Investing in the Energy Technology Revolution

The magnitude of the opportunities in energy technology has attracted a growing pool of public and private equity. The market capitalization of the 45-50 energy technology-focused companies traded in the US exceeds $25 billion. Since the fall of 1999, publicly traded energy tech companies have raised close to $3 billion through IPOs, follow-on offerings and private placements. Meanwhile, privately-held companies collected $3 - 4 billion from venture capital funds and strategic players. In considering an investment in the energy technology industry, the size of the markets and the potential rates of growth are significant positives. There are several other factors we believe should be kept in mind, including (but of course not limited to) the following.

Barriers to Competition

A major flaw in the investments made in the last "new, new thing," the Internet, was the funding of companies with few real defendable advantages. If one team of three business school dropouts could come up with an idea for a company on the back of a napkin, so could the next 25 teams. The good news about the energy technology industry is that, by and large, the companies are either established businesses whose existence testifies to their competitive position and value proposition, or they are earlier-stage companies with proprietary intellectual property of sufficient long-term potential to attract venture-style funding. In either case, they have something of substance. The energy technology industry never had the luxury of mammoth pools of virtually free capital puring into the sketchiest of business plans. The life expectancy of energy tech companies without some defendable advantage, real or potential, is relatively short.

Quality of Management

Skill levels of energy tech management teams tends to be uneven. The serial entrepreneurs that are common in software and information technology are fairly rare in energy tech. More typically, the CEO is also the founder-inventor, and he or she may not have significant company-building experience. Senior executives in energy tech may also come from business divisions of large corporations, bringing with themselves a substantial contact list and industry knowledge base, but few early-stage company management skills.

Stage of Development

Energy tech companies run the gamut from one-person startups to multi-billion dollar, publicly-traded corporations. Each stage of development along this spectrum represents a particular risk-return profile, with the early-stage companies usually offering the highest return potential, but of course the greatest risk as well.

Risk Factors

The last consideration is that there are a number of risks involved in energy technology investing - "sometimes you eat the bear, and sometimes the bear eats you." Risks include, but are not limited to, the following.

- Technology Risk

There are two basic kinds of technology risk: development risk and obsolescence risk. Development risk is the possibility that an unproven technology may not ever reach commercial viability, while obsolescence risk represents the danger that an established technology may be replaced by a next-generation technology offering superior performance and/or lower cost.

- Market Adoption Risk

For those energy technology companies developing fundamentally new solutions, there is risk of market adoption - the possibility that customers may not be willing to adopt a new product or service.

- Financing Risk

Earlier-stage energy tech companies are generally unprofitable and cash-flow negative. An investment in an energy tech company in a particular round of funding is by no means guaranteed to be the last financing the company will require, and there is a risk that additional capital may not be available at attractive terms, or may not be available at all, the next time the company needs an infusion.

- Regulatory Risk

At least some energy technology companies are based on business models that rely on a certain regulatory framework. One example would be those companies developing or marketing emissions control solutions for vehicles or power generation assets, whose existence would be threatened if emissions standards were significantly loosened.