Weekly Insider (Victory Pose & Energy Storage)

My ever curious and thoughtful Lux Capital partner Adam Kalish posed a great question: Yankee games, political rallies. Why do nearly all fans (sports or other) exhibit the physical display of arms thrust up in the air in victory pose? Across cultures, rhyming (stanzas) stances of clenched fists arms extended upright in victory stance.



An explanation from evolutionary psychology explanation is that it may be a display of flaunting victory/power/dominance. In other animals: pigeons puff up against other pigeons, lions and horses on all fours rear back on their hind two legs to make themselves bigger. Monkeys and gorillas that walk on all fours will display dominance by standing up-right, raising their hands wave their arms, beating their chest. Since we're primates, like monkeys, it's a predisposed behavior. Alpha men that displayed dominance and power by thrusting their arms upward, displaying their muscles, puffing their chest and even inviting attack to the vulnerable body-center. Why? Because they were confident they were dominant. These men that scared off others survived, passing the behavior on. Men that didn't successfully scare off attackers with displays of dominance invited more attacks more often and died. This explains why the behavior of the victory pose might have been adaptive and selected for.



Speaking of selections—here’s a selection from a just released Lux Research report on the $41 billion energy storage market. Subscribers will get a valuable inside look. Here’s a sneak peak:



From the mobile phones carried by 3.3 billion people to the half a million hybrid electric vehicles sold last year, the world runs on energy storage technologies - the batteries, capacitors, and other devices that play a hidden, vital role in the energy economy. Energy storage is poised as the next big energy investment field: Venture capital in the field grew 74% to $709 million in 2007. But a complex market with many competing technologies will challenge firms that seek simple routes to success, according to a new report from Lux Research entitled "Alternative Power and Energy Storage State of the Market Q2 2008: Making Sense of the Next Big Thing."



"Energy storage is fragmented because it covers a vast range of technologies - from batteries to flywheels to compressed air systems - that play into multiple market segments," said Ying Wu, Senior Analyst at Lux Research and principal author of the report. "But the prize for companies that succeed is tremendous: The market will grow by 55% over the next five years."



To make sense of the energy storage opportunity, Lux Research studied the field from two perspectives - analyzing seven energy storage markets, like "transportation" and "consumer electronics," on one hand, and five technology variations - from batteries to energy harvesting devices - on the other. The team's methodology combined expert interviews with exhaustive secondary research and rigorous quantitative modeling. Report highlights include:



-- The transportation energy storage market will grow from $12.9 billion last year to $19.9 billion in 2012, the greatest growth of all seven markets studied - principally driven by light electric vehicle shipments rising from about 500,000 to nearly three million as new plug-in hybrid and pure electric vehicles emerge. NiMH and Li-ion batteries will take center stage in this market, benefiting companies like Matsushita Electric and LG Chem.



-- Fuel cells will return from the dead. Commercial sales will rise from $92 million in 2007 to $1.8 billion in 2012, driven almost entirely by new applications in residential combined heat and power systems and distributed generation deployments - not transportation or consumer electronics. Adoption of both polymer electrolyte membrane fuel cells (PEMFCs) and solid oxide fuel cells (SOFCs) will drive growth for leaders like Ballard Power Systems and Ceramic Fuel Cells.



-- Bulk energy storage for utilities - shifting large amounts of energy from excess production times to peak usage times - presents the biggest potential opportunity of all markets studied: If even 10% of installed wind power plants adopted large-scale energy storage, the market would hit $50 billion. However, utility companies' risk aversion and long planning cycles will sharply limit market size through 2012 to only $600 million.



-- After conquering the consumer electronics market, lithium-ion batteries will make similar inroads in the portable and transportation markets - going from $6.8 billion in 2007 sales to $16.9 billion in 2012. Nickel metal hydride and nickel cadmium technologies will be almost completely wiped out in consumer electronics.



-- Financing activities have swelled in energy storage: 2007 saw the greatest level of venture capital spending to date and a resurgence of IPOs. Expected IPOs from companies like A123Systems will drive venture capital, M&A, and IPO activity further upward in the next two years.



