GreenBeat: Where will the VC money flow on the Smart Grid?

Venture capitalists and investment bankers are fascinated by the potential of making money from Smart Grid investments and initial public offerings in the coming year, judging from the latest panel at VentureBeat’s GreenBeat 09 event today.

In spite of a difficult IPO market and the recession’s drag on the industry, Smart Grid companies are starting to get attention from both VCs and acquisitive technology giants, according to the speakers on the Follow the Money panel, moderated by VentureBeat’s lead writer for GreenBeat, Camille Ricketts (pictured at podium).

Peter Wagner, a partner at Accel Partners (second from right), compared the Smart Grid opportunities to those on technology platforms such as Apple’s iPhone. He says the utilities are like the cell phone network owners, and platform owners such as Silver Spring Networks — which makes wireless networks that transfer data from smart meters to utilities — make it possible to create lucrative apps that exploit the Smart Grid. A lot of the future opportunities for startups will be in the apps, he said. These are equivalent to “offdeck” apps as with the AppStore.

Right now, Wagner said he is looking for companies that can exploit the platform and create apps that can be sold directly to consumers. As with the iPhone, that enables startups to sell directly to consumers and bypass the gatekeeping process of the utilities.

“I encourage entrepreneurs to think of a customer that is not the utility, since the utility sales cycles are long and they move slowly on new business models,” Wagner said.

He pointed to Opower, a startup that shows people how they can save money on their energy bills. The idea of building social networks around saving energy is likely to lead to startup opportunities, Wagner said.

Don Wood (pictured, middle) , managing director at venture firm Draper Fisher Jurvetson, said the DFJ Network has 70 investments in cleantech companies, including a number of Smart Grid plays such as Enernoc, Solar City, Deeya Energy in India, and Prudent in China. He said that investments in local smart grids could prove fruitful. He noted there are 100,000 villages in India without electricity and that an effort to provide rural electrification is needed and could prove lucrative. DFJ invested in Husk Power, which is doing that.

He also said that he believes killer apps in the future will be in the storage of electricity, either in central storage repositories at the utilities, in individual homes, or in charging stations for electric vehicles.

Breakthroughs in that area depend on better battery technology, which has been exceedingly difficult to do since batteries don’t progress as other technologies do, Wagner said. Wood also said network control systems also have to be developed for better storage.

Bryce Lee (second from left), managing director at Credit Suisse, said he believes investments in hardware are necessary and important in the initial building of Smart Grids, but future opportunities will focus on the communications and intelligence that the grid makes possible. He also pointed to Silver Spring as an example of this.

Brian Bolster (picture far right), managing director at Goldman Sachs, said that smart metering companies and networking companies are doing well. He said those new technologies will inundate utilities with a huge amount of data. There should be opportunities in the companies that enable the utilities to manage and make sense of the data.

“We’re in the infrastructure phase now, but derivatives that come from the infrastructure will follow,” Bolster said.

The U.S. federal government has made $3.4 billion in stimulus funds available to Smart Grid companies, either as loan guarantees or grants. But Wood said that isn’t having a direct effect on his investment strategy. That’s because he believes companies should be able to stand on their own without the regulatory help.

Wagner said the stimulus announcements have succeeded in accelerating the market and helped it recover from the recession-induced stall in the market earlier this year. But he warned that startups should not become enamored with the possible mirage of getting stimulus money.

The bankers and VCs didn’t seem concerned that it might be a long time before there are exits. Mergers and acquisitions will likely be plentiful. Wagner, who is not an investor in Silver Spring, said he believes there “have to be” ongoing negotiations between Silver Spring and Cisco about an acquisition. Other big information technology players such as IBM, Oracle, SAP, Siemens and Google are likely to be acquisitive in this market, Wagner said.

Wood noted that players such as General Electric have made 400 acquisitions in the past decade and that there would likely be more in the Smart Grid industry. Big players such as GE have to look for big new markets constantly to keep growing. Wood expects that one of DFJ’s companies, Tang Energy, will likely go public in the coming year as demand increases for its turbine blades for wind power.

“There will be IPOs in this space,” Wood said. Added Lee, “I’m optimistic that 2010 will be a good year for the public markets, and hopefully cleantech will benefit.”

It’s still pretty early for IPOs. But the successful IPO of cleantech player A123 Systems earlier this year has given investors hope that there will be more to come. Asked if shocks to the system, such as a drop in commodity prices for oil or conventional electricity, could hurt the prospects, the panelists said that most of their investments aren’t contingent on soaring prices for energy.

“We’ve reached a tipping point on electricity,” Wagner said. “It’s got momentum, regardless of the price of oil.” [Photo credit: David Lin]