October 17, 2003

Emerging Technology Energy Firms Showcased
at Philadelphia Energy Venture Fair

By Christopher Perdue
Director, Market Research

Analysis: This unique conference began over two years ago in Boston and appears to have started a successful continuing series of conferences focused on ventures in the energy space. Organized by Infocast, the Energy Venture Fair-IV witnessed an attendance of over 240. Held at the Loews Philadelphia Hotel, the fair drew companies practicing in a variety of fields including generation, distributed generation, transmission, distribution, retail, information management and technology, exploration and production, energy storage, billing, fuel cell, wind power, hydrogen technology, power quality, and reliability.

Investors in attendance included the likes of Technology Partners, EnerTech Capital, Altira, Nth Power, Eastman Ventures, Advent International, CDP Capital, Perseus LLC, ACCERA Venture Partners, RockPort Capital Partners, Hunt Resources, ChevronTexaco Technology Partners, RBC Capital Partners, Battelle Ventures, Firelake Capital, Braemar Energy Ventures, Hydro-Quebec CapiTech, OPG Ventures, EON Venture Partners, Hamilton Robinson LLC, Exelon Capital Partners, Angeleno Group, Expansion Capital Partners, Taproot Ventures, and Stephens, Inc.

The conference began with a panel of investors that included EnerTech Capital, Nth Power, Altira, Eastman Ventures, and Technology Partners, and was moderated by yours truly. According to the panel, the relative undersupply of capital into the energy technology sector means that there is less competition for both companies and venture capitalists alike compared to some of the more common—and crowded—areas of information technology investment.

Ira Ehrenpreis, a Partner at Technology Partners (a 20-year old firm investing out of its seventh fund) explained his firm's interest in the energy technology sector as follows: “The amount of capital and investments flowing into Energy Technology companies relative to other sectors remains small. Although venture capitalists have more money to invest than ever before—there's approximately $80 billion of overhang—much of that capital will flow into other sectors, such as software, storage, security, and even telecom. Energy technology companies will garner a relatively small percentage of that capital because most of the mainstream funds do not invest in the space. As a result, there's a great opportunity for firms like Technology Partners who focus on the energy technology sector to invest in great deals and stand out as a leader in the space.”

The panelists did seem to agree that the market still presented an attractive investment opportunity for their funds. According to Michael DeRosa, Principal at EnerTech Capital, “Venture and growth capital investing in the energy technology sector continues to be one of the more attractive segments of private equity investing. As recent world events have demonstrated, the continual need for innovation in the energy sector is fundamental to the health of the global economy. The strong class of companies at this year's Energy Venture Fair represents the robustness and vitality of this sector. There are companies here that offer products and service across a wide variety of markets within the energy sector. There are also a range of early stage venture and later stage expansion capital opportunities.”

After the panel, the fair swiftly turned into a showcase of the 75 presenting companies. The companies will make two presentations each in five break-out rooms over the next day-and-a-half. The first day also presented great opportunities for attendees to interact.

During one of these opportunities I had the opportunity to talk to Mr. Hap Ellis of RockPort Capital Partners. According to Mr. Ellis, RockPort is interested in a number of areas, including distribution automation, renewable technologies, power electronics, powerline communications, and storage technologies. “We see more funds expressing interest in the energy area, but it still is very much a niche play with a number of strong niche players,” said Ellis. “Valuations are generally fairly reasonable. Funds want to put money to work. And, as always, companies with strong management teams and compelling technologies will be successful in this market. Notwithstanding the press coverage, it is not a market chasing would-be opportunities arising out of the latest media-hyped “crises” —like the August blackout. We've all seen that movie.”

I asked Mr. Ellis what type of trends he was seeing with energy-related companies that are looking for funding. According to Mr. Ellis it depends on the technology. “There is a lot of interest in micro fuel cell technologies for defense and consumer electronics purposes, said Ellis. “There is a lot of interest in the renewable sector, particularly photovoltaics. We see a migration of technologies from the tech sector to the electricity sector, which includes remote asset management hardware and software suites. Interestingly, many companies attempting to raise money in this area are 'first time' entrepreneurs, unlike teams in the software or biotech space who may be out for their second or third ride.”

I also had the opportunity to talk to Scott MacDonald, an Investment Manager at OPG Ventures. According to Mr. MacDonald, OPG Ventures finds technologies that enhance the transmission and distribution of energy of particular interest. “I find it truly remarkable that our digital society is powered by an antiquated electro-mechanical transmission system,” said MacDonald. “The North American grid has been described as one of the largest machines ever built and years of underinvestment in transmission capacity and control technology have lead to an inadequate system that is being pushed harder and is being used in ways for which it was not designed. The recent North American blackout which shut down 100 power plants and led to billions of dollars in losses in both Canada and the U.S. is a wakeup call that new technologies are required to create the a self-healing, digital-quality electricity superhighway. OPG Ventures' recent investments in RuggedCom, a developer of utility-hardened networking and communications equipment for substations, and NxtPhase, a developer of digital and fiber optic solutions for managing high-voltage electric power, demonstrates our growing interest in this sector.”

Mr. MacDonald confirmed that he is seeing increased interest in the energy sector from well established generalist funds. “Their mood appears to be cautiously optimistic and their growing presence in the energy technology space is a good sign for existing investors and entrepreneurs,” said MacDonald. “The increased awareness of America's dependence on foreign oil, raising natural gas costs, poor air quality and our personal need for dependable electrons to power our lives has certainly helped to elevate energy technology investing to the mainstream. Energy is like oxygen, you only notice it when it is not there.”

Having attended the previous three Energy Venture Fairs and seeing the presenting companies then, I would have to agree with the venture capitalist in that the market does seem to currently present an attractive investment opportunity. The quality of the presenting companies has improved and was composed of 31 in the development stage, 34 in the revenue stage, and 10 actually turning a profit.

At the conclusion of the fair later today, participants will vote on the best five presentations and, therefore, the best opportunities for investment. In Monday's IssueAlert we will take a closer look at these five emerging firms.

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