have had significant decline in normal internal security costs (with a very interesting explanation as to the reasons you can read in Freakonomics), but a six-year very significant spike in (what we hope are temporary) costs of wars on Terror at home and abroad.

What I believe is holding the US is a combination of talent import process, caused by the great H1-B visa policy that allowed more than a million talented scientists and engineers to immigrate into the US if they can show knowledge – not money – as the ticket to the promised land of silicon valley. That wealth of knowledge met wealth of capital (the funny part is this wealth comes from global capital coming to invest back in their own exported talents) – with the meeting place set for Sand Hill Rd, Menlo Park, CA. The creativity of these young engineers brought us the web, eCommerce, the gadgets (no, I didn’t get an iPhone yet – but I sure want one…), the ever present connected world, advertising based media, the social virtual community of web 2.0 – wave after wave of [Knowledge -> Technology -> IP -> wealth -> Venture Capital] circles. All the while, the economy is growing, taxes are flowing, and everyone enjoys the party (especially the tax man).

The comment on my previous post regarding Singapore’s leadership success, one that comes from treating the island state as a large company by its founder-leader is right on. To a certain (much larger) degree, China applied the same model to create modern china over the last few years. Where most countries need one good idea every 5-10 years and can ride the wave of that idea for a generation, China needs to create one of those big ideas pretty much every 5-10 months at their scale. So what is the next big idea – because if you are a small country, like Israel or Singapore, you just can’t wait for the wave to hit the shore, you have to start paddling before the wave comes.

I contend that it is time to get Israel out of cruise mode – not by slowing down the great circular VC model – rather by accelerating and focusing part of it. It is also time to turn Israel’s global brand around – the world mostly sees Israel as exporting a problem by the friction it creates through its (legitimate!!) presence in the middle-east. I believe it is time for Israel to start solving some big problems that worry us on a global scale and export the solutions. Personally, I would like to see Israel start exporting solutions to the true fundamentals again – Water, Food, Energy, Emissions, Genetics – the founding blocks of humanity.

The theory I have is that Israel should focus on one or two of these every five years, in overlaping waves. The focus is not a government program – quite the contrary, it needs to be a commercial focus, galvanized through a challenge of huge scale. The challenge needs to be one that can unite the common people, the entrepreneurs, the wealth – so much so that no one will want to be left “outside” the solution. Think of it as an Apollo mission, getting humanity to the moon and back, only targeted at one or more of these fundamental problems. Make the challenge look so big it becomes truly emotional, the best brains can see their life’s mission in it – after which they simply can’t back away from that mission, day and night.

In the next posts I will try to illustrate how big the problems are, but also how small the solutions can be. All of these fundamental solutions are tightly interlinked, and the key is that solving one will help solve the rest of them in a cascade of solutions.

IVA Continued - Generation IV

I believe that every region in the world has some evolved properties that drive the region to emerging behaviors. The properties are mostly a mix of demographics and government policy combining to create market conditions that in turn drive people’s behavior. Baby boomers create a booming market, aging baby boomers with accumulated wealth create a different market. Simple. When you open a market it usually becomes efficient; when you make a local market with more than a billion people efficient it will change the world. Simple.

So I took a look at the world’s markets and expertise by putting all the goods we make on some imaginary line, long tail by nature, but that’s not the point. I tried to figure out what each global region got better at over the years. The graph looks like this:

At the top left you see products that have mass appeal – global brands. The US is brand heaven, where companies learned how to export brand awareness for everything and make brands like Starbucks, Apple, MTV and NBA household names even in China. By creating global awareness the demand for those products (which is already high) becomes even higher – pushing value add up, and with it the US GDP.

On the tail side, America had to deal with geographically distribution of demand for esoteric products, as Chris Anderson calls it, long tail products. Stocking costs and distribution pains hurts profitability on these products – which America solved through the infinite store of the Internet and eCommerce – welcome to the land of eBay, iTunes and Amazon.

In between the two, we find the non-branded products lots of people buy. It is the part of the graph dominated by giant distributors like Walmart – serving as America’s storefront for anything produced in China. The Chinese perfected manufacturing and supply chains to drive these products manufacturing costs so low, the world can afford to buy more of them.

