A Hurdle for VCs Investing in the Smart Grid: Lure of Utility Sampling

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.

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