Weekly Insider (Groundbreaking Lux report & Shaving with Occam's Razor)

I always tell our analysts at Lux to shave daily with Occam’s Razor. With my recent Forbes interview with Lux Capital portfolio company, Luxtera (the leader in nano-photonics, turning light to electrical signal and back for communications at the speed of light), and my wife’s prodding, I realized I needed my own shave. I was being mistaken for a certain—ahem…unflattering, unwelcome—U.N. persona non grata: http://www.forbes.com/video/?video=fvn/clayton/info-at-the-speed-of-light

But when I say Lux’s team should shave with Occam’s Razor, it means this: find the simplest solution. When analyzing startups and their technologies, ask: “Is this the simplest way to do it?” Unlike Olympic divers, we don’t win any points for technical complexity. Engineers, like oenophiles prize “elegance”, “robustness” and other abstractions. We prize simplicity.

And speaking of simplicity, see the original groundbreaking report from Lux Research on ‘water wedges’. It’s called “Malthus Returns: Solving the Unsustainable Agricultural Water Demand Conundrum”. A sneak peek at the executive summary says: “The lion’s share of global water use is directed towards agriculture, and agricultural water usage already exceeds renewable supplies in the regions where people live and grow food. Water demands are set to skyrocket by virtue of population growth, economics expansion, and biofuel adoption. However, because recapture and recycling are out of the question, only technologies and practices that improve water efficiency can move the world towards sustainability. In this report, we forecast water demand and examine water reduction strategies – referred to as “water wedges” – that in certain scenarios bring water demand in line with renewable supply.”

Most valuably they outline the unintended consequences as well as all the new ag technologies that can lead to direct savings and boosted yields. Get access by emailing Lux Research at info@luxresearchinc.com

Weekly Insider (Doodles, Entropy & Warfare)

Change is the only constant. Hear me and fund manager and tech visionary Pip Coburn talk about change and why traditional equity research analysts are doomed (link to the complete video).

But before you watch that, read this. In recent years, investors have picked up on the Kelly Criterion, developed by John Kelly of Bell Labs after interpreting Claude Shannon’s information theory. Known as “Fortune’s Formula”, in short it tells you how much to bet based on when you believe the odds are in your favor. The simple math is 2p-1, where p is your confidence level--which tells you to never bet unless the odds favor you. If you have 60% edge, you’d bet 20% of your bankroll.

Now, Shannon’s information theory is proving as useful in warfare as it is in wagering. It was George Gilder who succinctly described that information is news, when it’s a surprise. And surprise is by definition a message with high entropy (that is, low predictability). Shannon’s calculus showed that a high-entropy message needs a low entropy carrier. Otherwise the signal gets lost in the noise. In analog terms writing a message on a clean crisp blank sheet of paper is way better than one with doodles and scribbles. In digital terms, sending a message (information) by glass and light is the best of all. As Gilder put it, a high entropy message needs a low entropy carrier.

In this new month’s issue we’ll have an exclusive sit-down with a Pentagon insider on the future of war. Notably, it’s been predicted the US will use one-tenth the force, yet 100 times the bandwidth, of prior wars. One company enabling that is Luxtera. Below is an exclusive excerpt from our premium monthly report with Greg Young, CEO of Lux Capital portfolio company, Luxtera who is delivering data at the speed of light.

Greg Young serves as president and CEO of Luxtera [full disclosure: My venture firm, Lux Capital, is an equity investor]. Prior to Luxtera, he was vice president and general manager of the High Speed Ethernet Controller and High Definition Media PC Video business units at Broadcom. While there, Greg led the growth of the Ethernet Controller business unit from concept to hundreds of millions in revenue and the No. 1 market share position. Prior to joining Broadcom, Greg was with Intel, where he held several engineering marketing and leadership positions.

Josh Wolfe: What career path led you to Luxtera?