Europe remains in a very interesting situation, due to higher manufacturing costs there is a strong drive to push away mass-production of any non-branded non-specialized goods from Europe, at the very least  away from western Europe. So the continent relies heavily on tourism and other service industries (like financial services) which cannot be easily pushed away to Asia, and on “niche monopolies” driven mostly by years of heritage. You cannot make French wines or Swiss watches outside France or Switzerland. You also cannot take a Paris vacation anywhere other than Paris (Sorry, Vegas, we did notice that Paris, Vegas was fake). Some of the expertise, such as enterprise software remains a form of art with many experts in residence within 50 miles of a small town in Germany – which makes the expertise highly concentrated, at least for a generation. The problem with the European model is that you cannot afford to lose any of those “temporary monopolies” as you cannot regain them very easily once lost. See the case with Baan Software in the Netherlands, once they lost their grip – no new software giant emerged in the same region.

The demographics that drive the models are pretty obvious, but what are the traits and policies that can be changed and how do they affect the country. How did Israel become a high-tech startup generator, and what happened to the startups in Germany, a country that has a very significant mid-market sector but very little in startups (Hasso Plattner is trying to change that with his new and successful HPV fund)

The US model almost forces talent to recycle into small companies once large ones fail to ride the next next wave. It is a model that uses incentives through education, immigration, taxation, and aspiration all fueling the desire for a bigger risk with better rewards. The US idolizes the Edisons, the Fords, the Wrights, the Jobs and the Gates of each generation. They are as big stars if not bigger than the movie stars, and they get the rewards through patents, investments, stock options (all of which can also be abused, but that does not make them evil…). The risk-reward equation is so skewed towards taking risk, that imagination continuously sparks the entrepreneurial genes, and ideas (even bad ones) tend to reach market early and often - failure is not only an option, it is well accepted socially. The successful startups generate another generation of Venture capitalists, eager to invest their new wealth in the next wave, and even more eager to share their experience and knowledge with the next generation of smarter guys – and so goes the circle of life. Silicon Valley’s version of “The lion King”.

Europe on the other hand tends to view stock options as almost evil – a compensation tool forced on owners, not a driving tool that sparks risk taking. Talking about risk, European students, who graduate from universities without debt (counter to their US counterparts – who have more debt at 25 than they can count) still tend to be risk averse in their job choices. The reason is not a trait that cannot be changed, it is a function of local policy – in particular, labor law. Since people tend to stay in their jobs, and get heavy protection the harder it is to convince European masses to generate new jobs threw risk taking enterprise. In other words, the less jobs get opened and created the more people get risk averse (no new jobs = protect my seat at any price), the less jobs get created - negative feedback cycle . Since not many new jobs are created due to the Asian emergence of more affordable labor, it does not seem as though that music is about to start again any time soon. As such, when you enter the cycle as a young kids , afraid that if you do not find a secure job with an established company right out of University, you think that you may never find a job. So, we have a generation of young guys that tend to shy away from the kind of jobs, and from the kind of education that made Europe so successful in previous generations. Just as India and China start to produce infinite classes of engineers, Europe stops.

I contend that Israel, although very similar in traits to the US market, falls more into the European category of temporary monopolies. Israel was great in Security software, with a core of expertise growing from one company. Israel is a world leader in Telco software, because of Amdocs’ heritage, but while that expertise branch out of Amdocs to other telco software companies, it did not branch out to other vertical industries. The problem with that model - when a company fails even if for one second, as happened recently to Comverse, the results can be devastating with hundreds or even thousands of jobs eliminated or shipped over to other countries and the temporary expertise disappears – as happened to Scitex in the 90s. The job market absorbs such talents, but the equity lost in market leadership (and the taxes the state gains from the profits) are almost never recovered.

Some countries find their way to growth by applying more government uber-guidance. Take Singapore as a great example – free market economics drive great successes proven over the years, yet government intervention in the form of massive guided grant and investment programs drive global market competitiveness into the country and grows local knowledge and companies around the seeds the government put in place. In small enough countries, such seeds grow to drive comparatively significant economic growth through sheer temporary competitiveness. In larger countries the market directives need to be more heavy handed at first - Japan applied that model in post WWII through MITI, and China is doing it today to its extreme success with double digit annual growth for more than a decade in a row.

