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Can Energy and Venture Capital Work Together?

Can you build a venture investable business selling to energy utilities?

Can you build a venture investable business selling to energy utilities?

The question above, asked on Twitter, is worth exploring in detail.

But, before we do, consider this: "to the man with a hammer, everything looks like a nail." Not all businesses fit the venture model and we shouldn't try to force them into it.

There are over 4,000 utilities in the US and each spends hundreds of thousands to millions on software per year. The elephant in the room is the sales cycle which can run from 9-18 months.

Long sales cycles slow the slope of growth in the early stages. Multiple pilots can often make revenues appear uneven. Deployment of new software to utilities often requires services that compress margin.

The result is an unfamiliar business model for most venture firms. It’s not conducive to the typical 12-month fundraising cycle early-stage VCs push on startups to get quick markups on their portfolio. Incentives matter.

Early-stage startups focused on selling to any legacy industry like energy should raise AT LEAST 20 months of capital in each of their first two raises.

Sales will take longer than you expect, and if you only raise 12 months one slow quarter will kill your business.

Today, the most prominent examples of successful startups who sold software to utilities raised little capital and took decades to come to fruition.

But, the map is not the terrain - at least not for the latter. The map of these routes to success began before the age of connectivity and the cloud.

The pace of company building has accelerated with technology and utilities are adapting to a new world brought on by the energy transition.

Much like the railroad revolution laid the groundwork for the industrial revolution, cleantech 1.0 and cloud computing have laid the groundwork for this industrial revolution.

There's also a matter of diversifying revenues - both as a startup and as a venture investor who manages a portfolio.

Startups can build solutions that sell across verticals with utilities being one. Venture investors can leverage portfolio theory to limit exposure to slow adopting industries.

Is it the right option for everyone? Definitely not.

Can it be done? Absolutely.