The investment news in mid-2004 sounded great for entrepreneurs developing energy technologies—investments in the clean technology sector shot up 41% for the first quarter of 2004, according to Cleantech Venture Network. Yet behind the news was another story, because investments in energy technology actually fell behind those of materials and nanotechnology. How could that happen to distributed energy? Isn't it a technology known for efficiency and low emissions?

Welcome to the fickle world of venture capital, an industry that hasn't quite recovered from being dot-bombed into recession when the Internet bubble burst. Yet, some distributed energy companies have lured venture capitalists back into the game. They capitalized on a growing trend in funding technologies seen as clean and green. It wasn't easy, and the demands of the typical venture capital business model can be brutal. Yet there are alternatives. How can distributed energy entrepreneurs compete for their fair share?

First, emphasize the energy connection to clean and green technologies, says Nicholas Parker, co-founder and chairman of the Cleantech Venture Network. Before the clean technology connection, energy technology accounted for roughly 3% of overall venture capital investments, so it didn't have much recognition. "By broadening the category and calling it cleantech you're now seeing close to 10% of the captured capital flow. That's making it maybe the sixth largest category,” explains Parker.

One of the most important advantages of recognition as a large category is the interest generated from institutional investors such as pension funds. Parker says that California's recent Green Wave environmental investment initiative offers a good example of the investment power available from such big guns. The initiative calls on the state's two largest public pension funds, the California Public Employees' Retirement System and the California State Teachers' Retirement System to commit $1.5 billion to investments in cutting-edge technologies and environmentally responsible companies.

"The Green Wave is massively important for a number of reasons,” Parker notes. "California sets a lot of trends and it's often emulated. Secondly, when the largest pension and teacher's funds have a mission to generate market-based returns and commit to putting money to work in this area it's very powerful. Combine that with other initiatives—such as Million Solar Roofs and the Hydrogen Highway—and you give distributed energy a real kick start.”

It's no surprise that California is kicking up the most action. Cleantech has reported that West Coast companies attracted more investment capital than all other regions in North America combined—$156 million in the first quarter of 2004. The investments represented a 138% jump over the fourth quarter of 2003. Still, compared to the $68.2 million invested in materials and nanotechnology, energy-related investments lost ground, falling to 19% ($56.8 million) of the total investment in Cleantech. There's certainly no shortage of energy technologies seeking investment capital. So why hasn't the distributed energy industry kept up with the competition?

Part of the problem is an issue of perception, says Parker. According to his company's research, there's an impression in the investment community that it takes more capital to bring clean technology or clean energy to market than other categories like software or biotech. Parker argues that there are two mitigating factors investors are missing. First, the initial costs for energy startups tend to be less than those for other industries. Second, they don't have as many competitors in their markets. "The good news,” adds Parker, "is that there's a willing buyer that believes in the hot application.”

A marketplace of willing buyers should weigh heavily on investors, but distributed energy manufacturers have other issues to worry about. Many technologies, such as fuel cells, don't have broad application track records. Investors view them as risks because revenue streams relate directly to performance and reliability. The renewable energy industry's dependence on subsidies also creates uncertainty. County, state, and federal funds are often driven by public policy, or worse—politics.

The situation sounds tough, but there are ways for distributed energy startups to answer the concerns of venture capitalists. The issue of track records can be countered with warranties or performance guarantees. It's common to guarantee power generation equipment as free from defects for the first year of operation. There's even an answer for the reliance on subsidies beholden to the whims of public policy and politics. It's fair to argue that the very same public policies and politics are driving rapid growth in city and state renewable portfolio standards. Industry analysts estimate a need for 23,000 MW of incremental renewable energy over the next 10 years, just to satisfy current requirements.

Another tack is to understand the trends venture capitalists are following. Global Environment Fund (GEF) offers a good example. The firm's investments focus on companies that deliver environmental improvements through infrastructure and clean technologies. Think cleaner, cheaper, more efficient, and more sustainable, but nothing that depends directly on government policy and regulation. Sectors of interest to GEF include water and wastewater, clean energy, waste management, mass transportation, environmentally sustainable forestry, health care, and clean technology.

One of GEF's most promising investments is Virginia-based Athena Controls Technologies. In energy, Athena's control systems hold the promise of providing immediate and substantial improvements in operating capabilities for clean power generation technologies, including micro-turbine, wind, and fuel cell power generation.

Investors like GEF often discover companies seeking funding at venture capital fairs and conferences, such as Cleantech's Venture Forums, which are held twice a year. The most recent was October 2004 in Toronto; the next is scheduled for March 2005 in San Francisco. The forums are designed to bring together clean technology entrepreneurs and venture investors in a venue where deals can originate and incubate.

In New Mexico, Technology Ventures Corp.'s 11th annual Equity Capital Symposium (www.techventures.org) will take place May 18–19, 2005. The New Mexico Equity Capital Symposium is the state's premiere showcase for presenting technology-rich business opportunities. To date, about 30% of the presenters have obtained financing.

In Oklahoma, the Southwest Capital Conference brings together more than 200 thought-leaders, scientists, entrepreneurs, and investors to Tulsa every fall to showcase the latest in science and technology, and to educate, inspire, and focus on the development of innovation. In November 2004 at the latest conference, entrepreneurial companies sought institutional capital in excess of $1 million, as well as angel and/or seed capital in the $200,000 to $500,000 range.

