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Sunday, July 29, 2001 By Justin Pope, The Associated Press
BOSTON -- Not so long ago, investing in the energy industry meant buying pieces of oil wells, hydroelectric dams and big, clunky utility companies.
But power deregulation broadened the possibilities, and the headlines from the California power crisis have drawn entrepreneurs and investors into the sector.
While traditional energy companies are attracting most of the attention, there's growing interest in smaller companies in an emerging sector called "energy technology": software, microturbines, Web-based electricity trading and more.
The companies and venture capitalists are after the "$300 billion jump ball" made possible by electricity deregulation, said Todd Klein, managing director of Kinetic Ventures, a Chevy Chase, Md.-based VC firm.
Their monopolies gone, power companies are being forced to improve productivity. Start-ups are trying to help with a new generation of high-tech gadgets.
Meanwhile, technology companies are demanding cheaper and more reliable power sources. Entrepreneurial talent is drifting to energy, and several technologies developed in government labs are now commercially viable.
"We have been following these technologies 10 years, and they never were anything more than science experiments," said Jeff Miller of Boston's Beacon Group, which manages $1.6 billion in two energy VC funds. "Now you've got the demand coming from the marketplace and very serious managers with very focused business plans."
Offsetting the flurry of enthusiasm is tighter funding from the VCs. According to research firm Venture Economics, 77 companies took in more than $1.2 billion in funding in the sector last year, but so far this year just 17 companies have raised a total of $132 million.
David Lincoln, founder of EnerTech Capital in Wayne, Delaware County, Pa., told entrepreneurs at a recent tech conference in Boston that nobody is in a hurry to make deals, and the conditions that VCs impose now "were virtually unheard of 18 months ago."
The California power crisis has grabbed the attention of the entire investment community -- every major investment bank is now tracking a sector.
"Everybody's backing out of the dot.coms and telecoms," said Bradley Johnson, president of Washington-based Pepco Technologies. "They're saying the next new thing is energy, but they haven't figured it out yet."
They are chasing some minor success stories such as Chatsworth, Calif.-based Capstone Turbine Corp., which makes free-standing microturbines that allow businesses to produce their own electricity. Company shares have traded as high as $100, but have fallen to under $20, and the company still hasn't turned a profit.
The next little thing is on the minds of VCs as much as the next big one. That means technologies that don't necessarily revolutionize how electricity is produced so much as help traditional companies produce it and customers use it more efficiently.
"With the events which occurred in California and which are threatening to occur in other parts of the country, people are focused on immediate solutions to those problems," Klein said.
These solutions include systems to help companies manage their electrical use and flywheels that store electricity on-site to guarantee a steady stream of power to sensitive equipment. Other companies target the power companies themselves, with everything from software to satellite meter-readers.
At the venture capital level, backers tend to be looking for smaller investments and quicker returns. That's been an obstacle for some early stage "green" companies.
"Everybody's supply-side," lamented R.W. Cushing, an entrepreneur whose Austin, Texas, alternative energy marketing company got the cold shoulder from VCs at the Boston tech conference. "Nobody thinks in demand terms."
But in fact, alternative energy firms raised $2 billion last year from IPOs and VCs, according to research firm Clean Edge, based in Oakland, Calif.
Renewable energy requires deep pockets and patience, and tends to be backed by big power companies that, if they can make alternative energy work, have the infrastructure in place to distribute it.
Many big power companies are ensuring that they get the needed technology by backing start-ups themselves. Houston-based conglomerate Enron Corp., for instance, has invested $90 million in 12 companies it sees as strategic partners.
"I don't think there is a dearth of interest or investment in renewable technologies," Lincoln said. "[But] ... the reason why you see such a strong level of interest in helping the supply-side companies is, right now that's where the capital is being spent."
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