"The energy storage landscape will change over the next five years as new technologies enter in earnest from 2011 onward," said Wu. "Flywheels will branch out from datacenter backup power to grid frequency regulation; fuel cells will finally achieve scale in stationary applications; and new battery types including zinc-bromide and vanadium redox flow batteries, silver-zinc batteries, and zinc-air rechargeables will stake out valuable niches. Opportunities abound for investors to take a portfolio approach to the market and for corporations to partner with start-ups for market development, system integration, and large-scale manufacturing."



"Alternative Power and Energy Storage State of the Market Q2 2008: Making Sense of the Next Big Thing" is part of the LR Alternative Power and Energy Storage Intelligence service. Clients receive: 1) State of the Market reports every six months; 2) ongoing technology scouting reports and proprietary data points in the weekly Lux Research Power Journal; and 3) on-demand inquiry with Lux Research analysts. For information on how to become a client, contact John Schwartz at john.schwartz@luxresearchinc.com or (646) 649-9582.

Weekly Insider: (Power, Politics, Energy & Editorials)

As we head into Memorial Day, I’m choosing to share a few selections from a flurry of fascinating media this week. The topics: power, politics, energy and editorials.



First, in a recent article, science writer Ivan Amato covered science comedian Brian Malow. Some nerd jokes: “a superconductor goes into and some helium gas drifts into a bar. The bartender says: ‘we don’t serve noble gases here’. The helium doesn't react. And the superconductor leaves the bar, putting up no resistance.” Bahdumpbum. Marlow is also quoted on his love life saying, “I find myself drawn to her, with a force that is inversely proportional to the square of the distance between us” and “Women have passed through my life like exotic particles through a cloud chamber, leaving only vapor trails for me to study clues to their nature.”



Next, in what I thought was a terrible joke, but proved true—(see YouTube as I can’t convey in words that which will pass your spam filter)—former chess champ Gary Kasparov became a ‘pawn star’. While giving a speech last week in Moscow, let’s just say the substance of his speech was trumped by a memorable interruption. As Marshall McLuhan said, the medium is the message—and the message was a brilliant move from his opponents (Putin & Co) who trivialized any possibly newsworthy remarks in Kasparov’s content and made certain the headlines were instead remarkable and absurd. Quite clever.



Thirdly, the WSJ attacks on Vinod Khosla have sparked a noteworthy debate. They mocked his advocacy of ethanol and biofuels and new technologies to produce them. Khosla took the defensive arguing that cellulosic or other advanced biofuels are the way to go, that UN officials are misinformed and that drought, not biofuel, is to blame for high food prices and resulting food riots. It’s sure to get heated as the worthwhile debate unfolds.



And finally also in the WSJ was Bjorn Lomberg’s op-ed. Consider what I wrote over seven months ago: “Histrionics and the awarding of (now two) shiny trophies have shown how media and emotion can galvanize a nation and a globe—yet my cynicism and my reason contend we’re rallying ‘round miscalculated priorities. For straight talk and the Gore-y details, seek out Bjorn Lomborg and his Copenhagen Consensus. But alas reason is so seductive and I’m a hopeless romantic to think we might stop and think. One activist group is calling for 70% reduction in carbon emissions. Am I so cold and callous to stack rank the probabilities, costs and expected outcomes and prefer a 70% reduction in cancer, heart disease, malaria, Alzheimer’s, traffic deaths, suicides, HIV/AIDS?”



Now before we get to Lomborg’s WSJ op-ed, consider this: If you had $1 would you prefer over the next year getting a 25x return or 90 cents on your invested dollar. The answer is clear, but faced with different situations we fall victim to pernicious mental accounting. We silo our situations. Further consider: you might go shopping in a store when a flat screen TV is on sale and the price is lower. Most people buy when things get cheaper. But in the stock market, a different situation silo, most people sell when things get cheaper! Why? You panic. You look at others. When you don't know what to do, you assume they do. As Abigail Adams recounted (roughly) to John Adams, “When men know not what to do, they ought not to do what they know-not.”



