Considering Venture Capital’s Role in the Energy Transition - Part II
In 1768, New England was the whaling capital of the world. By then, almost 75% of the world’s whale oil passed through American ports before (dimly) lighting up the world. Some 4200 voyages launched from New England in the years of the whaling industry, most funded by terms that look similar to today’s fund structures.
From the very beginning, energy and the earliest form of venture capital were a perfect match. Over two centuries later, history is poised to repeat itself.
VC is three to four times more powerful than corporate R&D as a spur to innovation and roughly 50% of the “entrepreneurial” IPOs in recent years are venture-backed despite the fact that only 0.2% of all firms receive venture funding.
So, how do we harness that power and apply it to energy? Where does venture capital fit in?
While it can excel in any winner-take-most industry, venture capital shines in asset-light sectors. More simply, it excels in software. Increasingly, the energy sector is adopting software for new solutions.
Recent successes of companies like AutoGrid and Nozomi Networks prove that utilities are adopting software not on the fringes but in core operations. If the regulatory landscape continues to improve, this trend will accelerate.
Venture capital also has a relatively long “harvest” period in that funds generally have anywhere from 5-9 years to exit their investments. This timeline does not work for technologies like batteries, carbon capture, etc… but it is long enough for companies trying to get to product-market fit with extended sales cycles.
Additionally, the rise of secondary equity markets could change the timeline equation altogether. It’s now increasingly possible for seed funds to sell parts or all of their ownership to larger funds, allowing them to provide liquidity to investors without requiring capital from the operating business.
Again, another trend that should result in a positive outcome for the energy + venture capital combo AND if it continues would likely increase the availability of seed capital for companies pursuing the “harder” technology I mentioned above.
Lastly, and what I believe often makes venture capital special, is the ability to syndicate easily with other firms. In energy, these firms often have additional motivations rather they be mission-driven or searching for strategic advantages with high-growth startups.
Combining factors like these with a creative, focused venture capital model is a formula that allows the asset class to do what it does best: move us into the future.
A note on corporate venture capital (CVC)
CVC offers advantages for the energy sector without the time horizon and fund-size constraints that might limit traditional venture firms. Most CVCs have also realized they are the gorilla in the room when it comes to control and incentive alignment leading to much more founder friendly terms.
If a technology can be deployed internally and it achieves realized cost savings, the investment has more intrinsic value to the CVC and helps startups reduce the notoriously long sales cycles that are a part of the industry.
Net, CVCs don’t need to chase the same return targets of the traditional venture firm since they can extract value in other ways. Instead, they can adopt a more targeted approach that pushes their entire organization forward in the form of a pseudo outsourced research and development arm.