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The New Venture Capitalists: Utilities Go Shopping for Deals

How gas supply and price disruptions now outweigh Big earnings potential plus an energy-related focus are prerequisites when AEP and Cinergy sort through investment projects.
Fortnightly Magazine - December 2000

market, poised for hyper-growth, will continue to foster an active venture capital interest in these technologies.

The emissions control market is fostered by regulations such as the U.S. Environmental Protection Agency's NO x SIP Call (the call for state implementation plans to reduce emissions of nitrogen oxide), which places strict limits on NOx emissions in the Eastern United States by 2003. Fossil generators are anxious for new, cheaper alternatives to existing control equipment choices in order to meet the new requirements. A number of small technology-oriented companies are working hard to meet these needs, and several have been graced with utility-based VC.

The recent attention to power quality and emissions control highlights just two of the many issues shaping the utility industry. As markets continue to change, the demand for emerging technologies—and the venture capital to spawn them—will continue to grow.

Finding a Project: What Makes a Good Match?

AEP is one of the power industry's venture-focused companies, formally entering the VC arena as an extension of its long and successful energy R&D program. The company remains active in R&D, but now is dedicating more effort toward commercializing promising products. AEP brings much more to a potential partner company than just cash, including the technical and commercial experience of its R&D program, laboratory access, management guidance, and a strong brand. The utility can offer these strengths to give growing companies a better chance of long-term success, and reap the rewards of boosted earnings through the target company's performance.

According to Warren Walborn, AEPÕs director of investment, an investment opportunity must meet three criteria before it enters AEPÕs portfolio. First and foremost, the investments . This enables the company to maintain a focus on its holdings, while capitalizing on the company's expertise and strengths in the energy industry. Second, the investments must add to the company. Walborn sees these investments as not only placing AEP in a favorable long-term position in the power industry, but also assisting the corporation's overall returns and perception by the capital markets. Finally, each investment must show the potential for "very high" return on investment. Without disclosing actual targets set by the company, Walborn says that throughout his career, he has seen venture capital as an asset class returning at least 25 percent. In many cases, especially for early-stage products, he sees targets well in excess of 100 percent. He predicts that these same levels will apply to utility-oriented venture capital.

Walborn prefers to find companies that are in the "expansion stage," needing capital and guidance with existing products. Earlier-stage opportunities may offer higher potential rewards, but AEP tries to avoid taking on projects with that level of risk. Each opportunity is considered on a case-by-case basis, however. Expansion-stage technologies are most likely to flourish with AEP's finishing touches, which include market experience and exposure, distribution support, and management guidance. The latter is critical to success, according to Walborn, and AEP typically maintains a presence on the target company's board of directors to watch over its investment and lend high-level guidance and resources.

One recent investment headed by