So, here’s the point: why should we silo our use of reasoned judgment when it comes to public policy? The government is your ultimate limited partner, spending its cut of your money on your behalf. Shouldn’t reason prevail?

Lomborg’s op-ed, “How to Think About the World’s Problems” notes: “The pain caused by the global food crisis has led many people to belatedly realize that we have prioritized growing crops to feed cars instead of people. That is only a small part of the real problem. This crisis demonstrates what happens when we focus doggedly on one specific – and inefficient – solution to one particular global challenge. A reduction in carbon emissions has become an end in itself. The fortune spent on this exercise could achieve an astounding amount of good in areas that we hear a lot less about.”

He goes on suggesting better more rational prioritization: “…$60 million spent on providing Vitamin A capsules and therapeutic Zinc supplements for under-2-year-olds would reach 80% of the infants in Sub-Saharan Africa and South Asia, with annual economic benefits (from lower mortality and improved health) of more than $1 billion. …doing $17 worth of good for each dollar spent. Spending $1 billion on tuberculosis would avert an astonishing one million deaths, with annual benefits adding up to $30 billion. This gives $30 back on the dollar.

Lomborg shows that heart disease accounts for over 25% of the death toll in poor countries, while the developed world treats heart attacks with cheap drugs. His prescription: spend $200 million getting cheap drugs to poor countries to prevent 300,000 deaths. $1 yields $25 worth of good.

Lomborg lambasts “Operation Enduring Freedom, which Copenhagen Consensus research found in the two years after 2001 returned 9 cents for each dollar spent. Or with the 90 cents Copenhagen Consensus research shows is returned for every $1 spent on carbon mitigation policies.…Acknowledging that some investments shouldn't be our top priority isn't the same as saying that the challenges don't exist. It simply means working out how to do the most good with our limited resources.”

Amen.

Weekly Insider: (New Findings & Curious Dogs Revisited)

A flood of stuff for you this week: This week’s longer column has two parts. First an exciting announcement: famed inventor Dean Kamen, famed entrepreneur and venture capitalist Bob Metcalfe and U.S. Senator John Kerry are amongst the lineup for this year’s Lux Executive Summit in October. Stay tuned! Second, I share an exclusive look at the new intensive findings from Lux Research on where the smart money (or dumb money) is putting theirs, with an exclusive inside look at the findings. Then third, an older column, I wrote one year ago on the eve of getting married and now our first anniversary. Time flies!



Here it is: Venture capital (VC) firms invested $702 million in nanotechnology start-ups last year across 61 deals, slightly down from $738 million across 73 deals in 2006. But this VC spending is sharply out of sync with investment returns. Although application-oriented life-sciences companies have delivered the majority of VC returns in nanotech, VC firms consistently devote most of their funding to companies in other areas, according to a new report from Lux Research entitled "How Venture Capitalists Are Misplaying Nanotech."



"Historical trends in nanotech exit returns are out of sync with VC spending," said Jacob Grose, Analyst at Lux Research and lead author of the report. "While alternative energy is hot right now, healthcare and life sciences companies have accounted for a staggering $1.68 billion of the $2.57 billion total valuation of nanotech start-ups at IPO. Correspondingly, revenue multiples at IPO have been an order of magnitude higher for the healthcare segment (206.2x on average) than in the four other segments we track, yet last year more nanotech VC deals closed in manufacturing and materials (16) than in healthcare and life sciences (15)."



To uncover the latest trends in nanotech VC, Lux Research took a snapshot of its ongoing, comprehensive database of the field, which contains every round of institutional VC funding in companies that are commercializing nanoscale structures with size-dependent properties. The report concludes that:



VC spending remains highly concentrated. The top 5% of venture-backed nanotech start-ups as measured by cumulative capital invested have received $1.24 billion since 1991, equal to 32% of cumulative VC funding through 2007. The top three: 1) optical equipment manufacturer, NeoPhotonics, at $205 million, 2) lithium-ion battery producer, A123Systems, at $133.8 million, and 3) drug developer, Acusphere, at $104.1 million.



