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Rather than Building Sustainable Cities, Let's Focus on Building Successful Cities Instead.

3/9/2017

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Cities have a unique role in sustainability where leadership requires a combination of business, policy, civil society, and citizenry, all working towards goals that benefit all stakeholders. Leadership in cities must benefit all, and the first step to cultivate leadership and working towards common goals is transparency and creating a dialogue. But are these enough to promote change in the world's cities?
 
There have been several pioneering cities that have adopted transparency through sustainability reporting in recent years. Several have produced sustainability reports over the past few years, such as Amsterdam, Atlanta, Chicago, Dublin, Melbourne, Warsaw, and many others around the world. While reporting on sustainability is important, getting access to an adequate amount and quality of information has been extremely difficult. Much like sustainable value chains, it has been challenging for cities to leverage company-level sustainability information to help drive policy, and their city sustainability reports often reflect a future-oriented commitment based on policies and guidelines, rather than hard data from companies.
 
This has been due to three primary barriers. First, reporting and disclosure is often not leveraged by companies (especially smaller ones), and even when the disclosure is available, it's available in static reports where the data cannot be easily extracted. So cities have been left to build their own assessments based on more generalized data, questionnaires, surveys, and algorithms. Lastly, cities (much like companies) have treated company-level sustainability disclosures as an accounting problem rather than a data problem, leading to a complicated and expensive exercise that looks to the past and inhibits innovation rather than enabling it.
 
In addition to getting access to the right data, promoting dialogue is equally important. There are several active networks such as ICLEI, C40, and others that create forums where cities to learn and share best practices, trends in sustainanabilty, and galvanize efforts that require cities to act  as a group.  So we are off to a very good start, but more must be done. Cities are like nodes in a network, where activities within the cities are amplified throughout the larger network. So leadership is the currency of sustainable innovation in the world's cities. If the role of a city is to lead, then we must start with a different kind of leadership in disclosure - using a data-driven, bottom-up approach, rather than a top-down policy-led approach. Start with ensuring disclosure, then focus on the data.
 
Ron Conway, the renowned (and somewhat controversial) investor and philanthropist once said "Technology does more than delight, entertain, and make our lives more convenient; it's also an agent for social good." I couldn't agree more, and cities should learn leverage the economies of scale that shared sustainability frameworks and standards provide. These are useful because they standardize the data being produced, so solutions can be built on top of them to collect, integrate, and learn from this data. Technology is the indispensable tool that is required to make all of this work.
 
Rather than reporting on a city or program level, cities should lead by promoting disclosure at the company level, and leveraging technology to aggregate the information to make it available to the public. While it's important to choose the right standard, it's much more important that all companies are using the same reporting standards to ensure comparability so the data can be aggregated and analyzed. Once you have the information, you need to be able to manage it - to aggregate and analyze the information in a coherent, shareable way. This doesn't mean using spreadsheets - this means utilizing data-driven solutions that requires technology to provide insight beyond the sustainability practitioner. Otherwise, you are only "preaching to the choir" and the learning from your city's data will not be transferred to your city's leadership, let alone to your citizenry or to other cities. And without learning, there is no progress.
 
Embrace the bottom-up, data-driven approach to sustainability to build more prosperous, innovative cities. Rather than creating new sustainability programs, focus on using sustainability data - derived from tried-and-true standards and global frameworks - to develop new programs informed by trusted sustainability data. Don't strive to be a "sustainable city", be a successful city because you incorporate sustainability information into all your policies, lead by promoting disclosure in your stakeholders, and instill innovation by your approach to shared information. This shouldn't be about chasing yet another sustainability label or award, it should be about creating a better city based on shared values, and shared value. 
 
So let's stop trying to build "sustainable cities" and start building successful cities instead, by using sustainability data just like any other information we use to develop policy, inspire constituents, or address stakeholder concerns. Treating sustainability like a special case, silo'd away from the mainstream, will only keep us preaching to ourselves rather than helping our cities - and others - from building a better society and world.
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The Impact Investment Conundrum: Too Much Data, Not Enough Intelligence

3/1/2017

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Despite the dozens of standards, frameworks, questionnaires, surveys, and approaches, investors still don't have the information they need. Despite decades of disclosures and an ever-growing number of sustainability disclosures, standards, frameworks, surveys, and questionnaires (not to mention consultants), the investment community needs more. As Jean Case of the Case Foundation put it, "For impact investing to move from niche to mainstream, it needs a fully formed, robust ecosystem driven by transparent data". I couldn’t agree more - and I believe this is the single greatest barrier to successful impact investment.
 