I truly believe that the VC industry is instrumental in absorbing these booms and busts and the talent is quickly reapplied into new startups. As such, the VC model is essential to keep the technology economy in Israel going on, no doubt. The question remains though whether the VC model alone is good enough to create significant growth and to generate long lasting strategic advantages for an economy with $120B in GDP? Remember that in order to get to double digit growth (which sounds like a fantasy until you consider China and India who are growing at that pace) you need to "create new GDP" in the order of $10B-$15B annualy.

In other words, will Generation IV drive this greatly succesful experiment called the state of Israel through the “Shaking the tree” model or is there a need for a single galvanizing vision that focuses some of the innovation on a new domain the country will be excelling in - driving $10B growth annually into the market on top of its existing dynamic?

**This post was written before the posting of the great comments on my previous post - I will respond to the first couple of comments posted by you guys later...

Israel Technology Generations - IVA

A few weeks ago I was asked to give a keynote at a venture capitalists conference in Israel. Given I was never funded by any Israeli VC I thought the honor was worth the afternoon . For the sake of full disclosure, one of the best local VCs – Yaffa formerly from Star Ventures - did want to invest and we just couldn’t get it done due to some technicality (She did introduce me to her brother in law, Leo Apotheker, and years later we ended up being co-presidents at SAP for a great couple of years). In any case, I wanted to share with you this presentation, as a broader vision for what I believe the next wave of Israeli technology and investments should become.

For those who are not familiar with Israel, the country is now entering its 60th year, which I divide into three generations, roughly 20 years in length each. If you add to these 60 years the generation that preceded the formation of an independent state in 1948 as “Generation 0” we get four very different set of periods, different drivers and, interestingly enough, very different technology industry in each.

Generation 0 was all focused on the creation of an independent state – and so the technologically minded folks (most educated at the Technion and Weizman Instititute) were all working on establishing the primary tools a state would need. The best evidence as to the importance of science on the this generation was the selection of a scientist, Chaim Weizman, as the first president of Israel (Einstein rejected an offer to become president later).

As the state achieved independence and was thrown into a battle for life, Generation I focused most of their efforts on survival of the state. A single galvanizing vision of survival sent every tech savvy youngster into science. The defense forces together with the universities served to assimilate the waves of immigrants into society and acquired knowledge became the equalizer in this nascent society.

My father, who immigrated from Iraq after the state achieved independence, became a communication officer in the army (where he met my mother, an immigrant from Morocco who served as a wireless communicator, for which I am thankful to this day). The army paid for him to get a bachelor’s degree, and he signed up to become a career officer – that was the deal, we educate you, and you serve the state for life (well for 16 years…). His first job out of college in 1972– build a wireless network across the Sinai peninsula. The same network served to defend the state and lasted the entire war in 1973. I was born as he started his university years in the Technion and returned to the same school a few years later to get my own bachelors degree in the same house my parents rented.

Somewhere after the six day war, or at the 1973 war, a new generation of Israeli technology emerged. The new companies took a lot of the knowledge the military developed for defense purposes and started exporting it to other countries through 10 or so large hi-tech companies. Generation II was asked to grow an export economy, and improve the Israeli economy. As the state started feeling more secure about survival, growth was the top requirement for a country that found its way into the global economy, at first with military oriented companies like Tadiran and Elbit, who branched out to civilian technologies as well, but later on with purely civilian giants like Scitex, and Daisy. Generation II had very few business leaders, some of them coming from Gen I companies (lik Uzia Galil) others representing the new Israeli Entrepreneur – like Efi Arazi.

My father, who retired from military service in 1981, transitioned just like the state from communication officer to exporting communication equipment in south America, first for Tadiran later for Elbit. I watched him go from military service into business and got exposed to the American culture and to my first Apple II computer in the American high school of buenos Aires.

Generation III started to emerge somewhere in the late 80s, and took shape in the happy days of the 90s internet bubble. It was a generation of individual risk takers, young, aggressive, techno-geeks. Some of the more successful members of the club are the Checkpoint founders - Gil Shwed, Shlomo Kramer (we both went to the same elementary school, he was one year ahead of me), The Chromatis guys, Mercury’s Arie Feingold (of Daisy fame) and Amnon Landan, Yossi Vardi and the ICQ boys, and so many others.

