SAN FRANCISCO – “For the first four or five years, nobody called us. Now, the phones are ringing of the hook,” said Rodrigo Prudencio, director of business development, reciting a common joke that passes around his energy-focused firm, Nth Power Technologies Inc.
When Managing Directors Nancy Floyd and Maurice Gunderson founded Nth Power in 1993, “energy was barely a blip” on the venture capital radar screen, according to Prudencio.
Annual venture investing in the energy and utility sector has increased to $450.2 million in 2000 from $29.2 million in 1993, a 48% annualized increase, according to data from Venture Economics, publisher of Venture Capital Journal.
At the sector’s peak in 1998, energy companies attracted over 3% of the overall VC dollars, but VC activity has yet to grow to match the overall economy where energy expenditures represent 7% of the gross domestic product, according to the Energy Information Administration.
“We believe as a firm there’s going to be a significant market transformation in how power is generated for, distributed to and used by end users,” Prudencio said.
Prudencio said Nth Power invests in energy-related start-up companies focusing on one of three broad concerns: energy production, energy efficiency or energy-related software.
In 1996, the firm began investing its first fund, Nth Power Technologies Fund I, which did not hold its final $63 million close until 1998.
Fund I currently has 11 active investments, and three portfolio companies – Capstone Turbine Corp., Evergreen Solar Inc. and Proton Energy Systems Inc. – held initial public offerings between June and November of 2000.
In a much shorter time frame than its debut effort, the firm raised the $125 million Nth Power Technologies Fund II over the first nine months of 2000. Fund II has 13 active investments, some of which overlap with Fund I’s active investments.
The firm typically invests between $2 million and $5 million in series A and B rounds. Nth Power tends not to invest as angels or get involved with a company during research and development stages, preferring to develop management teams and refine products.
Besides the standard VC filters on deal flow, Prudencio said the firm is careful not to mistake a technology for a business and avoids companies whose business plans rely on short-term market phenomena, such as the power grid problems in California.
Nth Power also chooses companies offering a fit with their strategic investors which include: PanCanadian Petroleum Ltd., Itochu International Inc., Meridian Energy Ltd., Alliant Energy Corp., CNE Venture-Tech Inc., Norsk Hydro and Sierra Pacific Power Co.
Nth Power’s purely-financial backers include Bank of America Corp., Canadian Imperial Bank of Commerce and Lehman Brothers Inc.
Prudencio estimates that 65% of the firm’s portfolio companies are involved in either distributed generation and storage or communications control/information technology.
Distributed generation companies produce technologies that allow people and businesses to generate and store their own power through such means as microturbines, solar panels and fuel cells. Today the technologies are most widely used in business applications to provide back-up power, augment peak-use power and avoid using the power grid.
Distributed generation products have not gained mass-market home use, but Prudencio said the progression from sophisticated business applications to home use resembled the transformation that occurred in the telecommunications industry following its deregulation.
As an off-shoot of the popularity of information technology companies in general, energy-focused IT companies have also received VC attention. The most popular companies recently have been online energy exchanges, but energy IT companies might also provide software to facilitate communication between systems or to integrate new hardware.
Nth Power invests 25% of its capital in firms that outsource business services for the energy sector or in companies that manufacture end-user efficiency products. End-user efficiency products are typically energy-saving or energy-use monitoring devices, such as gateways on meters or smart-energy devices.
The remaining 10% of the firm’s funds are invested in power-quality companies or transmission-and-distribution automation companies. Power-quality companies build technologies to deliver highly reliable and un-interruptible power for critical business functions. Transmission-and-distribution automation companies supply updated technology for the conventional power grid infrastructure.
As the industry embraces deregulation, Prudencio said he expects more energy-specific VC funds being formed, more generalist funds making energy investments and more utility companies establishing venture arms. He thinks generalist institutional players will probably participate only in the later, less-technically-intensive stages.
