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My Energy Investment Thesis #7: The Maturation of Local Energy VC Funds

by kirkcoburn
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It’s not just the resources and the people that are transforming the energy industry. The tools we use to build capital have to change, too — and they have been.

Thesis #7: Coastal VCs Aren’t in the Game: The Maturation of Local Energy VC Funds

Then:

VC powerhouses on the coasts have never invested in traditional energy.

In many cases, they lack the local presence and relationships needed to be successful. And there was (still is) a large cultural disconnect. The coastal VC’s culturally want to start over with clean energy. Besides Cleantech, the Coastal VCs did not invest in oil and gas with a few exceptions. At the same time, the successful energy VCs in Texas moved to bigger check sizes, focusing primarily on Series B/B+ or growth capital investments.

Now:

In light of the poor performance of most startups in oil and gas technology (no IPOs, no winner take alls, low exit values, though many are still fighting the good fight), the coastal VCs are still staying away — with a few notable exceptions. Instead, new categories of investors have taken their place. First, there are still the incumbents that have been here since the beginning, who have ridden out the storms in the industry and are prepared for the challenges of the future. Alongside them, and to fill in the gap, have risen a new breed of investors:

  1. Millennial-bred VCs that worked in oil and gas. They’re digital natives with the skills needed to examine the industry and determine the most effective places to invest. Examples: Blue Bear and Cottonwood Venture Partners
  2. Former CVC executives that have the deepest insights into the category. Examples include EIC, the newly-formed PVIC, and Evok.
  3. Energy PE Firms that are starting a venture arm. Examples: SCF Ventures and CSL Ventures
  4. Energy PE firms that are making interesting one-off investments. One example is Quantum Energy Partners’ investment into Chargepoint

This shift in investors has transformed the way many entrepreneurs are interacting with the industry as a whole — and the way they go about finding funding for their projects. While funding is still in short supply, there are investors out there, and savvy investors are taking a look at these opportunities as they learn how they will continue to shape the role of Cleantech.

The Maturation of Local Energy VC Funds, Corporate VC, and Angels

Note: this only a partial solution, but it is the beginning of the change that the energy industry needs!

Then:

In 2010, there were three groups investing in energy: the corporate venture capital funds. Chevron was the most active at that time. In 2010 the CVCs weren’t that active yet. Corporate VC was active in energy, but only had the capacity for later-stage investments: Series B+. It was still very early in the game for their involvement. The successful energy VCs in Texas were moving to bigger check sizes, focusing primarily on Series B/B+ or growth capital investments.

At this stage of the game, there was a lack of dedicated early-stage venture capital investment in energy across the value chain. This included both oil and gas and clean energy. The local angel network, HAN, was one of the most active angel groups in the US and the only one that understood energy. Note that angels typically make very early-stage investments, but lack the supporting ecosystem and process to support (rather than merely finance) young companies. As a result, many of these companies struggled to gain the additional support and processes they needed in order to truly succeed. It’s not just about the financing — as many companies discovered to their detriment throughout these years.

Now:

The existing VCs are few and far between. Most of them choose to focus primarily on oil and gas alone, rather than branching out into other energy ventures. As above, these firms have continued to invest in the later stages (Series B to Private Equity). Not only that, but SURGE stopped its program in 2015, which meant that it could no longer fill in this critical gap.

At that time, new VCs entered the game, including:

We also started to see classic Private Equity Oilfield Service Investors enter the technology space — a substantial change from previous years.

Why?

The largest cost declines in oil and gas will come from technology, especially as digital technology enters and begins to transform the industry as a whole. Enter SFC Ventures and CSL Ventures. The CVCs have moved from the co-investor seat into the driver’s seat, taking a far more active role in the industry as a whole.

The most active investors in oil and gas and clean energy are the corporates. Many of the major oil companies are now poised to do more clean energy deals this year than any other — and they’re driving the change within the industry.

Now, these oil and gas companies are reevaluating their current strategies due to the increased pressure from shareholders and consumers alike. As technology continues to evolve, major oil and gas players are discovering that they must invest heavily in these fields in order to stay ahead — and keep support from both other investors and consumers.

As they become more active players in the field, the corporates also become signal influencers, letting the rest of the industry know where to go and what to do next. They represent the largest end customers and must, therefore, make critical decisions that will help guide the future face of the industry.

As a result, it’s little surprise that oil companies are investing in other energy opportunities, including solar, wind, and biofuels. Not only are many companies investing in a wide range of big energy products, but they’re also investing heavily in smaller projects that have immense potential within the industry.

In my next and final installment, we’re going to wrap things up by talking about another major change in clean energy: outsourcing.

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