14 Aug For the exclusive use of O. Acar, 2016.B5672Date: August 1, 2012H ENRY C HE SBRO

For the exclusive use of O. Acar, 2016.B5672Date: August 1, 2012H ENRY C HE SBRO U GHGE’s ecomagination Challenge: An Experiment in OpenInnovationIn 2010, Beth Comstock, chief marketing officer and senior vice president at General Electric, sat inher office at GE’s corporate offices in Fairfield, CT and pondered her next move. She had justreviewed the results of GE’s ecomagination Challenge, and was making a mental tally of the problemsand the accomplishments of that initiative. GE’s ecomagination Challenge was “a $200 millioninnovation experiment where businesses, entrepreneurs, innovators, and students shared their bestideas on how to improve our energy future.” 1 Entrants could submit ideas to a panel of GEexecutives, leading academics, and technologists to evaluate the viability of ideas. In 2010, GE andventure capitalists provided $71 million to various start-ups. During the upcoming second phase ofinvestments in 2011, GE and venture capitalists planned to invest a similar amount in start-ups, butalso wanted to select five $100,000 Innovation Award winners to companies in the earlier phase ofdevelopment. In addition, the entry receiving the most user-submitted votes would receive $50,000.The ecomagination Challenge was launched in partnership with venture capital firms Kleiner Perkins,RockPort Capital, KPCB, Foundation Capital, Emerald Technology Ventures, and Carbon Trust andwas a key part of GE’s business strategy to accelerate the development and deployment of cleanenergy technology and drive a global energy transformation. As part of its overall ecomaginationcommitment, GE planned to invest $10 billion in R&D over a five-year period and “continue toincrease operational efficiency, reduce the energy and water intensity of its operations, and growecomagination revenues.”2As GE’s ecomagination Challenge engaged in an open innovation process within the company’straditionally closed R&D model, many new ideas had been identified in the green energy marketspace. But most of these ideas were uniformly early, extremely small in comparison to GE’s ownmassive energy business, and were 18 months or more away from being ready to engage in anyeffective way with GE’s energy business.12http://challenge.ecomagination.com/ct/a.bix?c=home.http://greenorder.com/2011/01/18/20.html?section=BLOG.Professor Henry Chesbrough prepared this case study with research assistance from Tania Dutta as the basis for class discussi on rather than toillustrate either effective or ineffective handling of an administrative situation. While GE executives generously gave their time, GE did notprovide any funding support for the development of this case and bears no responsibility for the material in this case.Copyright © 2001 by The Regents of the University of California. All rights reserved. No part of this publication may be reproduced, stored,or transmitted in any form or by any means without the express written permission of the Berkeley-Haas Case Series.This document is authorized for use only by Oguz Ali Acar in 2016.For the exclusive use of O. Acar, 2016.GE’S ECOMAGINATION CHALLENGE 2The following Monday, Comstock’s boss, Jeffrey Immelt, the CEO of GE, expected a full report fromher on the ecomagination Challenge. While he would want to know the results achieved to date andthe lessons learned, Comstock knew that his real questions were going to be more practical. Howwere the newly created ventures going to create value for GE? Was this experiment something GEshould do again in its energy business? Should it be done elsewhere in GE, or was this a noble failurethat should not be repeated?General ElectricGE was founded in 1892 out of a merger between Thomas Edison’s business interests and CharlesCoffin’s Thomson-Houston Electric Company. It was one of the original 12 companies in the DowJones Industrial Average (formed in 1896), and is the only one of the original 12 still in the index.Today the company is an advanced technology, services, and finance provider, which tackles some ofthe world’s toughest challenges. Built upon a culture of innovation that hearkens back to Edison, thecompany is a leader in energy, health, transportation, and infrastructure. The company employs morethan 300,000 people in more than 100 countries around the world. 