That's not to say the data isn't there. Over the years there have been some admirable approaches to disclosures (those of you with acronymophobia may want to look away) such as Global Reporting Initiative (GRI) (a full disclosure of my own: I was once the CEO of the GRI), The Sustainability Accounting Standards Board (SASB), CDP, and many others. There are even more approaches to bringing these general guidelines into alignment with investors, often through principles-based approaches such as Principles for Responsible Investment (PRI), or consortium approaches such as the Global Impact Investing Network (GIIN). Today, more targeted efforts are underway, such as the Task Force on Climate Related Disclosures (TCFD) led by FSB, and attempts to integrate all of these efforts to increase corporate value (for companies and their investors), such as the IIRC and various efforts focused on the natural, social, and human capitals that support and advance business such as the Natural Capital Coalition (NCC) and work by the WBCSD. There are, of course, many more organizations chipping away at the business of disclosure - so why aren't investors able to get the information they need? Why do they feel (79% of them, according to PwC) that they aren't getting quality data?
 
Because there is too much data, and not enough intelligence in the market.  There are too many attempts at disclosure, too many standards, too many reports, too many questionnaires and surveys.  There are too many frameworks trying to carve out a new niche in disclosure when the real challenge is translating the data that already exists into meaningful information the market can use. I'm not talking about sustainability reports, or investor questionnaires or surveys. And I'm certainly not talking about impact criteria baked into investment documents or the limited and unlikely inclusion of sustainability criteria into market regulators or exchanges. Though all of these things are important efforts, we are ignoring the most important resource that we already have: data.
 
Arthur Conan Doyle once said, "It is a capital mistake to theorize before one has data". Yet that is what we do all the time - we decide on impact criteria (or policy, or business strategy) without the right set of information - often deciding on criteria before understanding if our portfolio companies even have the information we need, or have the capacity to get it for us (the Achilles heel of value chains). So we ask for more data, more information, more surveys, more reports. Yet a critical disconnect remains between what our portfolio companies produce, and what we want to know. That's why decades of disclosure has failed to close the information gap.
 
It's important to remember that data is largely worthless; it only becomes valuable when combined with other data - and it is here where we are failing. A sustainability report out of context of the rest of the organization's performance (e.g., financial) is of little value. Data on CO2 emissions without an analysis of risks and/or reduction/abatement costs is incomplete and inspires inaction. To know a fact is one thing, but to be able to take action one must have enough facts to work with. And our silo'd thinking on sustainability issues, we have all the facts, but not enough to make them relevant to investors.
 
Over the years,  I've been amazed at the sheer amount of corporate sustainability data out there, and even more amazed at how little we leverage it. We just produce more. As CEO of the Global Reporting Initiative, still the primary way this kind of data is created and communicated around the world, I felt that the standard setters had an obligation to promote transparency to inform and engage, rather than just report. But the industry continues to focus more on a physical report rather than liberating the information within to inform, and is too often only valuable to sustainability practitioners, consultants, and those we hire to help us to quantify and verify our facts, the accounting firms. What's missing from this group are the people who know how to combine information to give investors what we are asking for: not more information, but relevant information.
 
Through the lens of impact investment, we must start with the data, not our impact statements. We must first look to our portfolio, assess what information is available, what could be made available, and how it could be leveraged to inform our impact investment strategy. We must choose among a variety of standard disclosures to ensure we have a consolidated approach where data can be compared, analyzed, and - most importantly - integrated with other information to inform our decisions. The flow of information from our portfolios needs to be uniform, and it needs to inform. Choosing the right strategy based on the data available is a great place to start.  Only then can we design impact portfolios that work.
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The combined impact of foreign direct investment and climate change 

12/18/2015

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This post originally appeared in The Economist. It has been republished here with their permission.


​How can foreign direct investment impact emerging markets that are already struggling with the effects of climate change.The conversation around climate change is sometimes narrow and often centres on mitigation and adaptation. Frequently, businesses and governments tend to overlook its wider effects. Climate change involves more than carbon and energy, and the solutions encompass more than fossil fuel divestment and legally binding agreements. The way in which climate change impacts foreign direct investment (FDI) is an issue that is often neglected.

Thus far, discussion on climate finance has concentrated on positive innovations in the areas of renewables, carbon capture and storage, new financial incentives, and financial tools such as the Green Climate Fund – all of which have added to the climate change financial discussion. However, key areas like foreign investment, and trade and development are closely connected to the collateral damage of climate change.
In the wake of the economic and financial crash in 2009, investors looked to emerging economies as possible growth markets while rates in their traditional markets remained low. Since then, many corporations in emerging markets have been borrowing at an unprecedented rate, buoyed by low rates and favorable terms. The IMF’s recent Financial Stability Report estimates that corporate debt in emerging markets grew fivefold in the past ten years to $18 trillion USD. However, the much anticipated rise in interest rates by the US Federal Reserve and the accompanying rise of the US Dollar have triggered a reversal in this trend, increasingly shifting investment from emerging markets and back to the United States.   

On top of $1.23 trillion USD FDI which shifted away from emerging markets in 2014, some of these markets lost an additional $1 trillion USD in investment in the past six months alone.  The additional impacts of climate change and a shifting global ecosystem add a worrying level of unpredictability for developing economies. If such outflows continue, companies and governments will be under considerable pressure to reduce their focus on the non-financial aspects of their economies. One way countries do this is by competing against each other to offer favorable corporate tax schemes and other economic incentives.

