AN OVERVIEW OF
ENERGY VENTURE CAPITAL
Richard T. Stuebi
President, NextWave Energy
November 18, 2004
Energy Advancement Leadership Conference, Houston
TOPICAL AREAS
• Overview of venture capital
• VC in overall energy finance spectrum
• Facts about energy VC marketplace
1
FAILURE RATE OF NEW VENTURES
Percent
100
90
80
70
60
50
40
30
20
10
0
1 year
6 years
8 years 10 years
Source: U.S. Department of Commerce, New Jersey Institute of Technology
2
TYPICAL VC PORTFOLIO
#
Year 5
Invested Return value Return
$ mm
multiple $ mm CAGR
“Dogs”
3
$3.0
0x
$0.0
NA
“Walking
Dead”
4
$4.0
2x
$8.0
15%
“Cash
Cows”
“Home
Runs”
2
$2.0
5x
$10.0
38%
1
$1.0
10 x
$10.0
58%
TOTAL
10
$10.0
2.8 x
$28.0
23%
Source: Venture Capital Online
3
Only 3 out of
10 investments
produce
favorable
returns
VC CONCERNS
• Misguided strategies
– Excessive reliance on government support to spur/sustain market
– “Me-too” strategies, no differentiating advantage
– Customer needs not urgent enough to adopt new technology
• Implausible analyses
– Overoptimistic or unwarranted assumptions
– Insufficient research in pricing and attainable market share
• Excessive technical orientation
– Inadequate marketing and sales experience
– Questionable management skills
– “Perfect is the enemy of the good enough”
4
WHY VC’S INVEST
•
Huge, rapidly growing, real market
– Market size: multiple millions per year desired
– Market growth: 10% + per year
– Demonstrated customer willingness to pay
•
Compelling business model
– Recurring revenue streams vs. large, one-time sales
– Sustainable advantage over competitors
– Solves urgent customer “pain”
•
Attractive, realistic financials
–
–
–
–
•
Logically supportable assumptions
Plausible revenue, cost and profit projections
Reasonable valuations of venture
Solid capital formation plan
Strong management team
– “Bet on jockeys, not on horses”
– Deep commercial orientation and business acumen
– Demonstrated successes in related fields
5
Most
important
factor
TOPICAL AREAS
• Overview of venture capital
• VC in overall energy finance spectrum
• Facts about energy VC marketplace
6
Asset-based energy
infrastructure projects
Energy
sector
finance
Businesses involving
energy services
Energy technology
venture capital
7
Increasing risk/return
ENERGY SECTOR FINANCE
ENERGY FINANCE ALTERNATIVES
Asset-based projects Service businesses
Examples
Key success
factors
•
•
•
•
•
Windfarms
•
Cogeneration
Energy efficiency
•
Hydrogen infrastructure
•
•
Well-structured
contracts (especially
off-take)
Favorable economics
Management team with
strong development/
operating experience
Technology risks
assessed/accepted
Modest upside (20%
equity IRR max?)
Minimal downside
(assuming technology
risks nil or hedged)
•
•
•
Risk/reward
profile
•
•
•
•
•
•
•
•
8
Technology VC
Green energy retailing
Mass-market retailing
of energy technologies
Networking of
distributed generation
Hydrogen sales
•
•
Solid general management
team, with marketing/sales
expertise
Clear evidence of customer
willingness (ability) to pay
to solve a clear need
Barriers to competitor
mimicry
Minimal technology risk
Possibly attractive
upside…
But significant market
and execution risk
•
•
•
•
•
•
•
•
Nanotech for PV
New wind turbine
concepts
Stirling engines
“Exotics”
Acceptable
technology
development risks
Modest market
adoption challenges
Time to exit/
liquidity acceptable
Strong patent
position
Big potential
upside (3-10x)…
But significant
possibility of total
loss
IMPLICATIONS FOR VC INVESTORS
IN ENERGY TECHNOLOGY PLAYS
Because new energy tech’s...:
…VC investors must:
•
•
•
•
•
•
•
Typically make inroads in niches
(rather than address the overall market)
Often rely in some degree on
government subsidies
Often entail higher upfront costs in
exchange for lower annual costs
Often require a long time to fully
develop technologies
Face high customer inertia and
obstacles from incumbents
Attract relatively few investors
(because of these issues)
9
•
•
•
•
•
Understand customer needs/
economics in those exact niches
Assess future “firmness” of
government supports
Research customer acceptance of
“paybacks”
Be willing to accept longer time
horizon to exit/liquidity
Evaluate these obstacles accurately
(conservatively?)
