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Energy-Tech Venture Capital: The Next Disruptive Technology

New ideas that may transform the utilities industry.

Fortnightly Magazine - April 2005
Graph 2 - U.S. Energy V.C. Investments as % of Total U.S. V.C., Moving Average

call centers, engineering, asset monitoring, billing services, and workforce automation.

By no means are these four categories exhaustive of the energy technology opportunities. For example, advances in material sciences are leading to companies that develop flexible batteries, membranes for miniature fuel cells, and catalysts for low-temperature reformation of natural gas. Also, laser technologies used in telecommunications applications are now serving as sensors in gas and water pipeline monitoring. These kinds of crossover technologies further expand the energy technology opportunity.

Energy Tech Investment Origins

How did all this happen? From the early 1990s through 1995, venture capital investments in energy technology were practically non-existent, barely totaling about $90 million over five years. Those funds came from a small group of venture capitalists and some corporate investors primarily focused on a narrow set of applications for electric utilities.

Graph 3 - Average U.S. Investment Per Energy V.C. Deal, 1997–2000 (in Millions of U.S. Dollars)

By 1995, Europe and Japan began to take steps to make power and energy markets more competitive in their respective countries. New Zealand and major markets in the United States soon followed. Suddenly, utilities became quite focused on the possibility that competition would require investments in new billing systems, customer management software, advanced metering, and new service offerings.

Entrepreneurs responded with new business plans and technology ideas, and investors began to understand the burgeoning opportunity in advanced energy solutions. In 1996 alone, investors poured $122 million into companies developing new energy technologies and services. And while the average deal size was small, only $5.8 million per company, the venture capital community's interest in energy technology began to grow.

The Rise and Rise

By the time new companies were formed to respond to rapidly restructuring energy markets, several specialized venture capital funds responded by raising targeted funds. Arête, Enertech, Kinetic Ventures, and Nth Power became the earliest and most visible venture capital funds dedicated to the energy niche, although a few generalist funds also explored energy-related deals.

Graph 4 - Number of U.S. Energy V.C. Deals Per Year

The arrival of specialized and generalist investors in this next phase meant that from 1997-2001, more than 266 investment rounds were closed, resulting in investments totaling more than $3.3 billion, according to Nth Power, which has gathered and analyzed such data since 1994. The most prolific of these years was 2000, when energy technology investment totaled more than $1.5 billion and the average amount raised by each company surpassed $20 million.

Remarkably, the growing investment in energy technology companies made only a small impression on the overall venture capital community. Rising investments in energy technologies mirrored the hyperactive levels of investment in the general venture capital markets and thus were lost in the swell of the market. Total venture capital investments in U.S.-based companies totaled $245 billion from 1997-2001, with more than $100 billion invested in 2001 alone. The venture capital industry had never seen such levels of investment activity.

During this same period, several venture-capital-backed energy technology companies completed successful initial public offerings, including Capstone, Proton Energy Systems (now known as Distributed Energy Systems Corp.), Evergreen Solar, Plug Power, and Active Power. The public valuations of some of these companies climbed to remarkable but unsustainable heights, although they did