Venture Capital For New Energy Technologies

By Scott A. Williams

[Personal Note: This story was my first and only assignment from Enron,

and I am among the fortunate Enron vendors who was paid in full.]

One of the fastest growing sectors of the technology industry is technologies related to measuring and controlling energy. Enron is actively participating in growing energy technology companies through the Principal Investments Group.

Principal Investments is Enron North America’s in-house merchant investing group. “We make minority investments in companies developing technologies relevant to Enron’s core business areas,” according to Principal Investments Vice President Michael L. Miller.

Many venture capital groups invest in growing companies. What makes Principal Investments different? “We provide more than money,” says Principal Investments Vice President Robert Greer. “Unlike traditional venture capital companies which typically are small businesses, Principal Investments is a group within a major operating company. We can leverage the knowledge and expertise within Enron to support our portfolio companies.”

Michael Miller concurs. “We can assess the technical viability and market potential of emerging energy technologies quicker than pure venture capital firms, and we make intelligent bets in only those sectors where we think we have a competitive advantage. In the past, that has helped us achieve above market returns.”

“Enron’s strategic position in the energy markets today – particularly in North America – gives us a preferred investor status in companies developing new energy technologies,” says Miller. “We often see opportunities before the mainstream venture capital community, so we can afford to be very selective.”

Being part of Enron is a key point of difference, but Principal Investments and traditional venture capitalists share one characteristic. “Our job is to make money,” Miller asserts. “We want the potential to make at least five times our investment over a 12 to 36 month period. That doesn’t mean we achieve it every time. The overall portfolio target is an internal rate of return of 35 to 40%, but you only get there with a few homeruns, a few base hits, and a few strikeouts as well.”

The group targets technologies and services that capitalize on emerging trends in energy, including:

increased competition from utility deregulation
growing demand for high quality/high reliability electricity
constraints on the electricity grid
increasingly stringent environmental regulations
growth of the Internet as a medium to monitor and control energy technology

Typically, the group invests between $5 and $10 million in an individual company, but larger investments are considered given the right opportunity. “The fundamental plan,” Miller explains, “is to invest at a stage of development where a company’s valuation is x, and exit when the value is 5 to 10x or better, preferably within 36 months of closing.”

Past and current investments total $60 million in invested capital. Networking automation, utility services, power quality/storage, measurement, generation hardware, distributed power. Recent investments have funded companies developing distributed power technologies, fuel cells, HVAC membranes, monitoring software, gas-to-liquids technology, and more.

Betting On Commercial Potential

Essentially, Principal Investments makes well-informed bets on the commercial applicability of developing technologies. Consider an example. In many states, fuel cell technologies are classified as renewable or clean power sources, and innovative companies are working to develop commercial applications. “We learned about one such company – FuelCell Energy – from Enron Energy Services,” according to Principal Investments Director Charles Vetters.

Headquartered in Danbury, Connecticut, FuelCell Energy is developing carbonate fuel cell power plants that produce high efficiency energy through a chemical reaction rather than combustion. “Principal Investments negotiated an up-front investment in FuelCell Energy’s common stock,” Vetters explains, “and warrants to purchase additional shares, contingent on sales of 55 megawatts of power generation utilizing FuelCell Energy products. This allowed the company to sell out its current production capacity for a year.”

Together, FuelCell Energy and Enron are targeting state-sponsored clean energy and conservation programs to accelerate the commercialization of FuelCell Energy products.

Enron’s Eyes and Ears

In addition to the group’s financial objectives, Principal Investments works to keep Enron apprised of technologies with potential applications for customers. “Our team has a profound understanding of how electricity and energy markets function,” says Vetters, “and that gives us an important advantage in evaluating the market potential of new energy technologies. We want to be Enron’s eyes and ears on new technology.”

Consider an example. Enron knows how to source natural gas, how to distribute it, and how to hedge its position. Natural gas is the base fuel for new fuel cells being designed for distributed power generation in North America. Enron Energy Services is responsible for distributed generation at more than 18,000 commercial and industrial sites.

Today, distributed generators are diesel powered, meant for backup if power goes out. But Principal Investments sees this market evolving to include a much broader mix of units that are cleaner, more efficient, and used in situations such as peak shaving, reselling to the grid, and base loading. “We expect distributed generation based on fuel cells will create new markets for natural gas and energy services,” says Vetters. “Enron can leverage existing capabilities in these areas to make money.”

Success By Association

Companies in which Enron invests capital gain intangible benefits beyond a source of funding. “Enron’s intellectual capital is widely respected,” says Principal Investments Director Kevin Kuykendall. “The fact that Enron is attached to a growing company’s name provides instant credibility that would otherwise take years to build. An investment by Enron is a validating sign to the market.”

And the market increasingly views Principal Investments as a credible alternative to the mainstream venture capital community. “The way we structure and price deals is no different from how they do it in Silicon Valley, Austin, or Boston,” says Miller. “We bring the same level of professionalism and the same safeguards as mainstream investors, but we have a significant advantage. We have an ability to assess energy market potential as no one else can because we’re an Enron business.”

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