Friday, October 2, 2009

Smart Money on the Smart Grid?

The Venture Capital business is a brutal one. The process can appear to be like Darwinian Natural Selection on speed, as venture dollars drive multiple entrants into an emerging space in hopes that as the weak are weeded out, their own investments will survive and thrive. At worst, there is cold comfort in the fact that the compressed timeframes will help them to identify their own latent failures more quickly so that they can cut their losses.

I was discussing this mechanism of investment acceleration yesterday with a colleague who does some later stage (profitable stable companies) cleantech investing, and he was remarking on the Klondike Gold Rush-like movement by some Venture firms into cleantech, and into Smart Grid startups particularly. The Smart Grid boom, in his view, is the first and closest child of the Internet boom. Biotech (another area of large investment) has been a very different model, with its long lead-times and eight or nine digit price tags. I had to agree. So much of the Smart Grid is looking like Soft Grid, and successful startups are bringing in management software, efficiency software, upgraded infrastructure and communications. It really does feel like the early days of the Internet, where technology startups faced relatively low costs to enter into a new market, where the existing infrastructure needed evolutionary enhancements pretty regularly, and where the established players were unlikely to step outside of the box to make those changes happen. In the Internet era it was telecommunications companies who provided both the enabling backbone and the lack of groundbreaking higher-level innovation that created the opportunity for entrepreneurs. Now it is the utilities' turn.

In sheer numbers, the investment is amazing. The Cleantech Group reported yesterday that the cleantech sector accounted for 27% of venture investing in the second quarter, which shows how enormous this wave is, totaling over $1.5B for that period. They also reported that many of the largest investments went to firms which were also leveraging Government funding dollars. So, what does this foretell?

It foretells a glut of new technologies, advancements, approaches, and failures. Larger organizations will be able to invest their own time and money on comprehending and capitalizing on the meaty part of the wave, while these new entrants stay at the crest, and either find the ride or the rocks as the industry approaches the first winnowing stages. Ordinarily, this kind of furious growth yields rapid progress, and markets and nations benefit from the rapid determination of good and stable solutions. Whether this will work for the Smart Grid is yet to be seen. The nature of power, and the economics of traditional utility finances can make this tumult and its turbulence a disaster.

Venture investors expect to see failures, their models assume them. The Government investors expect to see, well, whatever. The government is funding policy through technology.

Power providers and customers, however, can not be tolerant of too much instability, and so we hope that adoption of these technologies will remain proactive but prudent, regardless of the "energy" that all this investment may put into the grid.

Image courtesy of flickr :

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