The venture capital industry has seen a proliferation of incubators and accelerators in recent years, aiming to make it easier for tech start-ups to access capital and come to market. These have been particularly beneficial in regions far away from the East or West Coasts, where tech entrepreneurship has historically lagged.
It’s becoming clear that programs with connections to legacy industries such as energy that are eager to innovate have an edge on competitors without these relationships. Strategic limited partners are not only expediting start-ups’ development processes, but also providing practical feedback allowing founders to fine-tune product-market fit.
In Tulsa, Oklahoma, three fossil fuel-based energy companies – Devon Energy Corp, Oneok and Williams Companies – are among the founding partners of the Rose Rock Initiative, which runs both an incubator and venture fund aimed at jumpstarting an innovation economy in Oklahoma’s second-largest metro area. The three energy companies are also the leading allocators to these programs.
The incubator, called Rose Rock Bridge, supports energy technology start-ups by providing nondilutive cash awards of $100,000 to founders who agree to build their companies or locate significant operations in Tulsa for at least a year. The program also offers office space and access to support services such as legal, marketing and consulting.
The VC fund, EIC Rose Rock, is an early-stage vehicle managed by Energy Innovation Capital that makes strategic investments in new companies. Launched last year by Tulsa Innovation Labs, the venture fund and incubator are part of an effort to stop technology brain drain from the state, as well as attract more tech founders from elsewhere. Tulsa Innovation Labs was created by the George Kaiser Family Foundation (GKFF) to accelerate the development of an innovation economy in Oklahoma.
As of July, EIC Rose Rock had closed on $37 million of its inaugural fund, including from Devon, Oneok, Williams Companies and GKFF. The fund, which is targeting $50 million, is in talks with six other energy corporates in Oklahoma and has reached out to several energy-related family offices in Texas to secure the remaining $13 million of commitments. Managing director David Clouse told Venture Capital Journal the fund is targeting a final close by the end of the first quarter of 2024 and could raise up to $75 million if demand is strong enough.
“But a $50 million fund isn’t going to change the world, so we need to garner co-investors,” Clouse said. He’s tapping the network he built over 16 years as an investment manager and later venture principal at oil and gas company BP “to bring world-class investors to the table with these other investors who can impact Tulsa.”
Clouse has spent a fair amount of time educating would-be investors about the venture business. “We’re sharing some of our investment memos with people who don’t normally do venture capital and teaching them how to value a start-up company that doesn’t have revenue yet,” he said.
None of the seven investments that EIC Rose Rock has made to date are based in Tulsa, but four of the companies are joining the Bridge program and moving portions of their operations to Tulsa, Clouse added.
Not being cohort-based is another competitive advantage for the Bridge program, allowing it to accept start-ups whenever they are ready.
In addition to giving founders more flexibility about when and where to move and scale their companies, it lets Rose Rock Bridge “choose the best of the best,” said Jennifer Hankins, managing director of Tulsa Innovation Labs. Focusing on filling a cohort “can be limiting because some really talented entrepreneur may be finishing another program across the country so may not be able to join that cohort, and then you miss out on that opportunity.”
One of the first to join the Bridge program is Safety Radar, an AI-driven platform that collects data about local weather, client companies’ operations and worksite behavior, and displays it on a dashboard for any user to see and manage the risks at any worksite. On a more basic level, the company’s machine learning model has digitized the Occupational Safety and Health Administration (OSHA) reporting process to make it easier for operators.
Although Safety Radar isn’t a traditional energy technology company, its applications have major implications for the energy industry, said Kastle Jones, managing director of Rose Rock Bridge. “Given that they all have operational sites, safety is a huge priority for them.”
After meeting Rose Rock’s corporate partners early on, Safety Radar’s founders were introduced to their first paying pilot customer and presented their minimum viable product (MVP) at the third advisory board meeting.
“Now they’ve got an MVP, a first customer, and were able to present all of that after less than six months [in the Bridge program],” Jones said. “By the end of the year, hopefully they’ll be in a position to receive more funding and be able to grow their team. They’ve already made their first hire here in Tulsa. And then having access to partners like EIC Rose Rock and others will help to continue to guide them.”
Meetings that EIC Rose Rock arranged with the heads of the three corporate partners’ technology teams gave Safety Radar CEO and co-founder Garrison Haning feedback about what customers are looking for, how much they are willing to pay and how to build a product that can compete with something that customers already use.
Safety Radar initially designed the platform for static use cases in factories and warehouses and didn’t consider energy companies’ dispersed operations, which include trucks out in the field and pumping stations.