3GE is also known for its leadership in management and the quality of its senior leaders. The companyhas made extensive investments in its own management education facilities in Crotonville, NY.Former CEO Jack Welch formulated a management process that focused GE on its best businesses,forcing the company to divest businesses that were unable to grow or held a poor market shareposition. Management reviews occupy much of the top managers’ time at GE, and these reviews areclosely connected to GE’s strategic objectives in its main businesses. GE’s skills in attracting andretaining high quality staff mean that its top managers are actively sought by executive recruitersaround the world. When Immelt succeeded Welch as GE’s CEO, some of GE’s other top managerswere rapidly recruited away to lead other world-class companies.GE’s revenues in 2010 amounted to just over $150 billion, with its Energy Infrastructure businesssupplying $37 billion of those revenues, and more than $7 billion of GE’s $19.6 billion operatingprofit (see Exhibit 1 for a Summary of GE’s Operating Segments).GE’s Energy Business and ecomaginationGE’s Energy business serves a variety of customers in power generation, industrial, government andother customers worldwide. The energy business offers both products and services related to energyproduction, distribution and management. It includes wind turbines as part of GE’s renewable energyportfolio, which also includes solar technology. The business also offers aircraft engine derivativesfor use as industrial power sources, along with gas turbines and generators that are used principally inpower plants for generation of electricity and for industrial co-generation. GE’s nuclear reactors, fueland support services for both new and installed boiling water reactors are offered through jointventures with Hitachi and Toshiba. The business also designs and manufactures motors and controlsystems used in industrial applications primarily for oil and gas extraction and mining.GE’s energy business also includes a wealth of service offerings that support its products. Thebusiness offers customers total solutions to meet their needs through a complete portfolio ofaftermarket services, including equipment upgrades, long-term maintenance service agreements,repairs, equipment installation, monitoring and diagnostics, asset management, and performanceoptimization tools. The business is making new investments in areas of technology that complies with3Source: http://www.ge.com/.This document is authorized for use only by Oguz Ali Acar in 2016.For the exclusive use of O. Acar, 2016.GE’S ECOMAGINATION CHALLENGE 3more stringent environmental regulation, and water treatment solutions for industrial and municipalwater systems including wastewater, mobile treatment systems, and desalination processes.The scale and complexity of GE’s energy business was a proud accomplishment that created newopportunities and challenges. The ecomagination initiative grew out of a desire to connect GEenergy’s disparate activities together under a powerful brand. Mark Little, SVP of Global Research atGE, spent many years in the Energy business. In his previous job, he helped to grow the powergeneration business within GE Energy from $2 billion to $10 billion. He remarked:We kicked off the ecomagination theme in 2005. Initially we got a bit of backlash,since our customers were utilities and power generation companies. They thoughtwe were somehow criticizing them. But once we got to explain the program to themthey got excited. ecomagination gathered together many different things we werealready doing in GE. We were growing our sales in renewable energy; we doubledour research spending in this area. We started getting even more traction once wecreated a label to connect our disparate activities together.Tore Land, Director of ecomagination at GE, added:ecomagination is GE’s corporate strategy, built upon the idea of addressing unmetcustomer needs in the sustainable and renewable energy sector. We offer productsand services that reduce our customers’ environmental footprint and increase ourcustomers’ competitiveness. As a provider, we can help our customers and makeourselves more successful in the process.The Need to Open Up: The Birth of the ecomagination ChallengeWhile GE’s ecomagination initiative was well received, it forced GE to encounter some new anddifferent entities that it did not have to deal with in its traditional energy business. The interest inrenewable, “green energy” or “clean energy” was very high, and much of that interest came fromorganizations and individuals that GE currently did not do business with. Comstock said:We started the ecomagination initiative in 2005 as an innovation platform to providea focus for our capabilities in the clean tech space. Since that time, we have doubledour investments and greatly increased our sales. But there is only so much a singlecompany can do. We ran into a very big problem: in order to really develop theclean tech space, we needed to develop an ecosystem of companies. That meant weneeded ways to forge partnerships with a great many companies we didn’t ordinarilycome into contact with in our Energy business. To develop the technology for thesmartgrid4, for example, is a very wide focus.Because of the high level of interest in the green energy space, a significant amount of venture capitalinvestment was flowing into the area. Estimates were that over $1 billion of venture capital wasinvested in cleantech in 2007, with more than $2 billion invested in 2008. 