Fortunately, some emerging economies and blocs are bucking this trend, such as ASEAN which witnessed another banner year in foreign direct investment, despite a decrease in global FDI. Although the area contends with a history of corruption and environmental degradation, the ASEAN economy is an important test case to ensure the right course of action is taken.

One way of ensuring the correct course would be the creation of a filter for global investment based on open standards. This would take into account the full scope of non-financial risks posed by climate change to ensure that global investment flows are considering such these risks. This would not be confined to just carbon and energy, but all effects of climate change, relevant to emerging economies.

Additionally, the Paris Climate Summit pledge of $100billion in public and private funding to developing countries on an annual basis by 2020 could help curb the tide of adverse climate change effects in developing countries.

While it is evident that climate change will affect our most active global economies, some solutions already exist. GRI Sustainability Reporting Standards are available and used by thousands of companies in almost a hundred countries, as well as dozens of governments worldwide. Employing an effective filter for FDI in emerging economies is fundamental to building a more sustainable economy and world.
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Stakeholder reporting: Michael Meehan on reshaping corporate culture

10/1/2015

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This post originally appeared in The Economist. It has been republished here with their permission. 

Corporations are not islands – they exist in a vast ecosystem of stakeholders, including shareholders, suppliers, employees, regulation, and markets. And when something happens to disrupt that ecosystem, stakeholder confidence is lost which can drastically affect a company's market value and its ability to do business - after all markets are based on trust.Building and maintaining lasting trust in your company is about more than what you do externally. It's about how your company operates; the corporate culture you cultivate in order to weather shocks to the ecosystem that erode trust and credibility.
The 2008 financial crisis was a massive shock to these ecosystems; one that laid bare significant violations of trust between corporations and their stakeholders. Trusted corporations were operating on increasingly risky ventures, and the culture within these companies ignored - or even perpetuated - these risks. The results were not only disastrous in real economic terms, they fundamentally undermined trust in these corporations, the people who run them and the market as a whole. In the aftermath of the Great Recession companies across many sectors have found it necessary to redouble their efforts to restore stakeholder trust and to justify their role in society.  
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This has led to a series of pressing questions for businesses to answer: Are directors primarily responsible to shareholders, other stakeholders or society at large? How can an organization change its culture and what changes should be made? What are the benefits of reshaping corporate culture?

Changing a company’s culture is no small task. It takes years of work and it only happens when there’s full buy-in, top to bottom, from management and employees. Here are four things companies can do to reshape their corporate culture:

Strive for greater transparency to empower better decisions based on reliable information
You can market your way to trust in the short term, but for lasting credibility your ecosystem needs high-quality, reliable information about the business, its values and how it operates. This information doesn't come from closed, protective cultures. Stakeholders need comparable information regarding a company’s performance, and it’s important to demonstrate how a company’s corporate culture and values align with this. Last year’s accounting scandal at Tesco demonstrates this point. Revelations about the scope of the company’s problems shocked Tesco’s ecosystem affecting stakeholders from shareholders to employees and customers. As part of his efforts to reshape Tesco’s culture, CEO Dave Lewis sent his employees a simple message: “We want to work in a business which is open, transparent, fair and honest. We all expect Tesco to act with integrity and transparency at all times.” I couldn’t agree more with this sentiment. This is what sustainability reporting is all about – a trusted, transparent way to collect information in order to communicate your company’s position around risks, opportunities, and challenges – both financial and non-financial.

Once this information is available it can inform better decision-making within companies. This is what builds trust in the market, and ultimately enhances the credibility of your organization. But the cycle must be continuous, being refreshed through an open, transparent corporate culture to push the cycle along. A breakdown in this cycle, as seen in 2008, can destroy the trust in corporations that took decades to create, often in minutes. Rebuilding this can take years.  

Shift your business focus from short-term to long-term
The trend in global stock markets is to reward short-term productivity, often at the expense of long-term viability. This has resulted in a much more volatile market, riskier indices, and a breed of investor that is more focused on earnings rather than long-term fundamentals. A short-term corporate focus benefits only one stakeholder; the shareholder. But long-term, it benefits no one and leaves most of a corporation’s ecosystem looking for answers for long-term risks. These risks are often non-financial and detached from short-term stock performance – major risks such as corruption, human rights, and governance can have a significant impact on a company’s credibility.

Reassess your definition of corporate risk and the fiduciary responsibility of your directors.
It is the fiduciary responsibility of corporate directors to be aware of risks to the corporation, whatever they may be. With the advent of corporate accounting standards, many companies have opted to focus on the financial risks rather than (and sometimes at the expense of) non-financial ones. But in reality, these non-financial risks can become financial risks over time – a hidden human rights issue in your supply chain, a corrupt executive at a subsidiary, an environmental violation within a business unit – all are non-financial risks that could very well become serious financial ones, and it’s important your corporate culture properly assesses what fiduciary responsibility really means. The changing nature of the corporate director requires a change in culture, one that considers both financial and non-financial information in the "basket of risks" that face their organization.