Greg Young: After trying some startups out of school I joined Intel in the mid-90s, beginning as an engineer and then transitioning over to marketing and running product lines. I worked at Intel until 1999, when I joined Broadcom. I spent eight years at Broadcom helping to pioneer the company's participation in the Ethernet market for the network interface controller business. Ultimately, I helped grow that business to about $350 million dollars a year in semiconductor revenue. Most of my career has been spent building businesses off of advanced transceiver technology (devices that both transmit and receive information), so when I recognized the opportunity within Luxtera, it was easy for me to see how the technology could be built into a large-scale enterprise.

What excited you about the company?

First, some market backdrop here: It's getting harder and harder to send fast signals over copper wires. The world of optics has been sitting out there for a long time as the performance leader, but it has been a very expensive way to get the performance that you need for the same kind of input/output speeds. When I recognized that Luxtera had the ability to create a complete optical transceiver in CMOS technology to take performance to 10 gigabits and well beyond 10 gigabits at a cost point that was previously unachievable, I saw the same kind of opportunity I was given at both Intel and Broadcom.

Put it in perspective--how fast is 10 gigabits?

If you use a cable modem at home, that's about a 1 megabit connection--a million bits per second. We're talking about ultimately transitioning people to the point where they can readily transmit 10 billion bits a second. That's the equivalent of downloading more than 300 songs every second.

Why do photons trump electrons when it comes to broadcasting bits?

When you send an electronic signal over copper wires, there is a relationship between speed, distance, and signal integrity. As you get faster and faster over the same distance of wire, your signal integrity gets worse, and you see distortion in the signal that starts to dominate the signal quality at higher speeds. Because of that relationship, there is a natural limit for how fast and far you can push a signal over a copper wire.

At 10 gigabit speeds, electrical interconnects over copper wires really start to break down--it's hard to transmit the signal even 10 meters. Alternatively, you can send a burst of photonic energy down a low-cost fiber optic waveguide, and you can easily send a 10 gigabit signal over 10 kilometers. You can do it with less power, less complexity, and with Luxtera's technology--lower cost.

An inclusive version of the interview is available on the Forbes website, click here to be linked to the article.

Weekly Insider (Lux's Peter Hebert on Smart Grid)

This week my Lux Capital partner Peter Hébert who leads many of our energy VC investments weighs in with great insights from a recent interview on the “Smart Grid” which he says is getting smarter by the hour.

PLI: Lately, we've been hearing a lot about smart grid technology? What exactly is it?
PETER HÉBERT: "Smart grid" has definitely become the topic du jour in both Silicon Valley and Washington, DC. One of our portfolio companies Lux Research—which analyzes energy technologies on behalf of large corporations and hedge funds—defines the smart grid as a “two-way real-time network connecting distributed generation, distributed storage, and distributed intelligence to increase grid reliability and enable green technologies such as wind turbines and plug-in hybrid vehicles." Smart grid technologies will help modernize the electrical power grid to support increasing demand, more intermittent renewable energy as well as increase overall energy efficiency. This is a big deal—Lux Research expects the smart grid to grow from a $2.7 billion market today to $4.8 billion in 2013—that represents an 11.8% compound annual growth rate (CAGR).

PLI: Can you give an example of smart grid technology?
PETER HÉBERT: Sure. First it's valuable to take a step back and understand our current electrical power infrastructure. Today's power grid is a one-way transmission and distribution network that allows utilities and other generation companies to deliver power to residential, commercial and industrial customers. Much of our grid dates back to the days of Edison—more than 50% of the transformer assets are over 40 years old! The aging grid can't keep up with ever-increasing electricity demands. If the infrastructure fails during periods of peak demand, we see blackouts—like those that swept the Northeast in the summer of 2003 and knocked out New York City's electricity. Replacing or adding additional power lines is prohibitively expensive, so utilities are looking for alternative ways to deal with peak demand—particularly in the summer.

Smart grid technologies fall into three broad categories: advanced metering infrastructure (AMI), networking systems, and software. A smarter grid infrastructure can help integrate renewable generation sources (like wind and solar) and in the long run, smart grid technologies will help utilities expand to more customers (such as plug-in electric vehicle drivers). At Lux Capital, we've made investments in several technologies that power a smarter and more efficient grid. The smart grid will also enable both utilities and energy users to better understand and control power usage. Demand response systems can help mitigate blackouts despite old power lines, and connects distributed storage and generation to the grid. Real-time energy information and time-of-use pricing can help consumers make better decisions—for example running a load of laundry when electricity prices might be cheapest late at night.

