When Jeff Colborn first sought financing for his energy start-up, he studied a thousand VC firms, contacted 70 candidates and met with five. "We did a couple of epic road trips where we took our prototype and showed it to VCs," Colborn recalls. "It was pretty hard."
The odyssey occupied much of 1998 and produced $2 million total from two institutional backers. Last year, Colborn's company, Metallic Power Inc. of Carlsbad, California, went for a second round. The developer of fuel cell power systems raised $6.6 million from four firms, including its original financiers and the venture capital arms of two of North America's largest public utilities, Hydro-Quebec and Allete Inc., formerly Minnesota Power. When two additional backers showed interest at the last minute, Colborn promised a third round later in the year.
Then the floodgates opened. Just seven months after its second round, Metallic Power accepted $18 million from eight firms. "Enthusiasm skyrocketed, and we got considerably oversubscribed," says the 75-person company's chairman and CEO. "A lot of other new people showed up and wanted to invest. We picked the best of them and had them invest considerably less than they wanted to."
Colborn's experience tracks a trend. According to Nth Power Technologies, a San Francisco VC firm that was one of Colborn's original backers, more than $1.2 billion in venture capital went to energy firms last year, up from $442 million in 1999 and 50 times the total in 1993, when Nth Power began tracking energy venture capital.
Entrepreneurs and financiers are now wondering whether energy will be "the next tech" in terms of investor excitement. Last year, according to the National Venture Capital Association, of the nearly $103 billion invested in young companies, $47.9 billion went to Internet-related firms. Other communications, computer software and services, semiconductor, electronics and computer hardware investments accounted for 39.2 percent of investments. Industrial and energy companies, the smallest of 10 sectors tracked, collected just 1.4 percent.
"Nothing's going to be the next tech," says Woody Tasch, chairman and CEO of Investors Circle, a San Francisco angel investors network. "It would be unrealistic to expect anything to compete with the upside and explosive growth the [tech industry] had."
Telecom is the better comparison. VCs compare the state of energy investing to where telecommunications investing was in 1983, when around $300 million flowed to telecom startups. The telecom investing boom was kicked off in the early 1980s by telecommunication deregulation, says Maurice Gunderson, principal of Nth Power. Likewise, interest in energy ventures began in the early 1990s when the United States and other nations began dismantling regulations controlling electric utilities and other energy enterprises. Relaxed rules promise, among other things, to give power users more choice about where they buy power, and even to encourage consumers to generate their own. Because of the focus on regulation, investors are equally interested in companies using both unproven new technologies like fuel cells and long-known devices like gas turbines. "This is a market transformation, not a technology breakthrough," Gunderson says.
Investors are looking at three main areas: new ways to generate power such as fuel and solar cells, ways to conserve and manage demand and, finally, information technology to tie it all together. An information technology company could allow other firms to manage energy usage at far-flung facilities using the Internet, while distributed generation technologies like Metallic Power's fuel cells promise to let businesses and homes produce their own power, reducing dependence on the power grid.
Looking forward, Gunderson sees energy investment staying flat in 2001 compared to 2000, then increasing sharply in 2002. And there's no telling where it will go from there-maybe an even longer run than telecommunications. After all, energy is a much larger industry at $900 billion worldwide. Meanwhile, Colborn is considering another round of financing, but he's not looking very hard. "We're just lining up a few candidates for new investors and talking with investment bankers about our IPO," he says. "We have the luxury of being selective."
A few things to know before you hit the trail in search of funds for your energy company
Raising money for an energy start-up is harder than screwing in a lightbulb, but investors and experienced energy entrepreneurs say it can be done if you follow some simple rules:
Have a working prototype of your new technology ready to show investors. Exception: Companies selling energy management services and software may need only a good idea and a strong management team.
1. Have customers before looking for investors. Seek government R&D contracts. Utility companies may also hire early-stage energy start-ups to do R&D.
2. Look for institutional venture capitalists with track records of investing in energy companies. Few angel investors have the expertise to invest in cutting-edge energy firms.
3. Get a good management team. Investors want to see seasoned, entrepreneurial executives running the company.
4. Write your business plan to stress the market opportunity, not the technology.
- Metallic Power Inc.
2320 Camino Vida Roble, Carlsbad, CA 92009, www.metallicpower.com;
- National Venture Capital Association
(703) 524-2549, www.nvca.org
- Nth Power Technologies