In 2007, the energy and environment segment attracted the most nanotech venture capital, with 17 deals (up from 13 in 2006) worth a total of $227.2 million. Notable firms receiving funding included aforementioned battery specialist, A123Systems, with $70 million in two rounds, nanocrystalline solar ink developer, Innovalight, with a $28 million Series C, and organic photovoltaic developer, Konarka, with a $45 million Series F.



U.S. domination became even more pronounced in 2007, accounting for 90% of total VC activity by value. The tiny state of New Hampshire alone accounted for more funding in 2007 ($76.5 million in two companies, Finetex Technology and Nanocomp Technologies) than all countries outside the U.S. combined ($70 million).



Many nanotech start-ups are showing their age. While VC firms have told Lux that they expect their nanotech VC deals to deliver returns in six years (longer than they expect in other investment domains), of the 66 nanotech start-ups which received their first institutional VC funding in 2001 or earlier, 58% continue to operate - implying that most nanotech start-ups are taking longer to exit than VCs had expected.



"Nanotech start-ups with technologies that are tailored to target one or two specific applications tend to be much more successful than companies who develop a broad technology platform with no clear purpose. However, the latter platform technology companies still generate valuable intellectual property," noted Jurron Bradley, Senior Analyst and head of Lux Research's nanomaterials practice. "Large corporations should roll up materials and platform technology companies that have already had their R&D and pilot-stage manufacturing paid for by VC firms, buying into hard-built technologies on the cheap."



"How Venture Capitalists Are Misplaying Nanotech" is part of the LR Nanomaterials Intelligence service. Clients receive: 1) State of the Market reports every six months; 2) ongoing technology scouting reports and proprietary data points in the weekly Lux Research Nanomaterials Journal; and 3) on-demand inquiry with Lux Research analysts. For information on how to become a client, contact John Schwartz at john.schwartz@luxresearchinc.com or (646) 649-9582.



Now, my column from last year:



Like the periodic table, the lessons of Sherlock Holmes are “elementary”, my dear reader.



In one story Holmes asked Watson, “Do you recall a conversation with Inspector Gregory during our celebrated search for Silver Blaze? I drew his attention then to the curious incident of the dog in the night-time. 'The dog did nothing in the night-time,' the Inspector responded. That, I told him, was the curious incident.” We’ll return to Holmes in a few moments and I’ll tell you about what I call the ‘curious incident of the dog in the blur.’



So, I done got hitched. Before our wedding I was tasked by my wife to do something my cynical nature is particularly well suited for: to imagine all the abstract low-probability things that might happen that could wreck havoc on our wedding. Torrential downpours, grandparents passing, groomsmen with lost clothing, passport mishaps, pest infestation, guest with a persistent and disruptive cough during our exchange of vows, muddied wedding dress.



Predicting a circumstance can sometimes help prevent its occurrence--if it’s controllable. And most dramatic changes in life, markets and science often occur from circumstances that couldn’t be predicted. And even if they could be predicted, they might not be controllable (earthquakes, torrential downpours). But that doesn’t stop the circumstances’ actors, 24-hour cable pundits or policy makers from explaining pretty much everything away. This is natural, part of our biology. We seek causation. We seek confirming evidence.



I’ve learned there are three words we don’t say enough and you almost surely never hear from newscasters, CEOs or most institutional investors. As Stevie Wonder sang, “These three words/ Sweet and simple/ These three words/ Short and kind/These three words/ Always kindles”.



No, not “I Love You”…but “I Don’t Know”



As Nassim Taleb has said, “We favor the visible, the embedded, the personal, the narrated, the tangible. We scorn the abstract.”



But it is the abstract that gets us. As I’ve written before and as Bill Miller of Legg Mason tells his analysts, 100% of the information we have (data and all the patterns we see in it) comes from the past. But 100% of the value of any decision (around an investment or life choice) comes from the future. And even the best scenario analyses can miss the very low-probability, low-frequency, high-impact events.



