by Thomas E. Cain
The progress of major civilizations has depended largely on finding new and better sources of cheap energy. Energy has even functioned as the catalyst for many of the world’s wars and continues to do so today.
The need to find resolutions has become so overwhelming and so critical that we believe this situation presents an unusually durable and global opportunity for extraordinary investor returns. Our role as venture capitalists, therefore, is to find, fund and grow breakthroughs that have innovative ways to generate and utilize energy.
Prior to the creation of SAIL Venture Partners, there had never been a VC solely dedicated to developing breakthroughs in energy. Based on individual investment history, SAIL’s partners had a 3.7 money-on-money return for a wide variety of alternative energy / clean technology investments, providing the credibility that such a fund was promising.
When seeking investments, we always try to find the most innovative forms of technology in the market. We start with identifying large problems that require urgent solutions. We consider the team, technology, maturity, and scalability.
SAIL’s portfolio companies focus on providing profitable, global solutions to the world’s resource crisis.
Portfolio Companies
For example, SAIL’s investment in Xtreme Power Solutions provides a critical component for large-scale energy storage to wind and PV farms, replacement of peak-power plants and large, stand-by power capacity. Its batteries have virtually no energy loss, last for decades, are environmentally friendly and can be configured to megawatt quantities. They act like a capacitor with low resistance under load and can be charged and discharged at incredible rates.
It is impractical to discuss energy without the presence of water. Over 50% of all electricity used in the U.S. is used to move water. SAIL’s co-investment with Dow Chemical Company in WaterHealth International has addressed this concern and is supplying underserved areas of the globe with affordable access to safe drinking water with low energy consumption.
Our investment in Ice Energy was specifically targeted to use low-cost, night-time electricity, and the 20-degree day/night temperature difference in some areas of the world to store air conditioning energy for use during the day. The inexpensive technology moves 95 percent of the peak electrical demand for refrigeration-based air conditioning to night, significantly lowering the cost of air conditioning and improving overall energy performance.
ORYXE Energy International develops low-cost additives for gasoline, diesel, residual and coal, which dramatically reduce pollutants while improving combustion efficiency.
Another primary function of energy-focused venture capitalists is to find breakthroughs in international research. We believe we have found one of those companies in our investment in SNTech, a Korean company that has discovered what may be the greatest single contribution to energy in this decade-a new electric motor design that reduces electrical consumption by 80 percent, while staying consistent with the cost of existing motors.
The U.S. Department of Energy estimates that 60 percent of all electricity in the U.S. is consumed by electric motors. This single invention could free up enough energy to eliminate the need for constructing future power plants in our lifetime. Additionally, with over 1.2 billion electric motors sold each year in the U.S. alone, this company has the potential for truly breathtaking returns for its investors.
Deciding Whether to Invest
Before making an investment in this area, there are two major types of risk that must be considered. The first is the technology risk. Even though we believe the technology we are interested in is the best of its kind at the present time, we also need to consider whether it is the best solution that will continue to emerge over the investment horizon for the next five to seven years.
The second major risk factor in this investment area is what we call the "people risk." It is important for us to learn as much as we can about the company’s people before we decide to invest in order to determine whether they may be capable of creating extraordinary returns for our fund.
Identifying these risks is an art. SAIL determines these risks by:
- Engaging in deep conversations with potential customers to understand their buying criteria, timing and process
- Reserving sufficient funds, because it always takes longer and costs more
- Focusing on teams that fully understand the financial model
- Ensuring business models are compelling without government changes in regulations or statutes, and
- Anticipating severe competitive responses if successful
Establishing accurate company valuations can also be very difficult as many of these technologies which have the potential to solve major problems do not yet generate significant revenues. In addition, we cannot predict how widely the innovation may be adopted. As venture capitalists, it is our job to analyze trends both within the invested company and without.
The energy sector also introduces another unique investment challenge, including the fact that this multi-trillion dollar sector is currently dominated by very large corporations and operates under many governmental regulations. Engaging with these major energy corporations presents an obstacle within the industry as they are typically in no hurry to innovate. These corporations are already generating record profits.
ORYXE Energy has confronted and continues to confront the complexities that governmental regulations can cultivate. ORYXE Energy’s fuel additive dramatically reduces pollution, however state regulators have yet to be convinced that this particular technology should be mandated.
Another example of an energy investment facing regulatory approval is Ice Energy’s Ice BearTM 50 technology. This company’s innovation is worth billions, but requires government regulation for electrical costs and must be negotiated utility by utility.
In the resource sector, our present global resource problems are going to continue for a lifetime. With the Internet, TV, and satellite communications, Earth’s 5 billion starving people are going to be increasingly frustrated with the 1.7 billion living well. It is our responsibility to find the pioneers of viable ground-breaking technologies so all can enjoy a full life.
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Tom Cain is founder and managing partner of SAIL Venture Partners. He contributed to "Best Practice for Energy Venture Capital in 2008," available from Amazon.com.
FROM Cleantech.com, a SustainableBusiness.com Content Partner
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