Venture Capital and Energy In the United States: Where To From Here

Six or seven years ago the broader venture capital community took an interest in energy as a category for venture capital investing. Storied venture capitalist like John Doerr and Vinod Khosla began to give speeches, raised lots of capital and put down some bets. Many firms were already making sizeable investments but not the headliners. The idea that energy might be "cool" began to percolate into the ethos of Silicon Valley. So why did this begin to happen, where are we today, and most importantly, where do we go from here.

How did energy become a hot investment area?

Hard to recall exactly what were the hot investment sectors six years ago, but for venture capital technology was not a hot investment sector. Healthcare was still hanging on as a good market for investments but not going gangbusters, either. Entrepreneurs and some VCs noticed the rising public discussion about climate change. In the news, for example, was the Kyoto Protocol adopted by the world was now in force in February 2005. The IPCC, a world-based organization founded in 1988, which few people knew or cared much about issued a report in 2007 sounding the alarm bell on climate change. This brought the concern for climate change to the world's scientific community and the topic above the crease on the front page of every major newspaper and media outlet, and on the lips of every politician.

Entrepreneurs are quick studies of hot trends and opportunities. In the Silicon Valley many successful IT entrepreneurs with VC relationships from the decade of the 1990s took an interest. They quickly concluded that a change in the American energy landscape was an opportunity in the making and thus began to team up with the scientists and engineers in energy, many from the 70s revolution in solar innovation. Together they put out business plans all along Sand Hill Road seeking capital. I recall one year Venrock saw over 80 solar investment opportunities. VCs are nothing if not recognizers of patterns. Entrepreneurs were forming up new energy companies and so the VCs quickly followed suit rationalizing there would be a big payoff because the markets were huge and new technology was emerging.

What was driving the energy investment opportunity?

During the 2000s, the Bush Administration mostly turned a blind eye to the discussion of climate change. After all, it was fighting a significant war that many would argue was about energy, in particular oil. Also during this decade the world watched the rise of China's economy and its energy-consuming middle class. This new demand on energy impacted world energy prices practically over night. In 2010, China's total energy output equaled that of the United States for the first time ever even though its economic output was still about 25 percent that of the United States.

During this decade the world saw oil prices hit an all time high of $145 per barrel in July 2008. It was amazing how quickly Americans changed driving habits; some even bought Priuses as fast as these new hybrid cars could get to our shores.

Of course the world economic crisis of 2008 revealed the fact that every country had too much debt. The governments of many major countries enacted emergency legislation when they realized they could not pay their debt but had to keep their countries afloat and productive. Nonetheless, the Great Recession set in.

As the decade came to a close, the personal pain of high unemployment and recession unsettled most of the developed world. All of the drivers for new energy solutions -- recognized climate change by the authoritative IPCC, economic prosperity and rising energy consumption of the world's most populous country, China, and the daily reminder that the United States was in a protracted war where it gets 22 percent of its oil supply signaled that business as usual in energy was not acceptable.

So where are we as 2011 closes out and 2012 begins?

Here are some facts to consider. In March of 2011 the world witnessed a colossal nuclear power disaster at Fukushima, Japan resulting from nearly the worst earthquake and tsunami ever. The outcome is likely a significant delay in the nuclear renaissance in the developed world and the outright abandonment of nuclear energy in Germany. The developing world has no choice in the matter if they want to grow. They are and will continue to deploy nuclear power.

Oil and gas exploration is booming since the U.S. figured out that shale gas was essentially everywhere, cheap to extract, and domestic. Rig counts are up and unemployment in O&G is at an all time low. Oil on the world market fluctuated wildly from about $70 to $120 a barrel as the Arab Spring happened this last year and has now settled at just over $100 a barrel. No one thinks it will go below that price for the foreseeable future. Most of the progressive countries in the Middle East completely depend on oil prices above $80 to support their government programs. Letting the price drop puts those governments at risk. Here in the United States the price of gasoline is 70 cents lower than its high in the spring of 2011 citing reduced demand. It appears that $3.50 to $4.50 a gallon for gasoline evokes behavior change in Americans to cut back their demand.

