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AN OVERVIEW OF ENERGY VENTURE CAPITAL

AN OVERVIEW OF ENERGY VENTURE CAPITAL. Richard T. Stuebi President, NextWave Energy November 18, 2004 Energy Advancement Leadership Conference, Houston. TOPICAL AREAS. Overview of venture capital VC in overall energy finance spectrum Facts about energy VC marketplace. 1.

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AN OVERVIEW OF ENERGY VENTURE CAPITAL

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  1. AN OVERVIEW OF ENERGY VENTURE CAPITAL Richard T. Stuebi President, NextWave Energy November 18, 2004 Energy Advancement Leadership Conference, Houston

  2. TOPICAL AREAS • Overview of venture capital • VC in overall energy finance spectrum • Facts about energy VC marketplace 1

  3. FAILURE RATE OF NEW VENTURES Percent Source: U.S. Department of Commerce, New Jersey Institute of Technology 2

  4. TYPICAL VC PORTFOLIO Year 5 value$ mm Invested$ mm Return multiple Return CAGR # “Dogs” 3 $3.0 0 x $0.0 NA Only 3 out of 10 investments produce favorable returns “Walking Dead” 4 $4.0 2 x $8.0 15% “Cash Cows” 2 $2.0 5 x $10.0 38% “Home Runs” 1 $1.0 10 x $10.0 58% 10 $10.0 2.8 x $28.0 23% TOTAL Source: Venture Capital Online 3

  5. VC CONCERNS • Misguided strategies • Excessive reliance on government support to spur/sustain market • “Me-too” strategies, no differentiating advantage • Customer needs not urgent enough to adopt new technology • Implausible analyses • Overoptimistic or unwarranted assumptions • Insufficient research in pricing and attainable market share • Excessive technical orientation • Inadequate marketing and sales experience • Questionable management skills • “Perfect is the enemy of the good enough” 4

  6. WHY VC’S INVEST • Huge, rapidly growing, real market • Market size: multiple millions per year desired • Market growth: 10% + per year • Demonstrated customer willingness to pay • Compelling business model • Recurring revenue streams vs. large, one-time sales • Sustainable advantage over competitors • Solves urgent customer “pain” • Attractive, realistic financials • Logically supportable assumptions • Plausible revenue, cost and profit projections • Reasonable valuations of venture • Solid capital formation plan • Strong management team • “Bet on jockeys, not on horses” • Deep commercial orientation and business acumen • Demonstrated successes in related fields Most important factor 5

  7. TOPICAL AREAS • Overview of venture capital • VC in overall energy finance spectrum • Facts about energy VC marketplace 6

  8. ENERGY SECTOR FINANCE Asset-based energy infrastructure projects Energy sector finance Increasing risk/return Businesses involving energy services Energy technology venture capital 7

  9. ENERGY FINANCE ALTERNATIVES Asset-based projects Service businesses Technology VC Examples • Green energy retailing • Mass-market retailing of energy technologies • Networking of distributed generation • Hydrogen sales • Windfarms • Cogeneration • Energy efficiency • Hydrogen infrastructure • Nanotech for PV • New wind turbine concepts • Stirling engines • “Exotics” Key success factors • Well-structured contracts (especially off-take) • Favorable economics • Management team with strong development/ operating experience • Technology risks assessed/accepted • Solid general management team, with marketing/sales expertise • Clear evidence of customer willingness (ability) to pay to solve a clear need • Barriers to competitor mimicry • Minimal technology risk • Acceptable technology development risks • Modest market adoption challenges • Time to exit/ liquidity acceptable • Strong patent position Risk/reward profile • Modest upside (20% equity IRR max?) • Minimal downside (assuming technology risks nil or hedged) • Possibly attractive upside… • But significant market and execution risk • Big potential upside (3-10x)… • But significant possibility of total loss 8

  10. IMPLICATIONS FOR VC INVESTORS IN ENERGY TECHNOLOGY PLAYS Because new energy tech’s...: …VC investors must: • Typically make inroads in niches (rather than address the overall market) • Often rely in some degree on government subsidies • Often entail higher upfront costs in exchange for lower annual costs • Often require a long time to fully develop technologies • Face high customer inertia and obstacles from incumbents • Attract relatively few investors (because of these issues) • Understand customer needs/ economics in those exact niches • Assess future “firmness” of government supports • Research customer acceptance of “paybacks” • Be willing to accept longer time horizon to exit/liquidity • Evaluate these obstacles accurately (conservatively?) • Consider risks associated with subsequent financing requirements 9

  11. RECENT ENERGY DEVELOPMENTS AFFECTING VC INTEREST • California debacle  deregulation? • Enron debacle  trading? generation? • Premature hype (microturbines, fuel cells, hydrogen?) • Lack of consistent transmission policy “Negatives” “Positives” • High oil/gas prices • Energy security post-9/11 • Increased recognition of grid vulnerability (Aug. 03 blackout) 10

  12. TOPICAL AREAS • Overview of venture capital • VC in overall energy finance spectrum • Facts about energy VC marketplace 11

  13. SMALL SHARE OF VC TO ENERGY Percent U.S. VC investments U.S. GDP 100% = $18.2 billion (2003) 100% = $9.8 trillion (2000) 2.3% 7.1% 97.7% 92.9% Source: Nth Power, U.S. Dept. of Commerce, U.S. Energy Information Administration, NextWave Energy analysis 12

  14. U.S. ENERGY VC INVESTMENTS $ millions 13 Source: Nth Power

  15. WORLDWIDE ENERGY TECH VC $ millions 14 Source: Nth Power

  16. PROFILE OF GLOBAL ENERGY VC DEALS $ millions More, smaller deals (risk diversification) 15 Source: Nth Power

  17. LEADING ENERGY TECH VC INVESTORS “Then” (2000/2001) “Now” (2004) • Alliant • Avista • Chevron • Cinergy • DQE • Enron • Exelon • Hydro-Quebec • OPG • PG&E • Reliant • Shell • ChevronTexaco • Cinergy • ConocoPhillips • Eastman • Hunt • OPG • Shell • Altira • Arete • EnerTech Strategic investors • FA Tech Ventures • Kinetic • Nth Power • Perseus • Advent • Altira • Braemar • EnerTech • Nth Power • RockPort Energy VC’s • Alta • Benchmark • DFJ • JP Morgan • Mayfield • Mohr Davidow • RBC • Sevin Rosen • Technology Partners • USVP • JP Morgan (Beacon) • RBC • Sevin Rosen • Technology Partners General VC’s 16 Source: NextWave Energy assessment

  18. CONTACT INFORMATION Richard T. Stuebi President NextWave Energy, Inc. 1600 Broadway, Suite 2400 Denver, CO 80202 (303) 352-0377 (303) 573-1830 fax rts@nextwave-energy.com www.nextwave-energy.com 17

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