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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 5 - U.S. V.C. Investing in Energy Technologies by Subsector 1998-2004

briefly create strong returns for some investors.

After the Bubble and Beyond: 2002-2004

Just as energy technology investments rose with the tide of overall venture capital activity, they also fell as public investors fled the tech bubble. Investments in energy technology companies in 2002 dropped by 45 percent as California's energy markets calmed. Investors stepped back to assess the impact on energy technology demand and some posited that energy technology might be a short-lived investment segment.

The pessimists were wrong, however, as the data showed energy technology growing as a percentage of overall venture capital activity. Even as investors tightened their belts and grew pickier about the deals they would support, they actually dedicated more of their tightly held capital to energy deals. As a result, energy deals, which represented about 1 percent of overall venture capital investments in 1998, by 2003 rose to nearly 2.7 percent.

More information emerges from the data collected by Nth Power; venture capital investors continually adjusted their investment approach in the wake of the 2001 market crash. At first, investors became more discerning. From 2001 to 2002, the number of energy technology deals completed went from 77 to 55. In 2003, however, the deal count climbed right back up to 75.

And while venture capitalists dramatically reduced the size of their average energy technology deal, in 2004 they nevertheless dedicated just over $8 million to each deal. This was up from the 2003 average of $6.8 million. In sum, venture capitalists continue to demonstrate a high degree of selectivity in the deals they will back, but they are making larger commitments to energy technology companies.

Energy Technology's Promise

Two important forces drive today's sustained interest in energy technology. The first is the establishment of experienced investors who understand the subtle dynamics of technology development and adoption in the energy markets. The second is the power of perspective brought by more seasoned investors that keeps capital working toward new innovations and solutions. Rather than retreat, these investors continue to seek companies that promise to create new value in the energy sector.

The continued commitment suggests a fair amount of visionary thought and action by long-time energy venture capitalists. Once focused on a narrow set of power utility advancements, venture capitalists today see energy technologies much more broadly, incorporating technologies from material sciences, wireless communications, and advanced sensors to create solutions that address nearly every aspect of the energy sector and every way in which energy touches our lives. As governments, businesses, and individuals around the world continue to search for improved energy products and solutions-from power that can be generated with less greenhouse gas emissions to batteries that can power laptops and other mobile devices for days at a time-energy innovation is making energy technology an increasingly important segment of venture capital investing.

Venture Capital Basics

Simply put, venture capital is an investment strategy that seeks out, funds, and guides early-stage technology companies with significant growth potential. Because these companies are typically very young in their development cycle, a high degree of risk accompanies the investments. Generally