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The Venture Financiers: Still Bullish on Energy?

Their numbers remain small, but investors in energy technology say California's energy crisis this summer may be a boon.
Fortnightly Magazine - December 2000

starting to invest in this whole energy technology area; what's a fuel cell?' That is not an exaggeration."

Hugh Holman, senior analyst at CIBC World Markets, agrees that while ignorance has been an issue in the past, the learning curve has been fast, since "when money is at stake, people normally get smart." Nevertheless, if VC activity in energy is heating up, it is only beginning to do so, and the number of firms focusing on energy remains small at the moment.

"It's not widely followed," confirms Philip Deutch, managing director at Perseus LLC, a venture capital firm that has funded such companies as Beacon Power, Proton Energy, and Metallic Power. "It's a small group that knows the sector well."

Whether the number of players will increase depends on how the companies perform. As Deutch notes, "Dollars tend to follow success." And while the amount of venture capital flowing into energy technology projects is relatively small, for Nth Power, investing early actually is part of its investment strategy. "Go for the companies that need the $2 million to $5 million, not the $20 [million] or $30 million or $40 [million] or $50 [million]," as Floyd says.

Energy Insiders are First-Movers

It's important to bear in mind that the overall amount of venture capital flowing into the energy sector is minute when compared to other industries that the venture capital world is investing in.

According to venture capital research firm VentureOne, $24.4 million in venture capital made its way into the energy industry in 1999. Compare that with the big-time venture capital industries such as the connectivity products industry segment (e.g., systems networking products) which last year took in $2 billion in venture capital.

While the second quarter of 2000 saw $50.1 million in VC going into the energy sector, the first and third quarter saw none. But because the number of companies involved in these deals is so small when compared to venture capital in other industry segments, itÕs difficult to draw any conclusions from these statistics. The same caveat must be noted when considering the 134 percent rise for energy technology stocks, Floyd does acknowledge. When you're talking about a relatively small number of companies, the percentage swings are likely to be more dramatic.

It also is important to note that Nth Power may define energy technology more broadly than does a research firm like VentureOne. Nth Power considers energy technology to be opportunities arising from the restructuring of the global energy industry. Meanwhile, VentureOne defines venture capital fairly strictly, while Nth Power may not. Nth Power's calculations (see charts, below), therefore, don't necessarily correlate with those of VentureOne.

Still, it may be too early for the new capital to have shown up in the bank accounts of the ventures themselves. In the case of Nth Power's second fund, for example, since the $120.5 million was just raised recently, it has not had a chance to flow to the ventures. ThereÕs no doubt, however, that the pace of the fund raising has accelerated as of late.

And as for industry insiders