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Distributed Generation: A "Hot Corner" for Venture Capital?

Fortnightly Magazine - October 15 1998


Floyd pegs venture capital investment in energy at about $50 million annually.

But according to Venture Economics Information Services, a research firm that has tracked venture capital and the private equity industry for 35 years, alternative energy sources - including solar, photovoltaic, wind and nuclear - have received spotty VC funding since 1980 (see Figure 1). Over 17 years, 37 companies received $73.2 million in funding.

Floyd likes to point out that prior to AT&T's divestiture, almost nothing was invested in communications technology. Yet just years after divestiture, telecom drew $800 million in venture capital (see Figure 2).

"We think the same thing is going to happen in energy," she says.

Much can be learned about what's happening with distributed power and venture capital by speaking to executives at VC firms and startups. Many roads lead to Shaw's backyard. In fact, he sits on the boards of companies he funds, as a director, chairman, or even, in the case of Northern Power Systems Inc., as full owner - the result of a debt-for-equities swap.

From most venture capitalists' perspective, however, there's a shortage of solid ideas and top-notch managerial talent. In some cases, hurting the startups' chances is the fact that "leading" distributed power companies aren't meeting their growth targets.

On the flip side, the companies say VCs are followers who don't dare invest without industry-wise partners.

Jito Coleman, president of Northern Power Systems of Waitsfield, Vt., says from looking at business plans and from talking to venture capitalists, several companies are behind on their schedules - companies such as AlliedSignal Inc. and Capstone Turbine Corp.

"In distributed generation itself, the venture guys have been burnt a number of times because things have not matured on the pace and the plan they thought they would," he says. "AlliedSignal is behind. Capstone is behind ¼ behind on the projections they made to the investors, to say, 'Here's what's going to happen: We're going to do this, this and this and you're going to get your money back.'

"So a lot of the investors are a little disappointed in how those technology-driven solutions have made it in the marketplace. Whether it's the market that isn't ready or it's the equipment that isn't ready, it doesn't really matter."

Growth targets are crucial to VCs. They typically require an increase in equity over three to five years of 10 times or more by the time the startup goes public.

Lance W. Schneier of Capital Technology Group LLC of Dublin, Ohio, makes another crucial point: Distributed power's use is either for self generation or reliability. If it's to lower costs, it's a tough sell. The efficiencies of microturbines have yet to be lowered to where the investment is recouped through operation. If the technology is offered as a cut-the-wires solution, it has to be reliable and redundant, and it often fails on those counts as well, Schneier says.

"From the market point of view, it's an idea whose time may not have yet come," he says. "They don't seem to have a unit yet that they're