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The massive market opportunity of the smart grid, invigorated by stimulus funds and new energy efficiency rules, is clear — but how are venture capitalists deciding which early stage smart grid startups to back? Well, one way would be for a VC to look into which […]

The massive market opportunity of the smart grid, invigorated by stimulus funds and new energy efficiency rules, is clear — but how are venture capitalists deciding which early stage smart grid startups to back? Well, one way would be for a VC to look into which firms have done a deal with a utility, which would give the startup its first revenue and could indicate a market leader. Problem is, a lot of utilities are in the process of “sampling” right now, doing several small pilot deals with a lot of experimental companies. As a result, venture capitalists are struggling to see past the initial lure of the utility smart grid sample to the true leaders.

This challenge was brought up last week at the Fortune Brainstorm Green conference, where venture capitalists in a smart grid discussion said that many of the smart grid firms looking for investment are all at the same level: $1 million to $3 million in revenue from a small-scale utility pilot deal. Just look at the landscape of some of the smart grid startups out there: Greenbox, which makes software to manage home energy use, has a deal to oufit a small percentage of Oklahoma Gas and Electric’s 765,000 customers with energy management tools and has been looking to raise its Series A. EnergyHub, which makes a sort of ultra-mobile PC for energy management, says it is launching a 50-home pilot trial in an East Coast city with a yet-to-be-named utility, and recently raised its first series A round.

So what’s a VC, who’s desperate to make a smart grid play, to do in an environment when the playing field is populated by companies with similar-looking wins? An easy answer is to fall back on traditional investing guidelines: invest in “the team,” figure out how valuable the intellectual property is, and crunch the numbers behind the business model. But if you’re an investor that’s still set on using the utility deal as the guide, look at the deal and the scale. Is it a major millions-of-meters utility or a small rural coop? Is there room for the deal to turn commercial and scale out? And does the firm have the money in the bank yet, or will they talk publicly about the partnership? Good news for investors, the current funding environment means you have the advantage at the negotiating table — so do the legwork.

  1. Interesting, thanks for the post.

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  2. [...] A Hurdle for VCs Investing in the Smart Grid: Lure of Utility Sampling Posted April 29, 2009 Filed under: Uncategorized | http://earth2tech.com/2009/04/29/a-hurdle-for-vcs-investing-in-the-smart-grid-lure-of-utility-sampli… [...]

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  3. Katie,

    Even though I agree with most of what was written in this article, I have problems with the last paragraph. VCs need to look for that diamond in the rough. A deal with a utility is a check-box item that says that yes this company has some traction. Beyond that it means very little. So much of this market is still in chaos. What is the right technology, the right standards, the usability of the product and user adoption, etc. Answers to those questions will determine who is the horse for the long race and who is just a short sprinter. I completely agree that the VCs need to do the legwork and look at the bigger picture for the long term.

    Some companies with good connections might get that pilot project but it does not mean that the product is usable. I recently saw one product with an optical sensor that attaches to a regular meter and transmits data to a monitor in the house. One utility is actually giving this product to residents and maybe collecting grants from the stimulus package. This product SUCKS! It does NOT work. I tried to make it work a few times and finally gave up. The point is that just because the company was able to get a pilot project means nothing since I seriously doubt whether the users (residents) will adopt their product.

    The VCs can help companies in this space by getting the standards defined quickly. The best company for the VCs would be one with a great team, great technology that works, is based upon what the standard will be and does not have a pilot project. Then the VC can use their connections to help the company get that pilot project. I have read about a few companies that have pretty interesting products and technology. However, they don’t seem to have the right marketing/sales and don’t have much of a traction. Others seem to have some traction but I am not too sure on the product functionality and usability. Its a typical conundrum of a startup. And it basically boils down to the team. The team needs to be well rounded and synergistic.

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  4. Kiran, Thanks, I totally agree with you. Unfortunately in the Valley ecosystem it’s not always the best technology that wins out, sometimes it can rest on things seemingly less important than technology, like marketing, PR, relationships, good sales, etc.

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  5. I definitely understand what you are talking about now. There are so many companies out there that monitor and do the same thing, in areas concerning energy conservation, that there is no telling which one to go with.

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  6. [...] http://earth2tech.com/2009/04/29/a-hurdle-for-vcs-investing-in-the-smart-grid-lure-of-utility-sampli… This entry was posted in Green Energy Markets, Green Innovators / Innovations and tagged cleantech investing, energy technology, greentech investing, smart grid, startup. Bookmark the permalink. Post a comment or leave a trackback: Trackback URL. Obama and Greentech: The First 100 Days » [...]

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