PLI: Can you give us a brief history of the technology?
PETER HÉBERT: As I said earlier, smart-grid is not one technology, but rather the combination of a number of products and technologies in hardware, software and networking. Over the past few years, utilities and local governments have been aggressively building out smart-meter infrastructure. The first step to enabling a smarter grid is upgrading meters for enhanced data capabilities, including two-way meters that read electricity flow in both directions — from the utilities to the customers, and vice versa. Around 20 million smart meters are already installed worldwide and many more are on the way. Based on announced and likely installation programs (and assumption of meter costs), Lux Research forecasts that the smart meter hardware segment alone will be a $2 billion/year business in the next five years.

PLI: How committed is the federal government to deployment of the technology and what steps is it taking to promote it?
PETER HÉBERT: In short—very committed. There has been huge government support and financing driving the deployment of the smart grid. Power outages and power quality disruptions cost U.S. businesses roughly $100+ billion per year. The Energy Independence and Security Act of 2007 mandates the deployment of smart-grid technologies. The recent $787 billion economic stimulus package included $4.5 billion for R&D, pilot projects and federal matching funds for the Smart Grid Investment Program to modernize the electricity grid. It's not just in the U.S.—the European Union has also formally promoted smart-grid technologies.

PLI: Are there any states, local governments or other communities that are already successfully using a smart grid?
PETER HÉBERT: Many utilities, as well as local and regional governments, have designed programs to roll out smart meters to enable the shift. Lux Research identified 147 such programs planned in the next 10 years worldwide, which would outfit global power grids with over 90 million smart meters in 2013 — and reach roughly 150 million 10 years from now. As an example, last month Florida's state utility Florida Power & Light and several corporate partners announced a state-wide smart grid-initiative, anticipated to cost upwards of $700 million.

Other utilities that have already announced major smart grid initiatives include PG&E, Nevada Power, San Diego Gas & Electric, Southern Maryland Electric Cooperative, Southern California Edison, Tampa Electric, Tennessee Valley Authority, Ontario Power Authority, ISO New England, PJM Interconnection, Toronto Hydro and ENEL. As part of these announced installation programs, about $28 billion of investments (government and private) have already been committed.

PLI: What companies are considered the “key players" in smart grid technology?
PETER HÉBERT: Some of the major smart grid pure-plays include public companies like Comverge (COMV), Echelon (ELON), EnerNOC (ENOC) and Itron (ITRI), as well as venture-backed start-ups like Silver Spring Networks, GridPoint, Trilliant and eMeter. Technology giants like IBM (IBM), Honeywell (HON), GE (GE) and Cisco (CSCO) also have major initiatives underway.

The biggest differentiator among smart-grid companies today is not rooted in technology, as much as in their business strategies. Companies like EnerNOC are focused on grid reliability for utilities, while firms like Comverge are targeting commercial and industrial customers that are trying to reduce their energy consumption.

PLI: What are some of the obstacles to a successful deployment of smart grid technology?
PETER HÉBERT: There are a plethora of different technology approaches to upgrading the grid, but the principal obstacles to successful deployment are not technical. Some major obstacles include future decisions on tax incentives, decoupling, and time-of-use pricing. While one driver for this increase on the utility side is a desire to decrease the number of blackouts, the conservation aspect serves a headwind to adoption. Many generators are paid by the megawatt-hour produced, and thus don't have a direct incentive to conserve. In fact, Lux Research has heard from many sources (including the CEO of a major U.S. utility) that utilities are getting paid less due to demand response and smart metering.

The bottom line: Whether or not utilities ever believe energy conservation is in their best interest, in the near term their focus will be on reliability. In the long run, smart grid technologies will likely help utilities expand to more customers, such as drivers of electric cars. At a recent conference I attended, one large energy company CEO said that he predicted the electric car would be the air conditioner of the 21st century for utilities.