Consider risks associated with
subsequent financing requirements
RECENT ENERGY DEVELOPMENTS
AFFECTING VC INTEREST
•
•
•
“Negatives”
•
California debacle 
deregulation?
Enron debacle 
trading? generation?
Premature hype
(microturbines, fuel
cells, hydrogen?)
Lack of consistent
transmission policy
•
•
•
10
High oil/gas prices
“Positives”
Energy security post-9/11
Increased recognition of grid
vulnerability (Aug. 03 blackout)
TOPICAL AREAS
• Overview of venture capital
• VC in overall energy finance spectrum
• Facts about energy VC marketplace
11
SMALL SHARE OF VC TO ENERGY
Percent
U.S. VC investments
U.S. GDP
100% = $18.2 billion (2003)
100% = $9.8 trillion (2000)
2.3%
Energy
Other
7.1%
97.7%
92.9%
Source: Nth Power, U.S. Dept. of Commerce, U.S. Energy Information Administration,
NextWave Energy analysis
12
Energy
Other
U.S. ENERGY VC INVESTMENTS
$ millions
1500
1300
1100
900
700
500
300
100
-100
1990
Source: Nth Power
1992
1994
1996
13
1998
2000
2002
WORLDWIDE ENERGY TECH VC
$ millions
Sector
2002
2003
Change
DG & storage
$329.0
$224.7
-32%
Power IT
$68.9
$87.6
+27%
Customer energy management
$24.1
$94.2
+191%
Services
$48.4
$23.7
-51%
Power quality
$51.7
$46.5
-10%
Grid optimization
$12.0
$17.0
+42%
Other
$49.5
$32.5
-34%
Total
$583.6
$526.2
-10%
Source: Nth Power
14
PROFILE OF GLOBAL
ENERGY VC DEALS
$ millions
No. of deals
Avg. deal size
Total investment
2002
55
$10.61
$584
2003
84
$6.26
$526
More, smaller deals
(risk diversification)
Source: Nth Power
15
LEADING ENERGY TECH VC INVESTORS
“Then” (2000/2001)
“Now” (2004)
Strategic
investors
•
•
•
•
•
•
Alliant
Avista
Chevron
Cinergy
DQE
Enron
•
•
•
•
•
•
Exelon
Hydro-Quebec
OPG
PG&E
Reliant
Shell
•
•
•
•
ChevronTexaco •
Cinergy
•
ConocoPhillips •
Eastman
Energy
VC’s
•
•
•
Altira
Arete
EnerTech
•
•
•
•
FA Tech Ventures
Kinetic
Nth Power
Perseus
•
•
•
Advent
Altira
Braemar
•
•
•
EnerTech
Nth Power
RockPort
•
JP Morgan
(Beacon)
RBC
Sevin Rosen
Technology
Partners
•
•
•
•
•
Alta
Benchmark
DFJ
JP Morgan
Mayfield
•
•
•
•
•
Mohr Davidow
RBC
Sevin Rosen
Technology Partners
USVP
General
VC’s
•
•
•
Source: NextWave Energy assessment
16
Hunt
OPG
Shell
CONTACT INFORMATION
Richard T. Stuebi
President
NextWave Energy, Inc.
1600 Broadway, Suite 2400
Denver, CO 80202
(303) 352-0377
(303) 573-1830 fax
rts@nextwave-energy.com
www.nextwave-energy.com
17