Expand your ecosystem
One of the best ways to build a more inclusive, transparent corporate culture is to expand the scope of stakeholder engagement. It’s not just investors who are important. Labor organizations, governments, civil society organizations, consumers and citizens are also essential in helping your company understand where the risk areas are, what’s important, and where to focus. Directors are accountable to both shareholders and stakeholders and this balance needs to be carefully managed.
Build your ecosystem to include a broader audience and listen to them. They will help guide you.


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When Is The Right Time For Your Startup to Take the Market Lead in an Emerging Market?

5/14/2014

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One of the things I’ve always loved about startups in emerging markets is the ability to go from zero to sixty almost immediately. When you get that feeling of the pavement rolling underneath your feet, the temptation to take the early market lead can be very compelling. But is it always a good idea? 

Back when I was running Carbonetworks, it was an interesting time. Global carbon trading was just taking shape and there was little debate around climate change; the whole world seemed headed towards a new and very large global market. The company, at least in it’s very early days, was intended for companies to monetize carbon emissions via trading and later, energy savings. It was an interesting time; companies didn’t know much about carbon but knew they needed to do something about their CO2 emissions. Similarly, investors in Silicon Valley also knew they needed to do something about it as well. At the time there was only two or three carbon management vendors in the world, and Carbonetworks was one of them. 

So we embarked on an education of our market, our potential clients, and investors. But in doing so, we also educated our competitors. Of course we knew this, but it was a trade-off we had to make; a balance of educating the market in order to connect with clients at the expense of alerting and educating competitors and their investors. When the better-funded competitors did arrive on the scene (they always will), things got more difficult, but not in the way you might think.

Cleantech, by definition, is a sprawling collection of technologies, IP, and services that is almost impossible to define because of its overlap with adjacent markets. For instance, is data center energy efficiency cleantech or IT? The answer is both, of course; and that’s what makes Cleantech a difficult market to address. You wind up with a mix of experts and laypersons, all vying for the same face time with the customer - a customer who has their own challenges finding the right person for the job. In their search for differentiation, new competitors invent value props that they may see in the market, but based on problems customers really aren’t experiencing (Marginal Abatement Cost Curve, anyone?). Things get noisy very, very quickly - and this was our problem in the early carbon/energy market. Lots and lots of noise. Rather than trying to shout louder than your competitors, sometimes you just need to stand up, shut up and listen.

A lot of entrepreneurs have opted for growing their startup in “stealth mode”. I’ve seen this approach succeed but also fail spectacularly - if you’re going stealth, you need to ensure you have something special (stellar management team, unique access to customers, etc) to replace the market exposure you’re giving up. For well-heeled management teams, stealth is a great option. But for the entrepreneur who doesn’t have access to these resources, it can make things much more difficult. On the flip side is the company that carries the banner for the market, but runs the risk of leading too early and bleeding IP to the market. 

However there is a middle road, where you let your customers define your leadership position. In Cleantech and other complex markets, there is often no one-size-fits-all solution. Customers need as much help as you do navigating through the buzz. The key is finding their core problems and finding solutions to those problems. Sounds simple, but it’s not. In our data center example above,  it depends on who the customer is. If its the CIO, s/he’s likely not going to respond directly to energy savings as it’s usually not core to their mandate, whereas performance is. If it’s the sustainability person, it’s unlikely they have the IT or implementation expertise to appreciate the technical advantage of your solutions. So as a vendor, extra diligence is required to define the problem and how you’ll help solve it. This is what’s going to lead you to closing deals in Cleantech, not pushing your firm as the next market leader. 

So when should your firm take the lead in an emerging market? Only your customers can tell you that. Let your sales numbers speak for themselves.

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How lessons from the IT sector can help Cleantech

4/12/2014

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Fear, Uncertainty, and Doubt (aka, FUD) is a common sales technique in the tech industry. Made (in)famous by Microsoft’s tactics against open source in the early days of Unix, FUD is most often used to convince your prospect (or entire target audience) that your competitor has hidden issues that make it a poor choice. For instance, Microsoft used to claim that open source may be free, but unseen support costs will bury you over time – which can be true, but it is also true of any infrastructure technology – including Microsoft. In the startup world, FUD is usually delivered in conversational mode, where concepts like financial viability, executive turnover, and other common startup issues are brought up in a competitive situation in an attempt to undermine competitors.