5 Kevin Skillern, managingdirector of GE’s Venture Capital group, commented: “Ten years ago, only 1 or 2 percent of VCfunding was going into the energy sector. Today, 15 or 20 percent of global VC funds are going intoenergy. GE’s got great processes, but we can’t ignore all this external activity in one of our core4“A smartgrid is an electricity network that can intelligently integrate the actions of all users connected to it —generators, consumers, and thosethat do both—in order to efficiently deliver sustainable, economic, and secure electricity supplies.”http://www.globalsmartgridfederation.org/smartgriddef.html.5Venture Capital Investment in Clean Technology Grows Despite Decline in Overall Activity. Climate Change and Sustainable Busi nessSolutions Update. Advisory Bulletin, 2008.This document is authorized for use only by Oguz Ali Acar in 2016.For the exclusive use of O. Acar, 2016.GE’S ECOMAGINATION CHALLENGE 4business areas.” A lot of other energy innovation activity was also underway in universities, researchinstitutes, NGOs, and individuals.This rapid increase in activity was challenging for GE to cope with. Land commented: “GE felt thatits own development cycles were getting shorter and shorter, especially in areas like smartgridsoftware technologies, making it hard to keep up with the market relying only on our own internalresources.” Little also saw real challenges for GE’s business, noting: “This space is in its early stages,so you need a portfolio approach in starting projects. You don’t know which will prove to be thewinning approach, so having multiple bets helps you cover the space better. And we don’t have allthe good ideas inside GE; we cannot cover all the opportunities ourselves.” Land’s and Little’sperspectives were strongly consistent with those of a recent book on innovation called OpenInnovation, written by the author of this case study.6As these concerns were being considered, the idea of creating a challenge in the green and renewableenergy space for outsiders to offer their own ideas to GE began to take shape. In this challenge, GEwould ask the world to offer solutions that fit with the ecomagination theme, and commit $100 millionof its own money to launch companies for those responses that seemed the most promising.Engaging the VCsBut the ecomagination Challenge was not limited to GE’s own support. GE executives also felt thatthere was an opportunity to do more by working with VCs already active in the energy space. Landsaid:An ecomagination Challenge would harness the energy of entrepreneurs and VCs inservice of the ecomagination strategy, and connect the individual solutions into alarger value proposition for our large customers. We felt that our Challenge wouldbe more effective if we brought in outside partners, like VCs, to invest alongside usin these initiatives. The VCs look at the market with a different perspective than wedo here at GE. Our GE commercial people have a deep understanding of the market,but it is from a GE perspective, conditioned by our own business model and previousexperience. External VCs bring a different viewpoint, and might spot opportunitiesthat our internal commercial people might miss.There were concerns inside GE about this approach. Some managers in GE Research felt that the$100 million to be spent on a Challenge by GE could be better used to support additional internalresearch. Some inside GE’s energy business felt that working closely with VCs would risk GE losingcontrol over not only the external ideas being supported, but also potentially internal GE ideas thatleaked out during the evaluation and due diligence process. Another suggestion was to listen to thestartups looking for support, but not to disclose GE’s activities or business needs to them.Still another potential issue was whether external VCs would even agree to participate in such aprocess with GE, which actually turned out to be a non-issue. “We found great interest when weapproached VC firms,” said Land. “After we had four VCs agree (after some considerable discussionwith them), I stopped asking for more VC participation to keep the process manageable.” KleinerPerkins, Foundation Capital, Rockport Capital and Emerald Capital all agreed to join theecomagination Challenge.6Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, HBS Press, 2003This document is authorized for use only by Oguz Ali Acar in 2016.For the exclusive use of O. Acar, 2016.GE’S ECOMAGINATION CHALLENGE 5However, the VCs themselves had some concerns and ground rules that had to be established upfrontin order to attract them into the initiative. Chuck McDermott, a general partner at Rockport Capitalrecalled:I told GE that we would be very interested in this idea. We could be your pilot fish,swimming ahead of you in the energy market, able to do stuff with startups that GEis too big to do. But there were