Here’s what I wrote quoting Taleb in this column nearly three years ago: "I have just completed a thorough statistical examination of the life of President Bush. For 55 years, close to 16,000 observations, he did not die once. I can hence pronounce him as immortal, with a high degree of statistical significance."

When we assume models are linear when they're not, we also increase the odds that we will pick the wrong model from which to make predictions. And as Keynes said, “It is better to be roughly right than precisely wrong”.



This cognitive bias and kind of reasoning made sense in our primitive ancestral past. If you don’t see a lion or an elephant, you’re pretty safe. But in our modern non-primitive environment, there are far more random, unpredictable low-probability events.


The point Taleb was making was our inability to deal with probabilities accurately and our tendency to reason inductively and incorrectly while presuming the future will continue linearly as the past (side note: this was something Ray Kurzweil drilled upon at MIT yesterday as he illustrated in example after example how technology improves at exponential—not linear--rates). People are horrible with probability and horrible with predicting risk. We just didn't evolve to weigh all the factors involved. Why? The logic is simple. In our ancestral environments, the people that acted quickly on emotions, ran away and survived. The people that sat around and over-analyzed situations got eaten by tigers. We don't have to run from tigers today, but our brains haven't changed much
since then.



And many people get confused over the difference between risk and uncertainty. Risk is when there's a *known* but *undesired* outcome. Uncertainty is having no clue and getting struck completely by surprise. Uncertainty is not knowing the underlying distribution. And as many find out the hard way, markets and much of life are uncertain.

This is when you're most vulnerable. These very, very low probability but high magnitude events. September 11th was such an event, so were the major historic stock crashes and bursting of tech bubbles. We call these: "Black Swans." Why
black swans? It comes from a philosophical thought experiment demonstrating the problem we have with inductive reasoning by asking this simple question: "How many white swans do you need to see to conclude that all swans are white?" The answer is infinite.

Because all you need to observe is just one black swan and the prior conclusion is false. Or try this admittedly silly thought experiment. Pretend you're a turkey born on January 1st, 2005. For the next 11 months, up through Thanksgiving, life is good. Actually, life is great. You (the turkey) wake up, get fed and walk around all day. Just in time to go to sleep and do it all over again the next day. And with each new day you become conditioned to assume that the next day will be just like the one before it. And this logic works all the way up till Thanksgiving. When suddenly--boom! Off with your head! The irony is that the closer the turkey is to death, the more confident it becomes. And so it is with many investors. We're not good at preparing for these low probability events--even though their magnitude could spell devastating consequences.

Now let me take you to two make-believe countries invented by Taleb. Mediocristan and Extremistan. First, we’re in Mediocristan and we take a random sample of 1,000 people. And we weigh them all. Next we take the fattest person we can find and we throw him or her in the mix. As a percentage, even that fattest of fat people won’t skew the groupvery much and they will represent a very miniscule percentage of the total. In Mediocristan, no single instance can influence the total: the exceptional in inconsequential

But in Extremistan, things are different. Instead of weight, think: income. Unlike weight, income is not normally distributed on a bell curve. If Warren Buffett walks into a bar, the average wealth just skyrocketed. The exceptional is consequential.

You can scorn the abstract in Mediocristan, but not in Extremistan. Harry Potter, Google, September 11, Long-Term Capital Management all live in Extremistan.

Back to Sherlock Holmes. So what is ‘the curious incident of the dog in the blur’? It has to do with confirmation bias and also illustrates the danger of watching too much CNBC, sucking up too much information (and why Buffett prospers in the quiet poise of Omaha).



Imagine this: You’re looking at a very blurry picture with a hidden dog and you can’t make it out. Meanwhile, my hand is on a dial that can increase the resolution.



If I turn the dial gradually and increase the resolution slowly, you don’t see the dog. But if I turn the dial more quickly, thus increasing the resolution quickly, you will see the dog more easily. Why? In the first case you are receiving more information (let’s say I turn the dial 10 notches each one increasing the resolution gradually; ie. once every 6 seconds for 60 seconds) and forming theory after theory of what you are seeing. In this case, you produce 9 theories.



