At a recent Columbia University symposium, energy entrepreneurs spent time weighing in on the types of energy companies that are attracting capital and those that just don’t make sense from a “VC math” perspective.
The panelists, made up of various energy entrepreneurs and investors including Micah Kotch from the New York State Energy Research & Development Authority (NYSERDA) and Tim Hoffman, a managing director with Watts Capital, were divided on the potential for software-oriented businesses versus hardware-oriented businesses.
According to Hoffman, who is also the NYC metro director for the Cleantech Open Northeast, capital efficient, software-oriented businesses are “hot,” while hardware-oriented businesses are “not.”
“There’s been a move away from investment in harder assets,” Hoffman said during the panel discussion.
Business ideas that don’t require millions of dollars for a scaled manufacturing facility to produce a product before it can get sold are much more attractive to venture capitalists than opportunities that do require a huge infusion of capital to build and scale, he explained. Software as a service or software products have a marginal cost of “near zero” and can be distributed to customers in efficient ways, Hoffman continued. Such products can then be scaled rapidly with limited amounts of capital, “and investors can realize huge returns.”
On the other hand, said Kotch, while that may be true on a large scale, hardware technology based on the “Internet of Things” has seen a lot of deal flow, he said. He pointed to Google’s $3.2 billion purchase of thermostat maker Nest as an example.
“It’s a very acquisitive space,” said Kotch. “I think that’s a trend that we are going to see continue.”
At the same time, he pointed out that Nest hasn’t branded itself as a clean energy company, but as more startups develop sensors, improved analytics and intelligent agents, there will be more activity in the Internet of Things space, said Kotch.
“I think where that advanced buildings technology begins to converge with smart grid, that’s going to continue to be a very, very active space.”
In addition, “behind the meter” solutions, microgrids and controllers are active areas startups are tackling with new innovations. In such ventures, the focus is on “balancing supply and demand in real time,” said Kotch.
Another area of interest includes distributed-storage pilot projects rolled out by such companies as Aquion Energy, Boston-Power, Ambri, AES and others that are focusing on the demand-side management space, he added.
One major hurdle is the fact that the market is “so fragmented.” Fragmentation is a barrier to scaling technologies – “you can’t just build an app and put it on the iTunes store for energy,” Kotch noted. But at the same time, utilities are trying to solve some “very, very difficult problems,” said Kotch. Those problems create an opportunity for innovations in energy transactions, he said.
John Freer, a technology leader for General Electric’s Venture Capital team, who also spoke at the symposium, says a related area of innovation is understanding how to put energy storage “assets to beneficial use,” such as demand charge offsets, selling capacity, or regulation services. He cites, as an example of emerging focus, the ability to dispatch backup generators to respond to utility signals in real time. “That’s where the innovation is these days” he said.
However, one of the major problems with innovations in energy is the fact that entrepreneurs tend to “romanticize” or even “fetishize” venture capital, said Kotch. And it doesn’t help when companies like Uber go out and raise $1.2 billion. However, budding entrepreneurs “should do the math,” said Kotch. “Do the VC math.”
It’s very difficult to generate the types of returns in energy that need to be delivered back to investors in a fund, said Kotch.
“There are people out there who say traditional venture capital is not set up to invest in energy technology companies,” he added.
And that problem has yet to be resolved.
“The number of active firms who are still [investing in energy technology companies] – you can probably count on two hands, right?” said Kotch. “That produces a real problem that I don’t know that we’ll solve on this panel.”
Nonetheless, strategic investors such as GE have more freedom to monetize exits, including acquisitions or forming a joint venture in order to gain access to new markets.
GE’s Freer said that he is seeing more creative exits and creative relationships being formed that generate value for corporate strategic investors.
He said, as a strategic investor, GE gets to think more about truly disruptive hardware technologies that could work out in three to five years, such as a new battery chemistry or new ways to turn natural gas into electricity or heat, or transportation. However, these technologies take a long time to adopt, and investing in them requires a “different lens,” so it doesn’t really fit the venture capital model, he said.
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