The point of putting FUD into the market is so a target customer chooses your product over a competitor’s. The nature of FUD is that it is often not based on actual facts, it cherry-picks information to support that your competition is not up to the task. When FUD works, it’s usually because you’ve been able to choose the right information to create a hot-button issue in the client – even if no such issue existed before. But what often happens is that nobody wins – a customer becomes confused or wary of the entire product segment and simply switches off. This “customer apathy” and is the primary risk of using FUD tactics in the sales process. In the end, too much FUD can be bad for early markets.

Climate change is also an early market. While FUD is a well-known tactic in the tech business, it is now being used to undermine solid science in climate change. Several groups all over the world (but especially here in the US) are using this strategy to call into question the authority of experts. In fact, the word “expert” has acquired a negative connotation in some circles and people are becoming more distrustful of science. This is a dangerous trend because there is more at stake here than a simple purchasing decision, it’s an issue that affects our very future. To remove our trust from science without an appropriate place to put it is not a sound strategy.

At the risk of sounding opportunistic, this year should have been the year for the advancement of the climate change agenda. Extreme weather threatens Pakistan. Studies on climate refugees estimate over 50 Million people will be displaced by climate change by 2011, increasing to over a billion by 2020. And still, in America, climate change denial is on the increase in the GOP. Climate FUD is at an all-time high against climate change, but it’s not clear what the other “competitive option” is.

The problem is that we haven’t put our trust elsewhere, we have simply switched off. A recent article in Fast Company really illuminated me to a fact that I have suspected for some time. The survey suggests that no matter what happens, climate change skeptics will simply not change their minds, regardless of the consequences. Is sounds a bit alarmist, but the survey the magazine commissioned outlines a study that offered climate change skeptics different scenarios like “if the polar ice cap melted, would you then believe in global warming?” (15% said yes), or if the people of Samoa had to relocate because their island sunk below a rising ocean (0.06% said yes), or –and this is an actual question – if your kids could no longer go outside, would you then believe in climate change? A whopping 15% said they would then change their minds. Let’s be clear: 85% of the respondents said they wouldn’t change their minds about climate change if their kids had to remain inside for the rest of their lives.

That’s the one that got me. If the climate has become so bad that a climate skeptic’s kids can’t go outside and they will still not believe in global warming, then we simply aren’t dealing on a level playing field. This made me realize that we now at an impasse and are not talking on the same level. We need to change our tactic because the Climate FUD approach employed in the US has led to “customer apathy”, where nothing you can say or do will get them interested, even an issue that impacts them at a very personal level.

Put in this context, what looks like sheer insanity looks more like a basic FUD strategy gone wrong, a common occurrence in the business sector. So, how to you combat Climate FUD?

Our first reaction is to fight FUD with FUD, but this is always the wrong approach and only hastens apathy in our target base (e.g., the American population). Think FOX News vs MSNBC. I can only listen to Sean Hannity or Keith Olbermann so much before I simply start to tune out, regardless of where my political leanings may lie. Fighting FUD with FUD simply doesn’t work, but it does tend to whip up the outliers at first. I believe the climate change debate is past this point with opinions firmly set on either side.

Another common approach to combat Climate FUD is to make it personal. Show people how climate change will affect their lives – how climate change could, say, prevent their kids from going outside. But as the survey above illustrates, even this tactic is failing in the fight against climate change denial.

Another, more realistic way is to show a clear ROI in climate change. This was the underlying concept in one of my startups, Carbonetworks, where companies could actually see the money they could save (or make) by reducing their impact on the environment. Environmental issues simply become another financial asset to manage for the corporation. The problem with this approach is that it only works for corporations, not for the average individual. Of course, we as individuals are motivated my more than just financial returns.

The best way to fight Climate FUD is to expose it for what it is – an attempt to undermine a sound strategy by using out-of-context, cherry-picked information, recast in a light to distort the facts. These are the facts of countless scientific papers, expert opinion, and the prevailing consensus around the world. Most people I meet in the US are surprised to hear that there is little serious climate debate in the rest of the world, and global warming is widely accepted as a critical global issue. Though a conversation on climate is international, hardcore skepticism is a particularly American phenomenon. It’s not that Americans are different, it’s just that we are the last to the climate change party, and we have domestic interests that simply don’t want us to join in.
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It’s important to emphasize that Climate FUD is primarily a position of weakness rather than strength.  Groups of people may tend to act irrationally, but individuals are intelligent, and they don’t appreciate being played. We need to work to focus on Climate FUD and ignore the climate skeptics. It can be difficult – the are certainly the vocal minority. Let’s stop wasting our time and resources trying to turn skeptics, and focus on undermining the strategy that drives them. That’s the real – and only – way to fight the Climate FUD that is paralyzing climate progress in America.

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Why Cities Need to Stop Trying to Emulate Silicon Valley and Focus on Their Entrepreneurs.

3/3/2014

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As a person who has run companies in Silicon Valley, Canada, and Europe, I can say with confidence that Silicon Valley leads the world by a large margin in terms of venture capital, entrepreneurship, and innovation.  By a very, very wide margin.

