A share in the future

With the potential to disrupt the energy industry with their innovative technologies, it is start-ups that are helping power the energy revolution. But moving an idea from concept to reality has never been easy.

The opportunities for new approaches to the energy business have never been greater, yet energy start-ups – like most new businesses – often find raising up-front capital problematic. Many need little in terms of money or supplies at their inception since their ideas have gone no further than their computer hard drives. But the next stage, moving on from concept to prototype and on to the market, requires serious money to buy in expertise, equipment and premises. ‘Bridging the gap between the idea and the prototype, that’s the hard part,’ says Nicholas Flanders, CEO of California-based Opus 12, which developed a technology for turning CO2 into industrial chemicals.

In recent years, a specialised energy-investment community has sprung up that, like the innovators, faces increasing difficulty in identifying the areas that offer a profitable return in a market that is in flux. The only certainty in this approaching low-carbon world is that demand for electricity will increase.

‘Success stems from being able to envision an energy innovation’s benefits or contribution, to accomplish higher productivity or provide other products and comforts that can be monetised,’ states W Ross Williams, CEO of Alfresco Group in Denver, US. Basically, the marketing fundamentals apply: we don’t pay for energy, we pay for the benefits that energy provides. Energy is only one ingredient in the value chain.

Capital gain

Raising up-front capital is the first challenge. Start-ups have to answer a series of fundamental questions to the satisfaction of potential investors: Who is the customer? What is the problem? What is the solution and can it be monetised? However, Nelson Phillips, Professor of Strategy and Innovation at Imperial College Business School in London, explains that ‘if the start-up is trying to do something truly innovative then good information on customer wants and needs will be very difficult to come by.’

Valto Loikkanen, CEO of London-based Grow Venture Capital, notes, ‘The more ‘‘deep tech’’ things go, the harder it is to prove the thing works as explained or can be made to work.’ Unfortunately, new ideas or disruptive solutions find it hard to attract investors. Thermal storage is a case in point. Equally important, investors are not only investing in the product or service, but also in the leadership and the personnel of the start-up. One thing is clear – having leaders with the qualities and media presence of Elon Musk, Tesla’s CEO, can help attract investors, but to get buy-in, the skills and experience of the team members matter just as much.

Currently, many start-ups rely on financial backing from the European Investment Fund (EIF), and can continue to do so if partially located in an EU member state. In order to replace the EIF, after Brexit, a national investment fund has been proposed to help fledgling UK businesses compete worldwide. A Treasury spokesman said that it was hoped the new fund would ‘help cutting-edge British start-ups become world-leading unicorns’ – a term denoting recently launched companies that are valued at more than US$1bn. The US accounts for 54% of all unicorns globally, China for 23%, but the UK is home to just 4% – although it is the European leader in unicorns.

The other challenge is attracting interest in a potentially risky venture from a risk-averse investor. Lucius Cary, Founder and Managing Director of venture capital firm Oxford Technology Management, suggests, ‘It is important to remind such an investor that the gains could be large and the current tax relief is very generous at the moment for start-ups, with a new one created every hour in the UK.’

Where angels tread

An energy start-up can do much to improve its chances of success. Preparation is crucial. For instance, Quatre Ltd, a company offering innovative funding and insurance solutions for decommissioning of oil and gas fields, spent three years building a multi-skilled team able to deliver an investment and insurance solution that meets regulatory requirements. ‘Moving quickly and being willing and able to adapt and evolve is the foundation for success,’ states Professor Phillips.

Obtaining the right business angel – an affluent individual who provides capital for a start-up – helps. ‘Many angel investors provide critical access to networks, connections to potential customers and business experience that the entrepreneur may lack,’ the professor adds. For example, Shell Technology Ventures supplied capital and knowledge of customers in the Persian Gulf to California-based GlassPoint, manufacturer of solar steam generators for oil and gas companies. 

Moving quickly and being willing and able to adapt and evolve is the foundation for success

Dynamic disruption

The pressures on companies to innovate have never been greater. Therefore, for many companies outsourcing is necessary since, as Valto Loikkanen observes, ‘it’s harder to come up with disruptive innovations in-house so most internal innovation is iterative.’ Therefore, an increasing number of large energy investors choose to make a stake in fledgling entrepreneurial energy businesses. For instance, some of Europe’s largest energy companies, including Germany’s Innogy and France’s EDF have created venture capital funds totalling some €1bn to be invested in or buying into often-disruptive innovations from start-ups.

For their part, large organisations also have many complementary assets such as market knowledge and distribution channels that are crucial for marketing innovatory products and services. French-owned energy company Total brings its distribution and sales expertise to its interests in solar PV maker SunPower and battery company Sunverge. Outsourcing helps large energy companies to keep ahead in a turbulent marketplace characterised by sustainability, costs and productivity concerns.

‘To succeed, start-ups need imagination, luck and business skills. Fortunately, starting up an energy company is becoming cheaper for both software and hardware-based entrepreneurs,’ says British-born, US-based Venture Capitalist Paul Graham. What is clear is that innovation can mutually benefit not only the start-up, but also potential stakeholders including energy giants, institutional and individual investors.