When cleantech investing falls off a cliff, and the IPO curse isn’t expected to open up until 2010, what’s a cleantech investor to do? Stick with what you know. Many cleantech VCs who made money in the infotech boom are now crawling all over themselves to find capital-efficient plays in the smart grid. Why? It’s the perfect storm: The smart grid is essentially an IT play with a policy-friendly cleantech component and little technology risk.
The smart grid presents a massive opportunity for networking and software players, including wireless mesh companies, broadband powerline players, energy dashboard web interface makers, and software systems developers. VCs who cut their teeth on these types of companies during Internet, computing and telecom build-outs, will feel right at home evaluating these firms and finding a potential breakout.
VCs also like markets with an emerging and diverse set of customers — particularly customers that they’ve worked with before. New smart-grid businesses are moving beyond utility companies and finding other partners that can get them into homes and offices more quickly — typically telecommunications companies (Verizon), but also Google, thanks to its PowerMeter offering. Many VCs in the Valley have Rolodexes filled with telecom and Internet industry connections.
The smart grid is less about betting on a blue sky technology that will take years in the lab to evolve than some other cleantech plays. It’s more about “innovation in the business model and in the packaging and integration of technology,” according to Matt Denesuk, apartner with IBM Venture Capital Group. “That’s another reason VCs like this space: There’s really no technology risk.”
What will really get VCs salivating is a massive but emerging market. For the smart grid, the storm hasn’t even quite hit yet — investments in the space accounted for less than 5 percent of first-quarter 2009 cleantech investments (compared with solar at over 30 percent). “Really, smart meters and the smart grid so far have been more of a tool for utilities to improve their cost efficiency and peak load management,” said Denesuk. “Theoretically, there’s a value there for consumers, but that hasn’t happened yet. The real value will come in when you get instruments inside small office buildings and homes, and that’s basically been missing outside of a few pilots.”
Denesuk doesn’t expect it to be missing for long. “Between the potential to deliver major reductions in energy usage and the fact that not many products have gotten to market yet, there’s a huge opportunity there,” he said. According to SBI Research, the smart-grid market is expected to grow by more than 20 percent in the U.S. over the next five years to $17 billion, and will reach $171 billion globally.
Of course, entrepreneurs are following the same thinking, too. Denesuk tells us there’s no shortage of companies trying to capitalize on all the interest in the smart grid. “One VC I spoke with said they had looked at 400 companies in this space and not funded a single one yet,” he said. “There are so many companies and so much interest — I think we’ll see a lot more innovation here in the next year or so.”