If I instead turn the dial in 5 steps instead of 10, you are more likely to see the dog. In this case you produce only 4 theories of what you’re seeing. Instead of confirming theory after theory with consistency and confirmation bias, you have better odds of seeing something new.



This invokes the boiling frog syndrome. Throw a frog in boiling water it will jump out. But put it in room temperature water and gradually turn up the heat and it’ll get cooked. The danger of gradualism and information creep is ever present in markets with sell-side equity analysts who incrementally adjust their earnings figures and cluster like a herd.



Don’t be the frog. Be ware of blurry dogs. Listen for the ones that don’t bark. And watch for black swans—especially the kind that might derail a wedding!

Weekly Insider (Biofools, Commodidiots & Invitation)

Special Invitation: Join Steve Forbes, Josh Wolfe, Robert Kiyosaki and a lineup of investing experts in Forbes.com's Investor iConference, "All-Weather Portfolio Strategies." Click here for details.



I’m rushing back from travels to be in New York because from this Sunday until Tuesday (May 4-May 6)—you’re invited to join me, Senator John Kerry, Congressman Bart Gordon and the who’s who of the nanotech sector 7th Annual NanoBusiness Alliance Conference www.nanobusiness2008.com Thanks to the tireless and tremendous efforts of my friend Vince Caprio and Sean Murdock this is one of the must-attend nanotech/cleantech events. Hope to see you there….



Meanwhile as I’ve been tirelessly quipping, the “biofools” and “commodidiots” are starting to feel pain. I’m hearing claims of biofool boondogglers having committing crimes against humanity for the poorly thought out unintended consequences and the resulting food crises their swindle has caused. And the latter have startups and investors chasing commodity markets that they mistook for technology problems (when they’re simply just US dollar problems). Most of the so-called ‘drivers’ justifying crazy startup valuations aren’t really a technology thing—it’s a dollar thing. The US government’s plan is clear: inflate our way out of debt crises. When you owe a fixed number of dollars to someone, that lender loses when those dollars become worth less in real terms. But be sure by year end 2008 interest rates will be higher. And remember the flood of speculative and easy money that's flown into 'green' could just as easily go from ‘green with envy’ to ‘green with nausea’. As I wrote three months ago:



“…So, what disasters loom? Start with what everyone takes as granted? What would take people by surprise? Will Gold, oil and every other commodity you can name continue their ascent? Is it more likely the Chindia demand narrative and gospel keeps people in the pews? Or do already high expectations and fewer incremental buyers on the margin mean vulnerability for surprise? Why is their virtually no media coverage of the rise in Oil as primarily a function of dollar decline and speculation? Over time, commodities approach their marginal cost of extraction. And being commodities: they’re undifferentiated and compete on price. When have VCs ever in history made money chasing ways to produce a commodity? Why do people keep insisting that solar is attractive when Oil is at $100 when we barely produce any electricity from oil? 50 years ago, sure—but oil is a declining piece of our energy pie as more and more things become electrified. What effect would an “unexpected” decline in commodity prices have on emerging markets?...”



Famed hedge fund manger Julian Robertson has a protégé Dwight Anderson who manages a commodity hedge fund. He’s baffled by the prices in the commodities market. Why? Because commodities are basically supply and demand. And the to-date accelerating price trends assume accelerating demand without a corresponding supply response. It’s shocking to me how the correlation between the dollar decline and commodities ascent is woefully (and soon to be painfully) underappreciated. Tread carefully and be sure to read this month’s premium issue and cover story that answer the question: How many environmentally friendly companies does it take to screw in a compact fluorescent light bulb? If the sheer (growing) number of TV & magazine ads--proclaiming how every company is now or has always been "green"--isn't enough to make you suspicious of "green washing", than you're just a sustainability-sucker for sad Polar bears adrift on floating ice. Accounting and accountability is what matters. Find out how it really is hitting the bottom line and ‘double bottom line’….