But that's not the only reason to build a company in a particular environment. It's time cities stop trying to compete with Silicon Valley by emulating it, and start taking themselves seriously. Silicon Roundabout ? Please. It's almost embarrassing for London - a city that certainly knows business and empire-building inside out and has access to huge amounts of capital - to try to emulate Silicon Valley.

Almost every city has something to offer entrepreneurs, and it doesn't need to be simply VC or the next big thing. VCs are now much more comfortable looking abroad for opportunities, and the recent spate of non-Silicon Valery leaders has demonstrated that well-funded innovation can come from almost anywhere (hello Rovio).

So why are cities trying to play a game that is almost impossible to win? The truth is that many cities are changing the game.  Think about how Austin or New York has chosen to play their cards in this game.   Look how Canada has supported technology innovation, if not its cities. Maybe not through VC alone, but though other, equally meaningful incentives like  access to human capital, favorable tax rates, alternative funding/reinvestment structures, and many other incentives that can make or break your business, whether VC-backed or not.

These things can weigh more heavily on your company than being in proximity to the greatest startup engine that ever was. It's time cities across the globe realized this and stopped chasing the leader. Just because the game has a winner doesn't mean the game can't be changed.
Check out the excellent post below for a slightly different perspective-

Will Silicon Valley ever share the wealth? »
Cities are doing a lot to build and promote their own startup communities. But Silicon Valley is still king, and it's growing even more powerful in startup investments. How do we fix this?
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Pay People What They're Worth

10/31/2013

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One of the things I come across constantly while working with startups is the subject of fair pay and equity. This can be one of the most disruptive aspects of growing a startup, and the decisions you make today can have implications for the success of your company for years to come.

First of all, the rule of management - especially in startups - is simple: pay people what they're worth. And when I say "pay", I'm including both salary and equity. What they're worth is dependent on two factors: how much value they bring to your company, and salary levels in your industry and location. That's it - everything else is negotiation, but if you start with those clear factors in mind and make them the starting point for your salary negotiations, you'll never go wrong.

Here's some of the hurdles you may come across, and how to deal with them:

1. Hoarders: A Founder / Management Team Who Hoards Cash and Equity. This is more common than you might think, and is something I've run into a lot. It's not usually because the founder or management team is greedy, it's often simply because startup leaders tend to be very binary about cash and equity. Everybody's trying to get it, and it's your job to protect it. While cash is king in startups, many early management teams misinterpret lowering salary expenditure with fiscal responsibility. It is not - quite the opposite, it's irresponsible because these kinds of cost reductions hurt your company's ability to sell, deliver, and so on.  You can usually identify these companies very quickly - they have no options plan for employees and pay staff below market value. As a result, they are usually filled with underperformers and unmotivated staff who are only there because they cannot go somewhere else. Not surprisingly, these types of companies are very unlikely to succeed.

If you're one of these hoarders, it's not hard to turn this around and re-energize your team. Startup salaries tend to be lower due to cash constraints, but there are many ways to keep staff engaged and motivated. Build and maintain a fair options plan and let everyone share in the success of the business. Take a hard look at your local market and adjust your salaries accordingly. Tie salary increases to simple but tangible performance milestones. It all sounds like boring HR, but in a startup these things are essential to creating a team that can clobber your competition.

2. Mismatched Expectations: Dealing Mismatched Salary/Equity Expectations. Again, this is common in every startup, especially those with staff that don't have a lot of experience in startups. Let's start with the employee who expects more salary/title/equity than they really deserve. Again, this usually isn't out of greed, more often it's because they have been given so much responsibility at the startup (where everyone wears many hats) they they overestimate their contribution in a larger organization. The key to dealing with employees like this is to show them the path, and be honest and direct with your reasoning. I like to show all employees the path to growth (what I'm thinking about for hiring plans and funding, for example) and invite them to see where they would like to fit within that much different and larger company. Sometimes, eager employees will immediately say, "I want that VP job, or the new COO job, etc" when their skill base doesn't qualify them for that role. Employees like this are usually exactly what you want in a startup - your job as a leader is to show them there is a path to get there, and outline all of the things that are expected of a person in that role, and how you will help them attain these skills. Then the role becomes a goal, rather than an expectation.

You also see this mismatch in founder teams, where people have a disproportionate amount of equity based on their contribution. This is very common and will usually get dealt with in the fundraising process eventually - usually at the cost of a founder - so it's best just to deal with it up front. Founder teams need to be careful about how they split up equity - they may all feel equal when they're not, or they may offer a disproportionately small equity stake to a "late founder". The reality is that some founders take more risk than others, and some bring more to the table than others. Other times it may be a question of less tangible contributions. Often, everyone has a sense of solidarity in the startup's early days and things feel equitable, and if the risk is truly shared then this is easy to deal with later on. But if founders' contributions are not equitable, then your cap table must reflect this at the outset. Otherwise, discontent will follow and your company will suffer for it; either in a founder exit (resulting in non-working shares) or a forced equity adjustment at your next funding round. The key here is to be transparent among founders and discuss these contributions early on.