some things we needed in place for this to work well.First, we had to have absolute discretion at our investment committee over whetheror not we invest in any deal. And second, GE can’t lock in companies that receive itsinvestment in ways that hardwire their exit options to GE. Things like right of firstrefusal for GE couldn’t be built into the investments.Despite their concerns, VCs also viewed the opportunity to work with GE as an overall positive.McDermott noted: “We have come to realize the growing importance of “strategics” in the energymarket. These are the large companies that really drive the development of the energy markets, andhave the clout to take new technologies to market at scale…. This could accelerate our time torevenue recognition for our portfolio companies.” Trae Vassello of Kleiner Perkins echoed thissentiment: “GE is a large, well-known brand, and is involved in complex energy sales to utilities.Building a better relationship with them was a prime reason for our involvement. We already havegood relations with GE at the top, but less so in the business units.” Exhibit 2 depicts the partnershipbetween GE and the VCs involved in the ecomagination Challenge.The Launch of the ecomagination ChallengeOn July 14, 2010, GE publicly announced its ecomagination Challenge (see Exhibit 3 for theannouncement). Jeff Immelt, CEO of GE, came in person and made the announcement. Sincenothing like this had been done before, the GE executives did not know how many submissions toexpect. Steve Liguori who worked for Comstock in GE Marketing, recalled their thinking: “Weknew going in that we were not in the same league as Pepsi Refresh, or finding the next flavor forMountain Dew. Or Doritos’ deciding which commercial to run at the Super Bowl. We were a B2Bsituation. So we expected perhaps a few hundred entries.” GE had assigned 12 people to review theinitial submissions, including people from GE, from its VC collaborators, and independent expertssuch as Chris Anderson of Wired magazine and Olaf Groth of Monitor consulting.However, GE began receiving ideas from people even before the announcement event itself hadconcluded. At the event, nearly 4,000 entries were received, with 1,600 companies and institutionsparticipating, from 160 countries around the world. Many of these were not the “usual suspects”.Liguori said: “The submissions came from a wide range of innovation sources—startup entrepreneurs,research institutes, universities, governments—an incredible source of diversity in ideas for us.” (SeeExhibit 6 for some examples of ideas that were awarded). Skillern concurred: “Ecomagination gaveus a wider aperture to invite and consider a much wider variety of possibilities, and committed us to alarger, more ambitious scale of investment activity. We were already investing in startups, but not atthis aperture, with this level of ambition.”GE and its VC partners were unprepared for this level of response. Each reviewer had to deal with 10times more submissions than initially expected. And some of the ideas received were unconventional,to say the least. Liguori said: “The judges were overwhelmed by the quantity of projects. This madeit hard to get the right ideas to the right judges to evaluate them. We had one crazy idea, wheresomeone suggested stocking ponds with electric eels, and putting a cord into the lake to get theelectricity out. Yet this got just as much attention as some very serious, interesting ideas.”In addition, no single set of criteria was used to evaluate each submission. Each judge made his or herown judgment. In part, this was a consequence of the ground rules set up with the VCs in advance.This document is authorized for use only by Oguz Ali Acar in 2016.For the exclusive use of O. Acar, 2016.GE’S ECOMAGINATION CHALLENGE 6Daniel Hullah of Rockport explained: “I asked Tore, what is the scoring rubric that you want me touse? How can you be sure that my evaluation will be consistent with that of another judge? He saidto me, ‘just judge them as you would any potential venture investment for your fund’”. Also, GE andthe VCs looked at each potential venture from a different perspective. “GE’s metrics for success weredifferent than ours. Every year, we develop a few theses for where we want to invest, and unless it ishighly unusual, we say ‘no’ to everything else. Some parts of GE just were interested in seeing theideas, even if there was no entrepreneur behind the idea,” Vassello remembered.Results of the First ecomagination ChallengeAs shown in Exhibit 4, nearly 4,000 responses were received to the ecomagination Challenge in July.A second round (or Phase) of responses was invited in January of 2011, though this second round wasfocused on ways to connect the smart grid to the home. Immelt also attended the second round, wherethis follow-on challenge was announced. That received roughly another 1,000 responses. About75,000 people participated in