The US Department of Energy (DOE) National Renewable Energy Laboratory (NREL) holds its 18th Industry Growth Forum (www.cleanenergyforum.com/) every November. The forum unites emerging clean energy technology companies from across the country with leading clean energy investors. The three-day event offers networking and company presentations.

Special sessions at the NREL event include such educational conferences as Strategic Alliances and Mergers and Acquisitions, and Project Financing. For those new to presenting funding proposals, there are forum logistics and presentation tips. Topics will range from strategic errors to avoid to the details of loading and operating PowerPoint presentations, availability of podiums, and clock/timer procedures. Helpful tips on following up with investors will be offered as well.

A bonus of the Growth Forum is the National Clean Energy Venture Competition. It began in 2002 to promote and support the creation of world-class businesses and bring more clean energy technology options into the mainstream energy market. Konarka, a company commercializing polymer and nanotechnology-based photovoltaics, took first place at the 2002 competition. The company is targeting markets ranging from portable electronics to distributed power and rural electrification.

According to Paul Wormser, a key business strategy adviser at Konarka, winning the award was really the kickoff for the company's coming-out party in 2002. "We were in the early stages of preparing a PR strategy and this event made investors and the media stop and take notice of our company and our technology,” said Wormser in an NREL interview. Shortly after the forum, Konarka was featured in several publications and its principals were asked to speak at various technology conferences and forums.

The publicity and appearances paid off well for Konarka. The company has coaxed millions from more than 15 venture capitalists and partners. Among them are Amerindo Investment Advisors, Massachusetts Technology Collaborative, Presidio Venture Partners LLC, Vanguard Ventures, and Zero Stage Capital. Much of the credit goes to Konarka CEO Howard Berke, who has founded or co-founded over 12 companies and has taken several companies public.

Berke says venture capitalists are paying attention to clean energy, especially now—not just because of the price of oil, but also because of the realization that investing in clean energy is a commerce and security concern. Of course, it takes more than just having a clean energy technology to win investors. "The important thing is to focus,” Berke explains. "Others have tried to own many markets. You need to focus on one and build an experienced leadership team with a proven track record. We've done this with our inside team as well as our advisors and board of directors.”

Advisors and a board of directors are just two of the many details in the fine print of a venture capital contract. Entrepreneurs and founders need to weigh the impact of sharing power in return for capital, advises Scott Sklar, consultant and president of The Stella Group Ltd., a national strategic marketing and policy firm for clean energy in Washington, DC.

Sklar has seen venture capital's good points and bad points for over 15 years. He served as executive director of the Solar Energy Industries Association and has advised many companies searching for funding. "It brings needed money at a critical time and they are willing to get involved in cutting-edge industries and that's good,” says Sklar. "The bad is that their expectations to increase the value of the early investment can hinder a company from actually succeeding. I see a lot of companies crippled by trying to create the impression of growth that may be true in the short term but not lasting. And it's just because of the VC's desire to gain value quickly so they can exit.”

Sklar often counsels entrepreneurs against taking the short-term venture route. "The typical exit strategy is just 18 months,” Sklar explains. "To me, five years is fine but 18 months is too hard. A company can become overextended, and in many cases they get gobbled up or sold off.” Even if the company survives, the founder has to consider the consequences of taking on investors and sharing power with a board of directors. "Many say they created the company and it's their baby,” Sklar notes. "They want the venture capitalist's money but don't want to have them involved, so I tell them that's not the best route.”

Those that find venture capital isn't the best route shouldn't give up. There are plenty of alternatives. Most states are aggressively courting energy technology businesses with funding programs and business incubators. For example, the Oklahoma Technology Commercialization Center (OTCC) works with Oklahoma companies, inventors, researchers, and entrepreneurs to turn technological innovations into business opportunities. The center provides statewide access to business development services, plus technology development, technology transfer, and economic development professionals in both the public and private sectors. One source of funding connected to the OTCC is the Enterprise Oklahoma Venture Fund, a small venture capital fund operating under state statutes. (See sidebar for other programs.)

On a national level, several DOE programs provide finance solutions through grants and seed money to help entrepreneurs get their energy ideas off the ground. The DOE's Inventions and Innovation Program provides financial assistance at two levels—up to $40,000 or up to $200,000—depending on the stage of development. Technologies within the areas of industry, power, transportation, or buildings that have a significant energy savings impact are eligible. In addition to financial assistance, this program offers technical guidance and commercialization support to successful applicants.

Also from the DOE is the National Industrial Competitiveness through Energy, Environment, and Economics (NICE3) grant program. NICE3 is an innovative, cost-sharing program to promote energy efficiency, clean production, and economic competitiveness in industry. It provides funding to state and industry partnerships (large- and small-business) for projects that develop and demonstrate advances in energy efficiency and clean production technologies. In total, NICE3 has sponsored over 100 projects, with more than half the sponsorships going to small businesses. Since 1991, it has leveraged $26.3 million in federal funds, with $81.8 million in state and industry funds.

With a wide array of state programs, DOE grants, and funding, there are many choices beyond venture capital. But they all share some common attributes: competition for limited funds and the need for a compelling business plan. Whether it's government or private funding, the potential for a healthy bottom line is still the ultimate deciding factor. Prepare yourself and take advantage of the growing interest in funding clean energy, advises Nicholas Parker. "People can always go to our Web site at www.cleantechventure.com,” Parker notes. "We have tools and resources there to help open doors. If the company is getting serious about raising money there's a lot of work to do.”

ED RITCHIE is a writer specializing in energy, transportation, and communication technologies.

DE - March/April 2005