The Conversation (0)
Energy venture capital firms, like their traditional industry focused counterparts, can assist emerging energy companies in commercializing their new energy technologies.
By James Wellstead – Exclusive to Resource Investing News
Venture capital is a specialized form of private equity, characterized by high-risk investment in new or young companies following a growth path in technology and other value-added sectors. Emerging companies are attracted to VC firms due to their history of strong entrepreneurial experience, substantial financial backing, and a diverse network of contacts. In seeking out VC firms, emerging companies hope that the services provided will help boost their companies into a new stage of initial development.
While traditionally focused on information and communication technology and biotechnology, VC’s energy market involvement has become more developed over the last decade. At the International Student Energy Summit (ISES) held last month at the University of British Columbia in Vancouver, a panel session on venture capital brought VC investors and emerging businesses together in front of a packed room of enterprising young energy leaders to talk about the venture capital investment process.
Seeking out investment-worthy companies
Vancouver-based VC firm Chrysalix has helped raise more than US$250 million for early-stage Canadian clean energy technology companies over the past three years. At the ISES, Chrysalix’s Managing Director Richard MacKellar shared the requirements that VC firms, like Chrysalix, have when seeking out investment-worthy companies. While many companies can develop fascinating products or services, MacKellar maintained that “unless the fundamental economics are there, there is no point in pursuing the investment.” MacKellar noted that not having an over-reliance on government subsidies is one of the most important components of maintaining economic fundamentals. One needs only to look at the Spanish solar market to see an example of why this is not a long-term funding strategy.
Importance of regional markets
Timo Mechler, a Senior Associate with the VC Pittsburgh Equity Partners, highlighted the importance of knowing the potential market share of the initial regional market where the product will first be rolled-out. “If [a new energy firm] comes to us and says, ‘my market is the whole appliance market which is a $150 billion’, we’re going to tell [them] that’s not good enough.” Instead, Mechler explained that companies must have a very specific knowledge of the potential for market share, energy or cost savings, and demand for their product or service, which many start-ups do not always have a full grasp of.
The success of VC investments must also be tempered by the knowledge that these companies are successful or failing within a specific initial regional debut market. Typically, VCs set their focus on companies with target markets greater than US$1billion. Markets this size will provide a strong sign of the viability of the product outside of the initial regional market, and also provide VCs with a large enough return to cover the high risk of their investment at this stage of company development. It is important to note that VC investments typically carry a slender success rate of only 15-20%.
These regional markets also carry a number of investment risks which can be specific to that market. While some markets are impacted by continued Middle East instability, others are affected by export quotas on critical materials or regulatory risks from carbon taxes. As a result, regional markets can help illustrate some of the true costs of political or regulatory risks associated with specific energy technologies.
Energy future
While energy VC firms cover a wide array of markets, products and services within the energy sector, most are focused on making the future of energy accessible to markets today. In describing the clean-tech companies that Chrysalix finances, MacKellar explained that while investors and entrepreneurs search for the elusive ‘black swans’ (low predictability, high consequence events), Chrysalix searches for ‘green elephants.’ By this, MacKellar states that they seek out companies with transformative technologies that offer the potential to drastically improve the environmental quality of existing and emerging energy sources, while also making them profitable. These two components, environmentally-benign and economically-efficient, will be central to the development of our energy future and are likely to be the focus of continued venture capital investment.