an overview of energy venture capital richard t. stuebi president, nextwave energy november 18, 2004...
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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
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FAILURE RATE OF NEW VENTURES
010
20
3040
50
6070
80
90100
1 year 6 years 8 years 10 years
Percent
Source: U.S. Department of Commerce, New Jersey Institute of Technology
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TYPICAL VC PORTFOLIO
#Invested$ mm
Return multiple
Year 5 value$ mm
“Dogs” 3 $3.0 0 x $0.0
“Walking Dead”
“Cash Cows”
“Home Runs”
Source: Venture Capital Online
Return CAGR
NA
4 $4.0 2 x $8.0 15%
2 $2.0 5 x $10.0 38%
1 $1.0 10 x $10.0 58%
TOTAL 10 $10.0 2.8 x $28.0 23%
Only 3 out of 10 investments
produce favorable returns
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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
Most important
factor
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TOPICAL AREAS
• Overview of venture capital
• VC in overall energy finance spectrum
• Facts about energy VC marketplace
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ENERGY SECTOR FINANCE
Asset-based energy infrastructure projects
Energy technology venture capital
Businesses involving energy services
Energy sector finance
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Incr
easi
ng r
isk/
retu
rn
ENERGY FINANCE ALTERNATIVES
• Windfarms• Cogeneration• Energy efficiency• Hydrogen infrastructure
Examples
Key success factors
Risk/reward profile
• 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)
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Asset-based projects• 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
Service businesses Technology VC
• 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
• 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)
• 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
Because new energy tech’s...: …VC investors must:
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RECENT ENERGY DEVELOPMENTS AFFECTING VC INTEREST
“Negatives”
“Positives”
• California debacle deregulation?
• Enron debacle trading? generation?
• Premature hype (microturbines, fuel cells, hydrogen?)
• Lack of consistent transmission policy
• High oil/gas prices
• Energy security post-9/11
• Increased recognition of grid vulnerability (Aug. 03 blackout)
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TOPICAL AREAS
• Overview of venture capital
• VC in overall energy finance spectrum
• Facts about energy VC marketplace
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EnergyOther
Source: Nth Power, U.S. Dept. of Commerce, U.S. Energy Information Administration, NextWave Energy analysis
SMALL SHARE OF VC TO ENERGYPercent
EnergyOther
7.1%100% = $9.8 trillion (2000)
2.3%
92.9%
100% = $18.2 billion (2003)
97.7%
U.S. VC investments U.S. GDP
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U.S. ENERGY VC INVESTMENTS$ millions
Source: Nth Power
-100
100
300
500
700
900
1100
1300
1500
1990 1992 1994 1996 1998 2000 2002
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WORLDWIDE ENERGY TECH VC$ millions
Source: Nth Power
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 $526.2 -10%
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PROFILE OF GLOBAL ENERGY VC DEALS$ millions
Source: Nth Power
No. of deals Avg. deal size Total investment
2002 55 $10.61 $584
2003 84 $6.26 $526
More, smaller deals (risk diversification)
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LEADING ENERGY TECH VC INVESTORS
• Altira
• Arete
• EnerTech
• Alliant
• Avista
• Chevron
• Cinergy
• DQE
• Enron
• FA Tech Ventures• Kinetic• Nth Power• Perseus
• Exelon
• Hydro-Quebec
• OPG
• PG&E
• Reliant
• Shell
• Advent
• Altira
• Braemar
• ChevronTexaco
• Cinergy
• ConocoPhillips
• Eastman
• EnerTech
• Nth Power
• RockPort
• Hunt
• OPG
• Shell
• Alta
• Benchmark
• DFJ
• JP Morgan
• Mayfield
• Mohr Davidow
• RBC
• Sevin Rosen
• Technology Partners
• USVP
• JP Morgan (Beacon)
• RBC
• Sevin Rosen
• Technology Partners
Strategic investors
Energy VC’s
General VC’s
“Then” (2000/2001) “Now” (2004)
Source: NextWave Energy assessment 16
CONTACT INFORMATION
Richard T. Stuebi
President
NextWave Energy, Inc.
1600 Broadway, Suite 2400
Denver, CO 80202
(303) 352-0377
(303) 573-1830 fax
www.nextwave-energy.com
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