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Energy-Tech Venture Capital: The Next Disruptive Technology

New ideas that may transform the utilities industry.

Fortnightly Magazine - April 2005

speaking, a portfolio of 10 such companies may yield only one or two successes-companies whose value appreciates sufficiently to make up for the low returns or losses in value from the rest of the portfolio.

Venture capital also must be patient capital. The gestation period of many venture capital investments can range three to six years from initial investment to a successful liquidity event, such as a public offering or acquisition. As a result, venture capitalists add value in the interim. In addition to serving as a funding source, venture capitalists coach and guide their portfolio companies and help pull them through the difficulties that many startup ventures encounter.

Yet, despite the mercurial nature of venture capital returns and the accompanying levels of risk and long-term commitment, venture capital makes unmistakable contributions to technology. According to Professor Joshua Lerner of the Harvard Business School, venture capital is much more successful than corporate research and development (R&D) in leveraging small amounts of capital into technology innovation.

Lerner's research shows that each dollar of venture capital delivers about three times the patented innovation of traditional corporate R&D programs. 1 This innovation multiplier is significant at a time when corporate R&D spending by energy companies, particularly utilities, is generally on the decline. And even though broader market opportunities for energy technologies are developing, the emergence of a defined energy technology niche as a significant venture capital category is apparent, and with it the establishment of specialized investment firms. -RP

Endnotes:

1. “Assessing the Contribution of Venture Capital to Innovation.” Joshua Lerner and Samuel Korum. Rand Journal of Economics, 31 (Winter 2000) 674-692.

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