“A lot of the input they gave us was, ‘As you’re building this, be sure to think about how we incorporate this across the full footprint of the company,’” said Safety Radar co-founder and chief operating officer Matt Weis. “Perhaps the people out in the field don’t have cellular service, they may not have Wi-Fi, so how do we technically build around that?”
Before joining the Bridge program, “We were cold calling individual customers, trying to get meetings on the books, trying to do customer discovery that way,” Weis added. “With Rose Rock Bridge, we have a direct line to those corporate partners. If we need input, there’s no hesitation. We already have their phone numbers. We can call over to Devon or Oneok, get their ear, get their input. It allows us to move a lot faster.”
Haning and Weis would not have had access to the same level of people “as two guys on their own in any other accelerator,” Clouse said.
Safety Radar’s pilot program with its first customer, Tulsa-based SNR Compression, will run for about three months and allow the company to test its product in a real setting. The company will then be able to take on additional pilot customers over the next half-year, opening paths to raise venture capital or outside funding.
Talk about the weather
Salient, which joined EIC Rose Rock’s portfolio this summer, expects the VC fund’s relationships with limited partners in the energy sector and knowledge of the industry to help it establish, with customers, multiple pilot programs that will strengthen its proof of concept and lead to commercial contracts.
Salient’s software predicts extreme weather events weeks and months in advance by tracking temperatures and salinity on the ocean surface, soil moisture levels and other weather inputs, with the aid of government satellites, weather balloons, in situ sensors and ocean-based buoys.
EIC Rose Rock participated in Salient’s $3 million funding round in June, and the Boston area company joined the Rose Rock Bridge accelerator program the same month. Capital from those relationships will help Salient expedite its work in the energy sector, where it already had a couple of contracts before engaging with the fund manager, Salient co-founder and CEO Matt Stein told VCJ. In the few months since the deal closed, Stein said he’s seen how EIC Rose Rock has been able to open doors to some of its LPs for energy use cases.
EIC Rose Rock’s understanding of how its limited partners’ businesses are exposed to the weather crisis has enabled Salient to map out its pilot programs. The company is also starting to apply its technology to commodity trading, where EIC Rose Rock has relationships with business leaders.
Targeted meetings the fund’s managers have coordinated with LPs have allowed Salient “to calibrate which parts of those businesses are most exposed and most ready to look at potentially adopting our technology,” Stein said. “We’re working closely with them to scope out those pilots. EIC [Rose Rock] has been involved at every step of the process.”
Even before establishing ties with the fund manager, one of Salient’ key scientific advisers was Dr Jason Furtado, who heads the Applied Climate Dynamics Group at the University of Oklahoma’s School of Meteorology at Norman, two hours from Tulsa. Funding from the June round and the Rose Rock initiative enabled the company to hire one of Furtado’s PhD students, who is now based at EIC Rose Rock’s facility in Tulsa.
Some of EIC Rose Rock’s other investments are directly helping its corporate energy partners support the transition to clean energy. Because hydrocarbons are likely to be part of the energy mix for the next 20-30 years, the fund has sought companies that will enable legacy energy companies “perform while they transform,” a mantra that Clouse brought with him from BP.
The fund’s investment in Canada-based Aurora Hydrogen was based on the company’s developing an alternative method for producing hydrogen that doesn’t compete with the natural gas that its corporate LPs currently sell, Clouse said. Methane pyrolysis uses microwave energy to heat natural gas in the absence of oxygen and water to produce hydrogen free of CO2 emissions.
“We chose methane pyrolysis because it offered this opportunity for our LPs who have half the natural gas molecules in the nation to sell additional natural gas and use those natural gas resources that they have to create hydrogen,” Clouse said.
Another portfolio company, Captura, uses renewable fuel-based electricity and ocean water to reduce and sequester atmospheric CO2. EIC Rose Rock participated in Captura’s $13.5 million combined Series A-1 and A-2 round this past April. Saudi Aramco, a co-investor in Captura, is leading the effort to install the company’s technology in its desalination plants across the Middle East, while Norway-based Equinor is at the forefront of using the technology to turn decommissioned offshore oil and gas platforms into offshore carbon capture facilities, Clouse said.
The fifth to last paragraph has been revised to reflect the correct title for Dr Jason Furtado at the University of Oklahoma.
This is the third in an occasional series about new and growing venture markets outside of Silicon Valley. Read our report on the broader Oklahoma market here and our feature about Columbus, Ohio, here.