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

Fortnightly Magazine - October 15 1998

confident in ¼ and that sort of raises the specter - at least on the microturbine side - whether they've gotten enough bugs out of it to merit its application and drive the cost down.

"We've looked at distributed generation and we've put it on the back burner for now. Overall, as a technology."

But the skepticism of some won't stop others from investing.

David F. Lincoln, managing director at EnerTech Capital Partners LP, a Wayne, Pa., VC, says it invested $1.5 million in Capstone Turbine, of Tarzana, Calif., in hopes of getting microturbines' price down to $350 per kilowatt, installed, with less than a 6-cent-per-kWh generating cost. (By way of comparison, reciprocating engine generator sets now cost more than $400 per kW installed, with per kWh costs as high as 15 cents.)

Looking for Something to Value

Lincoln says that what may be hurting distributed generation companies on the venture capital side is the fact that their valuations are high, due to their capital-intensive nature. VCs like to own a good chunk of the company they're investing in, and high valuations prevent that.

Lincoln's fund is worth about $50 million and it's raising $150 million.

He says once companies have met rigorous review of their technology and management team, his fund wants to be sure the market the company targets is sizeable. "We, ideally, are looking at investing in companies that we believe can be $100 million in sales or better." And that's a seven-year goal.

Besides its Capstone Turbine investment, Shaw has put money into Evergreen Solar Inc. of Waltham, Mass., and Proton Energy Systems Inc. of Rocky Hill, Conn. Shaw says he knows of no fund other than his own Micro-Generation Technology Fund that invests solely in distributed technology.

One of Aretê's success stories is Ballard Power Systems Inc., which started as a six-person operation. Now valued in the billions, it manufactures fuel cells that use a proton exchange membrane technology. When it went public, shares sold for $10 apiece, until they split. In August, Ballard stock was trading at $70 per share. The same month, Capstone was on the threshold of an IPO. (What effect the Aug. 31 stock market plunge had on the company's direction was uncertain.)

Aretê has almost 70 deals, and six funds.

Shaw says the reason his fund has been successful is because it has always stuck to demanding standards. Potential for high growth is what makes a good deal, but there also has to "be a sustainable competitive advantage. Either a technology or market presence, expertise. Something that somebody would place value on. And good management. The most important thing is the good management."

He says the small-scale generation units hold the most opportunity because they can be mass produced and sold like an appliance. "The price will go down and down and down and central station generation will never be able to compete in the long run," Shaw says.

He says if the utilities disclosed the true, delivered cost of power - 30 cents per kWh recently in the Washington, D.C., area,