Prudencio cited a few peers in the energy sector including Kinetic Ventures, Enertech, GFI Energy Ventures LLC, Arete Corp. and Energy Ventures Group. Discounting activities in online exchange companies, Nth Power has one of the few strictly-energy related portfolios.
The firm’s managing directors are Floyd, Gunderson and Tim Woodward, who joined the firm as a managing director in 1998 from Liberty Environmental Partners. Associates at the firm include Prudencio, Matt Jones and David Dreessen.
Dr. Robert Shaw, whom Prudencio called a founding father of energy VC particularly in the fuel cell industry, joined Nth Power early in 2000 on a limited, advisory basis. Shaw is the president of Arete Corp. and will become more involved with Nth Power as Arete’s funds wind down.
Shaw said he was getting too old to raise another fund and looked forward to working with Nth power at whatever capacity they need him.
As for the progress of Nth Power’s latest fund, Prudencio said, “Fund II is actively being invested,” adding that the firm was ahead of schedule on the “quality of investments” it had made to date.
Prudencio also said that Nth Power anticipates raising a new fund at some point this year.
Following are some of Nth Power portfolio companies:
Allconnect.com Inc. (Atlanta) offers a free service that helps consumers select and order utilities and communications services.
Other investors included Barnard & Co., Irving Capital Corp. and Southeast Interactive Technology Funds.
Inari Inc. (Draper, Utah) designs networking hardware and software products that transmit high-speed digital signals over AC electrical wiring and power lines, creating ways to connect the home using existing electrical outlets.
Other investors included Novell Inc., Odyssey Capital Group and Schneider Electric Ventures.
MainStreet Networks (Morgan Hill, Calif.), is an Internet gateway service provider (IGSP) that partners with utilities to put the entire home, all the devices in that home and all the people in that home on the Internet.
Other investors included Institutional Venture Partners, Crosspoint Venture Partners, Columbia Capital Group Inc. and Hydro-Quebec CapiTech Inc.
Metallic Power (Carlsbad, Calif.) develops zinc/air fuel cell power systems that make clean, safe power practical for a wide variety of commercial, residential, government, recreational and transportation applications.
Other investors included Arete Corp., Beacon Partners Inc., Hydro-Quebec CapiTech Inc. and Parseus LLC.
Nanogram (Fremont, Calif.) develops nano-sized proprietary materials for use in secondary batteries, enabling higher performance products in the optics, electronics and energy sectors.
Other investors included Venrock Associates, Bay Partners, Techno-Venture Co., Hydro-Quebec CapiTech Inc. and Fountainhead Capital Ltd.
Nexant Inc. (San Francisco) provides a spectrum of integrated energy technology and consulting services.
Other investors included Morgan Stanley Dean Witter & Co., Hellman & Friedman LLC and the Beacon Group.
Pentech Energy Solutions (San Diego) develops hardware and software to remotely monitor and manage distributed generation equipment and HVAC (heating, ventilating and air conditioning) systems.
Other investors included Enterprise Partners.
Silicon Energy (Alameda, Calif.) develops Internet-based energy technology software enabling enterprises and energy service providers to efficiently manage consumption, procurement and distributed energy assets.
Other investors included Red Rock Ventures, Peregrine Systems Inc., Integral Capital Partners, Stephens Inc. and JMI Equity.
TeamFuel (Huntington Beach, Calif.) contracts for outsourced liquid fuel procurement, fleet management and peak generation needs.
Other investors included Energy Ventures Group, DQE Enterprises and Garage.com.
Wellspring International (San Diego) provides fully-integrated water resource services and wireless water meter technology.
Other investors included Early Stage Enterprises LP.
Nth Power Technologies Inc. is located at 50 California Street, Suite 840, San Francisco, Calif. 94111. Tel: (415) 983-9983, Fax: (415) 983-9984. www.nthfund.com.
Source: Venture Economics and Nth Power Technologies Inc.