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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

a wholly owned subsidiary of Cinergy. Their unit is divided into two divisions—venture investing and e-business development—and business is booming on both fronts.

Going into 2000, Cinergy held roughly $40 million in venture capital investments. Since formalizing its approach through the creation of Cinergy Ventures earlier this year, that amount has risen to $100 million. The company expects returns of at least 30 percent on its venture capital investments.

Cinergy Ventures considers a variety of investment opportunities but one rule applies: each must be energy-related. Deals come from many places. In addition to uncovering opportunities internally, Cinergy sometimes receives pitches for deals. In other cases, the utility's venture capital partners help identify and assess new opportunities. In order to increase the likelihood of success with these companies, Cinergy plays the role of a strategic partner—not just a financial partner. The cash Cinergy invests is a key ingredient to a venture's success, but the company sees its role in providing strategic guidance and access to operational R&D resources as just as important. By offering both cash and other support, Cinergy says, it gives its seedlings the best chance for success.

Like Walborn at AEP—and most other VC players—Kushman breaks VC opportunities into three categories: (1) commercialized companies with ready products or products that will be marketed within three months; (2) refinement-stage companies with proof of concept for marketable products within one year; and (3) drawing board companies with solid concepts, but without proven technologies or imminently marketable products. Cinergy expects to have about 30 percent of its investments in opportunities in the commercialized stage, 60 percent to 65 percent in the refinement stage, and 5 percent to 10 percent on the drawing board. The earlier in development an investment is, the more that is expected in long-term ROI in order to account for the risk involved.

Cinergy Ventures considers a number of standard criteria in choosing projects for its portfolio. The potential opportunity must have a strong, rapidly growing market, a defendable business plan, and manageable capital requirements. Another critical component is Cinergy's comfort with the target company's management team. They must be a solid, growth-oriented group of managers that, ultimately, will be complemented by the addition of Cinergy membership on the board of directors.

One of Cinergy's venture investments was in the Convergent Group, an Internet enabler that, among other things, helps utility local distribution companies Web-enable their operations. Shortly after Cinergy's investment, Convergent was purchased by Schlumberger Ltd. In this case, Cinergy was able to turn a quick "multi-hundred percent" profit in a short period of time, and re-invest in the new Schlumberger-owned entity in the pre-IPO stage. Convergent benefits from Schlumberger's worldwide presence and management support. Kushman doesn't expect most of Cinergy's deals to be so financially successful in such short timeframes, but he is confident that attractive deals will continue to develop.

Competition for Projects: Stymied by Affiliate Rules?

While playing the role of venture capitalist is exciting and potentially rewarding, it has its potential headaches and pitfalls. In addition to the risks associated with any new business venture,