In my own family journey, after being part of a less than stellar startup in educational software, I decide to start a new company, and convince my dad to do the unthinkable – leave the security of a technology giant to the uncharted water of a 1989 startup - Quicksoft. That company spawned 3 more startups we both shared, two of those sold later to SAP, and one still runs to this day as Adobe’s distributor in Israel. That small startup  we started in my parents basement, grew after many acquisitions and changes to be SAP lab in Israel which hosts almost 1,000 engineers who write software for companies around the world.

Generation III was catalyzed by two actions taken by the Israeli government – in particular one person in the public Sector – Yigal Erlich – at first the chief scientist of Israel, who granted many startups, including Quicksoft the funds that made the difference between closing the doors and exporting software. Yigal then started "Yozma" a fund of funds – where he co-invested the state together with 7 international VC funds, and created the VC industry in Israel investing well over $2B a year in the state - making Israel the second most exciting region for high tech innovation after the silicon valley, my adopted home for the last 12 years. As an observer in both worlds, with the luxury to travel back and forth (well, most of the years, I traveled without luxury in coach…) I can see how Israel evolved along the same patterns as the bay area, with a very slight phase delay between the two centers of technological gravity.

It is common to ask in Israel, “ how come there is not one Nokia in all these startups?”. Israel did not grow a Microsoft, a Google, or an SAP out of all these great startups. The most successful got acquired early, and the ones who stood on their on, like CheckPoint remained leaders in their market, but the market did not become a giant market like cell phones or search. The two biggest technology companies in Israel are Teva and Iscar – one leads the world in generic drugs, the other makes carbide cutters that serve every metal cutting industry in the world. Both of these are considered giants in Israeli terms, both need lots of technology, but none of them is as sexy as Nokia, or Google. I keep asking myself whether Israel needs a Nokia?

 
So, if Gen 0 was about getting a state, Gen I was all about survival, Gen II was the organized export era, and Gen III is the generation of individual stars...

• What will make Generation IV, the one starting roughly arond now, a better one than previous generations?
• What are the challenges and where is the path to growth, and dare I say greatness for Israel?
• With the emergence of two Asian giants in China and India, with their infinite talent pool, and equally infinite markets, what is Israel to do to stay relevant, virant and growing?
• Which technology will fuel this growth?

More in the next few posts.

Blog Interrupted

I start with an apology for taking so long between posts – and I have an excuse. See, we are raising money to start this new company called Better PLC. After years of fighting for budget allocations, I forgot how much fun it is to actually go convince investors that your idea has enough merit that they should put their money, and much more importantly - their trust in you.

It is somewhat funny that everyone I talk to has heard about this new company we are trying to create, but no one really knows what we do. In every meeting I discover new ways of achieving the ambitious goal we have set for ourselves, and people really get energized about the idea. It is one of those giant small ideas that I truly believe can make a big difference in this world.

I had a conversation yesterday about all these software entrepreneurs who are moving into clean-tech. My view is that we all see a giant market ready for disruption, bursting ripe from years of very little investment. Put that with a group of people who made enough money not to be enticed by easy money, but looking for a real mission in life and you get some really interesting artifacts happening. It is almost as if the entire silicon valley is going through a mid-life crisis – but instead of looking for a new fast car (we now have our official fast car – the Tesla), we are all looking for a calling. I saw it at TED this year; I see it everyday with so many great ideas.

The people I met over the last 75 days on any part of the world are just amazing in their passion, and drive for a better world. Some solve energy issues, others education, healthcare, food, water – all problems that can really touch life. I am at awe with some of the scientists that I met; all have much bigger goal than to start a small company, or bring a new product. I personally stopped just seeing the problems in the future; I see an ocean of opportunities. 

I get people coming at me from every corner asking how do they sign up for our mission, before they even know what it is we’re going to do. When we share the vision with them you can see in their eyes that they all find their calling. I missed that sense for such a long time, it is just refreshing to be back in it. It is not that SAP was bad for me - it was a great home, it is a great company. It is just so easy to get sucked in to the daily grind of large corporate politics, that makes you lose that sense of big mission, your purpose and your sense of direction for what’s right and what’s wrong.

In any case, I promise to share this weekend some of the things that popped up on my radar over the last few weeks. I gave a few presentations, on both enterprise software and clean tech – in particular a presentation in Israel last week – which I will bring into a series of blog posts. So stay tuned next week…

shai