Unfortunately a vocal minority continues to challenge climate change. They say that recent data suggests that the some glaciers are not melting quite as fast once thought and some not at all. The same data also suggests that the polar ice cap is melting enough to open shipping routes over the top of the Earth in the coming years. CO2 is a main culprit. It is both naturally produced and man-made. We must step in now with technologies to reduce the use of fossil fuels, a key contributor to CO2. Not doing something about CO2 production and risking the known dire consequences of that decision would not be a wise choice for the planet.

In 2011 the world population surpassed 7 billion. General consensus is population will top at about 10 billion a few decades from now. The real impact on the planet of this growth in population is the transformation going within the societies of the world's developing nations. For fifty years North America and Europe, with some Japan, dominated the world's output and consumption based on their stable middle class populations. That is changing before our eyes. The OECD in 2010 estimated the world's middle class in 2009 to be about 1.8 billion and projected it to grow to 3.2 billion in 2020 and 4.9 billion in 2030. Almost all of the growth, 85%, is projected to come from Asia. As a percentage of the total middle class, the world's consumers from the developed world will decline and the world's consumers from the developing world will dominate. We know from history that energy is a fundamental driver of this growth and prosperity. The result is massive increase in energy demand for the world, perhaps as much as 50 percent higher from today's levels by 2035.

In 2012 the United States will have a presidential election. All the candidates on the Republican side largely poo-poo climate change science and essentially advocate "drill baby drill" to address the United States' energy needs for the coming decades. President Obama, who came to office with energy as one of the legs of his policy stool, seems to have abandoned energy as a platform position, yet he was so close to a national energy policy in late 2009. And then you complicate the alternative energy discussion with the spectacular California-based venture capital flameout of Solyndra, which had also been backed by the U.S. Government to the tune of $535 million. No national politician is going to go any where near alternative energy as exemplified by solar. They will all say let's do more of what we are currently doing since it appears to be the least risky course. This all translates to "do nothing!" This is nonsense and fool hearty and is the most risky of choices.

Where to from here?

The forces that put the United States at a crossroads in 2005 -- climate change science, economic needs for new industry, and desire for national security -- are as real as ever and must be addressed by our body politic. The world will not stand still waiting for America.

In the Silicon Valley and around the country, the entrepreneurial spirit of the great United States went to work over night in the last decade. It is still hard at work on these problems. In the recent past, optimistic entrepreneurs started thousands of energy companies across the spectrum of energy opportunities. These companies were backed by venture capitalist who invested billions of dollars. To date, 23 venture-backed energy companies have gone public and many more are making themselves ready. While some companies do not survive, of course, there are many spectacular examples of winners. Tesla, the electric car company, appeared out of nowhere demonstrating that in America a new car company can indeed be built. Bright Source Energy is building huge utility scale solar power plants on U.S. soil. A123 is building batteries capable of industrial and grid-scale applications. The list goes on and on.

America needs to keep doing what it does so well -- innovate. Innovation costs money. Venture capital must keep investing in energy startups that make economic sense. Public investors who provide the real growth capital for young companies need to come to the capital markets and buy those stocks. As a key source of innovation funding, the U.S. Government must keep putting R&D dollars into the market through its many programs including ARPA-E. It is this partnership of entrepreneurs, investors, and the U.S. Government that will keep the United States a leader in new energy technologies.

My hope is that the new generation of political leaders, young entrepreneurs, and venture capitalists with long-term points of view can rally to the cause of changing America's energy future. It's not about being green or not being green. Such labels are deceiving and simple. It's about being smart, making good investments and working hard. It's about painting a vision of the future and then investing in that vision and seeing it through.

Where do we go from here? My bet is up and to the right.

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Source: http://www.huffingtonpost.com/ray-a-rothrock/energy-venture-capital_b_1178721.html

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