The other side of the coin is where an employee is over/undercompensated due to some internal issue, such as a personality conflict with one of the founders. Again, this is quite common, but is much more difficult to deal with. When I help restructure a startup, this can be one of the most disruptive activities because no matter what you decide, you're going to get somebody very upset. This is precisely why most startups don't address it, and let it fester until it becomes a much larger problem down the road. The only advice I can give you is to deal with it now, as it will slowly eat away at your business, demotivate staff, and make you less competitive. Have a third party come in to deal with it, or take it on yourself, but deal with it now or you'll regret it at some point.

3. The False Deal: Thinking You're Getting a Deal With Undercompensation. I'll admit I've been suckered into this. I once had a VP R&D who was a friend of an investor. He had been through a successful exit and didn't require a lot of salary. He was a great guy, easy to get along with and didn't want a ton of equity. To me it sounded like the perfect combination. Only it wasn't - it was a total disaster. As the company grew, it rapidly outgrew his management capabilities, and it became apparent that he was unhappy with his salary deal as he hired people at a much higher level than himself. Then came the grumbling, the conflict, and the kind of unrest that eats your company from the inside. New to the startup game, we didn't deal with it head-on, just kept on making adjustments that weren't really addressing the issue. Resentment grew on both sides, and the negative attitude permeated both management and R&D teams into an "us vs. them" mentality. The company's productivity went way, way downhill. In the end it cost a lot more than just a friendship between early founders, it took our eye off the singular focus of building a great company and all the things that come with that.

If you're in a startup, it's very likely you have that situation playing out right now. If you think you're getting a deal by underpaying someone, you're not.  Recognize it for what it is and deal with it. Now. Sure, everyone takes a bath on compensation pre-funding, but once you're a functional startup with enough cash to take care of your employees, then do it. The undercompensation deal ends when you have the cash to remedy it. If the employee isn't the right guy for the role, then change the role, but undercompensation is a tool that can only be used sparingly, and only under specific circumstances. If you're doing it now, then ensure to create a clear path to prosperity, a light at the end of the tunnel for employees. To do otherwise will create a cancer in your company that can take years to remedy.

4. Priorities: Take Care of Your Employees First.  When I was a kid, a pretty shrewd businessperson gave me this advice: "In business, always pay yourself first". Now that I've been through the startup wringer a few times, I've built on this to say: "In a startup, take care of your employees first." As a founder/CEO, they're the lifeblood of your company, not you.  It took me a while to realize this myself, and there was a lot of trial and error along the way. But if you focus on them, everything else falls into place.

Like all things, it's all about priorities: if any of the above points sound familiar, then forego that PR stint at the Governor's Mansion - it may help you personally but it's not really going to help your business in any tangible way. Ignore that pay-for-play conference speaking slot. Get yourself out of first class and go to coach where every other startup CEO sits and invest those dollars in your employees. Stop paying marketing people to come up with new vaporware ideas and spend your capital on building capacity for delivery. Stop wasting your time on trying to be a visionary if you don't have the staff to execute. Solving your startup employee problem will ensure your company can deal with almost anything the market or the competition throw at it, then it'll be the right time to do the PR and the First Class flights.

Build from the inside, rather than from above, and you'll have an infinitely better chance at success.
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Why It’s so Hard to Build Good Sales Teams in Cleantech

7/18/2013

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One of the issues I’ve encountered time and again in cleantech software startups is the difficulty in building the right sales teams. Getting the right mix of experience and domain expertise in a sales team is always a critical, which is one of the reasons firms use domain-focused, technical team members such as product managers, presales, and overlays as a way to support salespeople in the field. Software companies have been doing this for decades, but many cleantech firms have a lot of trouble getting this mix right. Is Cleantech so different from other markets?  

In a word, yes. And it’s a real problem for today’s cleantech firms and their investors. 

First, there’s often product issues that are difficult to overcome. Cleantech is still a fragmented and complex market, and customers often see their problems as a single, massive problem rather than a set of smaller ones. In this case, salespeople often find themselves playing product manager to find the right fit for their product in the client’s set of problems. If you’re selling, say, carbon software and the client is looking for water management, many salespeople will simply add it to the list of enhancements because it’s all under the sustainability umbrella. I’ve seen few markets with as much of a problem with scope creep than cleantech software, mostly driven by the customers lack of clarity around the actual problems they’re trying to solve. It’s one of the reasons services do so well in this market, where experts can help dissect the larger problem into more manageable chunks.

There is also a common assumption that software sales is, well, software sales. And this is a good assumption - great enterprise software salespeople are worth their weight in gold. I often recommend hiring seasoned enterprise sales teams over domain-focused ones to the companies I advise. But the problem is finding the right client, otherwise you’re going shotgun. Sending in your expensive deal-closer into a vague deal is only going to end badly. Get enough of these deals and you’ll lose your rainmaker and frustrate you and your investors. Believe me, I know because I’ve done it - and now I see a lot of cleantech software firms doing the same thing. 

