Dec 14, 2012
Stories on the reduced VC investment in the cleantech sector have been common recently, including a recent article in Greentech Media, on Mohr Davidow. Common reasons cited include the capital-intensive and long-term nature of cleantech investments. Based on this trend, some in the industry have concluded that the requirements of energy entrepreneurship make it a poor fit for the goals of venture capital. However, Matthew Nordan and Venrock’s energy team still believe venture opportunities exist in energy, in specific spaces.
Entrepreneurship in energy can be categorized into three fundamental problems: baseload generation that replaces coal, matching electric supply and demand, and conflict-free/carbon-free transportation fuels. Marginal megawatts fall into the second category – the category that often receives the least attention. Companies that deliver marginal megawatts reduce load during peak times, deferring or preventing investment in additional power plants and transmission infrastructure. “Right now, transmission is built for the highest summer peak, plus 15%,” Nordan says. “We aren’t using 60% of the transmission capacity right now, and optimizing this would not be a small impact on world or a small return.”
Several existing business already deliver marginal megawatts, attempting to disrupt traditional investment cycle of electric utilities. One common challenge with these businesses is the ability to scale; Venrock is looking for business plans that can get past this barrier to growth. “Delivering more marginal megawatts is less of a technology problem and more of a sales execution problem – sales are too expensive,” Nordan says. “The cost of sales can be 25% of revenue. There must be a way to aggregate these loads that aren’t so cost-of-sales intensive – a way to shortcut to some broad-based solution.”
One way to scale quickly is to target large businesses with many locations. For example, an entrepreneur could optimize a solution that could be quickly deployed out at several ExxonMobil or McDonald’s locations. Alternatively, an entrepreneur could avoid the friction of having to install devices on major industrial equipment by making it simple to embed their peak-controlling device inside major appliances, most notably refrigerators. “If refrigerators could start synchronizing when they when they start their compressor, this would make a huge dent in the frequency regulation market,” Nordan envisions.
Besides being simple, a scalable solution must also be cost-effective. Some devices can already take advantage of retail rates that vary during the day. If devices could participate in energy markets, this would enhance cost effectiveness even more. When it comes to appliances participating in energy markets, Nordan says “there’s a limit to how many times you can knock on the door of each facility to instrument the equipment to do a particular feature. I’m looking for a device starts paying you checks because the ability to participate in energy markets is built in, with no sales involved.” Like many of Apple’s products, this would be more an improvement in usability, rather than technology – it needs to just work. Nordan predicts, “Most successful companies will be less whizz-bang technology innovators; instead successful companies will be the ones that make it just easy to do, and the easiest way to do this for it to become a feature of the stuff you buy.”
Even with a scalable, simple, cheap solution for delivering marginal megawatt, Venrock still cares most about the team. “The most important aspect of being able to get to scale quickly is the entrepreneurial ability to smash through boundaries that face you, which largely comes from the ability to recruit the very best people who can get through the inevitable pivot,” Nordan says. “It brings us back to team, and to people who are brilliant and who show unfakeable signals of bad-assery, and whom all the best people in the world want to work for.”
Though many cleantech startups have disappointed in their returns, this may be because observers are using examples like Instagram as their reference point. The time frame required for energy investments is comparable to other successful investments Venrock has made during its long history, such as Intel and McDonnell Douglas. “Semiconductor, software, biotech, enterprise companies took 5-10 years to develop their business,” Nordan notes. “Right now, it’s nuclear winter for VC funding in energy/environmental startups, but if you are really good entrepreneur, it’s a great time to go after this. A lot of money is being committed to energy still, and with less noise, it’s easier to rise to the top.
Despite the challenges, the advantage of energy investing is the low risk for the investor who is willing to let predictable trends develop. “It’s just clockwork that with rising gas prices and rising energy use, there will be value at the margins of electricity supply and demand,” Nordan predicts. “It requires some foresight and patience, but it’s more predictable than trying to play the odds of the iPhone app that captures people’s imagination tomorrow morning.”
Matthew Nordan spent much of his career in research and analysis, first at Forrester, then as the founder of Lux Research. Since coming to Venrock, his experience has led him to seek a non-traditional portfolio to deal with the time and capital associated with energy investing. Presently, Venrock has no solar, wind, or smart grid investments. Instead, Nordan has used his “Marginal Megawatts” concept to guide much of his investment scouting activity.
For more, see Matthew Nordan’s blog posts: