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CNET’s Martin LaMonica raised the interesting question last week: Is there an investment bubble building around the smart grid? He cites the opinions of several investors worried about too much money being invested by venture capitalists, corporations like Cisco (s CSCO) and IBM (s IBM), and even governments. From my perspective,, there is one clear area of the smart grid that is seeing too much investment from venture capitalists, specifically — home energy management tools — but much of the smart grid investments coming from IT firms and the federal government just represent the first phase of funds that will help build a potentially huge market. At this point I don’t see unreasonable amounts of money being invested into many other areas of the very nascent smart grid sector.
First off, it’s hard to make such blanket statements about the smart grid as a whole. It will be made up by many types of technologies (both hardware and software) that have various attractive and not-very-attractive business models. We know we’ve been guilty of using the general smart grid term in headlines (that’s the problem with having a word-count limit) and lumping the billions of smart grid stimulus funds together, but the infrastructure will actually be very complex. At the moment a lot of companies are just starting to scratch the surface when it comes to discovering possible areas of innovation.
But venture capitalists have clearly been flocking to the home energy management space. It’s a favorite for VCs partly because they can easily understand it — it looks (and is) about connected gadgets, software and wireless communications. At this point the amount of VC-backed companies is really starting to get out of control. Earlier this month both home energy management dashboard companies Tendril and AlertMe raised multimillion-dollar rounds; last week home energy management startup EcoDog raised $4.6 million. Here are 10 startups that are offering home energy management tools and another that is using open source to make the products even cheaper (and result in lower margin for the companies that make the tools). Never mind the huge, blue chip companies that are also building these tools, like GE (s GE).
Ultimately a lot of these home energy management ventures are offering very similar options, typically a ZigBee-based wireless sensor kit that connects energy data from a meter (smart or not), and possibly appliances, to a viewing device, like an energy dashboard or a PC. This market is either a consumer electronics play (difficult in terms of scale and margins for a startup) or a utility partnership play (less to do with the tech and more to do with the relationships created.)
Some companies are trying to differentiate themselves by offering only the software management piece, and there could be some successes for those that can seal strong partnerships, like that of Lixar SRS and Cisco. But Google’s (s goog) free PowerMeter will make a pure software play pretty difficult as well — a startup’s software had better be significantly better than what a team of Google programmers can create, which costs the user nothing.
So basically there are a lot of new, young companies trying to sell the same things. That could be beneficial for consumers (more choice) but will not be beneficial to the companies themselves. Expect a lot of these new firms to get bought up cheaply or even fold.
Other areas of the smart grid are maturing. Cisco entered the smart grid space to tackle end-to-end communications networking, while Silver Spring has turned into a well-established, well-funded firm in that sector. But end-to-end communications networking hasn’t yet produced a bubble, not by any means. Utilities and power companies are still moving relatively slowly to upgrade the power grid, and the communications portion of the smart grid could still grow to be worth as much as $20 billion a year over the next five years, according to Cisco.
There are even some areas of the smart grid that haven’t seen much investment. Smart-charging software, which would manage the rate at which electric vehicles charge, comes to mind. One of the only companies that’s developed a product in this space is V2Green, and it was quickly bought up by GridPoint. If we’re all going to be plugging our cars into the grid, there’s a huge untapped opportunity out there.
Image courtesy of Horizontal.integration and creative commons.