the process, either through submitting an idea themselves, orcommenting on the submissions of others.Forty of the responses received became “finalists”, in the sense that the proposals were judged to bethoughtful, addressed an important need, and often (but not always) were backed by a promising teamof entrepreneurs. As GE and its VC teammates sifted through these ideas, GE decided to make someadditions to the ecomagination Challenge after the initial launch. Hullah of Rockport Capitalremarked that:GE also identified early on a second category of awards, where the ideas were goodbut too early to be investible ventures. These became the ecomagination Challengeaward winners. I think they set aside five $100,000 prizes for these ideas. Most ofthe submissions at the beginning were just ideas, not even close to a venture…. Evenwhen GE didn’t invest, or give an award, those who submitted still got some valueout of the process. In this way, GE really built a community around theecomagination Challenge. They improvised well, and made many adjustmentsduring the process.Comstock had a similar perspective from inside of GE:We also paid some challenge awards to winners where we didn’t invest. I came to view theseas the equivalent of early stage investments. We also had some challenges ourselves. Ourequity guys were used to participating in Series B and later investments. How do you modelsome of these very early stage ideas? A good example of this was an idea for a solarrefrigerator in Africa. It didn’t get the temperature very cold, but it really helped reduce foodspoilage. We didn’t invest in it, but the idea had real promise.Boff of GE added that GE also improvised a third category of awards. She said that “it was a‘people’s choice’ award, though we called it something different. That idea received $50,000 from usas well. This last category of awards involved the least amount of time and money from us, but got ahuge amount of coverage.”Immelt attended the event during which the initial round of VC investment and the $100,000Challenge Awards were announced. Comstock also was enthusiastic about the process that led tothese results. “I loved how the VCs challenged our research people, and vice versa. This productivefriction created great new perspectives for us. Initially an idea might be dismissed by one or the other,but then they would discuss it. And slowly, sometimes a possibility would emerge out of thediscussions, and the idea might be viewed much more positively than before.”This document is authorized for use only by Oguz Ali Acar in 2016.For the exclusive use of O. Acar, 2016.GE’S ECOMAGINATION CHALLENGE 7Out of the finalists, 23 ventures have been funded so far, with roughly $140 million committed of the$200 million pledged. Exhibits 5 and 6 list those ventures where this funding has been publiclyannounced, as well as the other award winners.The Road AheadThe ecomagination Challenge has led to a number of new startups being funded, but from GE’sperspective, the hard work was just starting. “It’s not easy for entrepreneurs to work with a very largecompany like GE,” stated Land. ecomagination has become an interface between GE and thestartups. When we receive a new proposal from a start-up, we try to translate that into something thatwill be relevant to one or more of GE’s commercial managers. When GE makes an announcement,we try to figure out how to translate that into something that might be relevant for some of ourstartups.”Mark Little of GE Research found many of the proposals technically interesting. “Many of thesubmissions we received were in smaller wind turbines, with generating capacities in the kilowattrange. These have different customers and different distribution channels, in comparison with ourown business. Much of the smaller stuff is installed ‘behind the meter’, generating power locally, soyou don’t need to pay for the distribution of power from a central generation source. These are notnatural markets for us.”Vachon put the results to date into perspective. “There’s a mismatch with our own establishedbusinesses. GE needs to generate a Fortune 500 company every year in order to grow at an acceptablerate. So these small firms’ ideas are years away from the market, and many more years from enoughrevenue to matter to a GE business.” Boff noted: “It is still the early days. We’re one year in, with 23investments. We estimated that it would take 12 to 18 months to get traction, and to get to know thecompanies. We have already made one acquisition that we would not have made as a result of theecomagination program. That was definitely not on our radar prior to doing this. But this issomething for the long haul, and we know we will need lots of bets.”In order for the ecomagination Challenge to pay off for GE, some of the nascent ventures would needto gain scale or accelerate the growth of an existing…

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