Even at an early stage company, your sales teams need a lot of support from domain experts who shouldn’t be doing the selling. A successful Cleantech software sales strategy relies on enterprise sales expertise to close the deal, not domain expertise - but without domain expertise to shape the deal, everything starts looking like a nail. You’ll find your sales teams trying to fit your products into bad deals, or worse, dropping the price so low it no longer makes economic sense to keep selling them. This was precisely the problem in the early stage carbon management market, where the price of solutions became so low it didn’t make sense to stay in that business for many companies. 

But this is just one side of the coin. It’s very difficult to find salespeople with an appropriate level of cleantech domain expertise, it’s just as tough to find a domain expert with a sales focus. In my experience, domain experts can be highly valuable to the organization, but aren’t the best at selling. Putting domain experts in sales roles is a troubling trend in cleantech that hasn’t resulted in favorable results for most companies. As an emerging market matures, domain experts begin to migrate into sales and vice-versa, but in my view, in Cleantech it’s still too early. Utilizing domain experts as your front-line sales team will pad your pipeline but result in limited success.

Building successful sales teams in cleantech takes both sides of the same coin, which a particular emphasis on domain experts leading in the sales group in order to sell, and staying in until the deal closes. More so than most markets, the level of engagement for the domain expert must be high throughout the process, otherwise there is increased risk of the deal going sideways due to lack of focus. 

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4 Ways We are Already Paying for Climate Change

2/12/2013

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While we may think that the demise of the US Climate Bill has somehow pulled climate change out of our collective wallets,  climate change has found an unlikely ally- the insurance industry. What’s has been happening in this sector is already making energy management critical to companies, governments, and individuals and impacting us financially. The truth is we’ve been paying for it for some time – here’s how.

1. Insurance Firms Were First to the Climate Change Party – The insurance industry has been analyzing the effects of climate change for decades – not as the political hot potato it has become in America, but rather as an analytical function of risk. Before we politicized climate change in the US, insurers (or more accurately reinsurers) were studying the science behind climate change and the risks it imposes on all of us – and the results have been reflected in how we pay for insurance. Financial giants such as Allianz released a very interesting report with the WWF in 2006 that covers the effects of global warming on the US including flooding, fires, hurricanes, etc. and their impact on insurance rates. It may sound dry, but there’s billions of dollars at stake for these kinds of firms. Back in the 1990′s I saw a “carbon map of the world” by one of the world’s largest reinsurers, depicting the areas around the globe most at risk (and hence, higher premiums) from global warming. To many of us the idea of climate change, energy, and finance seems new and political, but to the insurance market it’s old news and a core to their business.

2. New Green Insurance for Consumers and Corporations – Let’s start with the consumer side of the equation – how this affects you and me. A growing area for insurers is changing insurance rates depending on how you build your home. A growing trend for Green Homeowners Insurance covers rebuilding a damaged home to green standards. This used to be only for new, green homes but now includes retrofits and renovations. If you put solar panels on your roof, your insurance rates may have changed already.

And it’s not just consumers –  a new form of insurance is being rolled out for green energy companies such as renewables. New insurance instruments are available (and sometimes mandatory) for all sorts of projects, from solar to wind, tidal, geothermal, and more.

3. Green Energy Insurance – Another area of insurance is a bit more serious – green energy insurance. Many people install solar panels in their homes and are amazed to see their energy meters going backwards as they push energy back into the grid. However utilities see this as a risk: if they are essentially paying you for your energy, they want to have the checks in place to ensure your numbers are correct. Enter Green Energy Insurance, a new kind on insurance that is becoming mandatory in many cities – if you want to reap the gains of putting green energy back into the grid, your utility may require this insurance for the privilege.

4. D&O Insurance for Corporations in Response to SEC Requirements - I’ve left this one for last as it is possibly the most serious in terms of risk to companies today. Directors & Officers (D&O) Insurance protects companies from the actions of it’s directors and officers. Without it, entire corporations would be at risk from the actions of it’s executives. It’s a key part of the corporate structure, and has now entered a grey area due to climate change.New SEC Disclosure Requirements regarding climate change information have spurred a new debate on exactly what D&O insurance covers. Several cases have already been brought about to the Supreme Court as groups target executives and their corporations for their activities that contribute to global warming. You can read more about the growing executive response to energy management and climate change in my recent post.

So while cap-and-trade may be struggling to gain a foothold in the US, entire industries are growing – and have already grown – to incorporate climate change and energy management, affecting how we do business and how we live.

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    Michael Meehan

    Michael is the former CEO of the Global Reporting Initiative, Carbonetworks, and other sustainability organizations. He has been an advisor and CEO in sustainability for almost 20 years, and writes about  technology, sustainability, and social innovation.

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