Green energy in the "valley of death"September 24, 2012: 11:58 AM ET
Broadscale Group wants to help fledgling alternative energy ventures make it through dicey times.
By Brian Dumaine, senior editor-at-large
FORTUNE -- A lot of promising startups in the green energy field get stranded in what venture capitalists call the "valley of death." These companies may have great technology but can't put together the capital or partnerships needed to scale. (By contrast Internet companies, which aren't nearly as capital-intensive, can grow much more quickly and easily because it costs almost nothing to produce each additional piece of software or app.) Broadscale Group, a new kind of investment company, hopes to change all that by helping these fledgling companies make it through the most dicey periods.
According to Bloomberg New Energy Finance, a record $260 billion was invested in clean energy in 2011, yet commercialization challenges persist for new companies due to uncertain public policy as well as basic economics. (The cheap price of natural gas is hurting alternatives like wind and solar.) Many big corporations have long had their own venture capital arms to search for new technologies, but results have been mixed. It's risky, time-consuming work to sort through the thousands of startups out there. Broadscale's idea is create a central clearinghouse where startups are vetted and then pitched to big corporations looking for the next hot thing.
Founder and CEO Andrew Shapiro, who previously launched the consulting firm GreenOrder, which among other things helped General Electric (GE) launch its ecomagination initiative, says: "The small companies will love it because they'll get access to the big players with deep pockets and access to markets. The corporations will like it because we'll save them all the time-consuming shoe leather."
Shapiro points out that corporate investment in the green energy field is ramping up but in a scattershot way. Chinese conglomerate Wanxiang Group recently invested $420 million in Greatpoint Energy, which has a technology to convert coal into cleaner natural gas. It is now trying to buy electric-car battery maker A123. Monsanto participated in the $144 million investment into an algae fuel maker, Sapphire Energy. According to the research firm Cleantech Group, five of the top 10 venture deals in Q1 had corporate participation.
Broadscale, which launched this week, wants to systematize that process. It has created a network of large power and utility companies -- including Duke Energy (DUK), General Electric, National Grid, and others -- to invest in and help commercialize new technologies and services created by growth-stage companies. "Technology is key to Duke Energy's mission of delivering affordable, reliable, and cleaner electricity," said Jim Rogers, Chairman and CEO of Duke Energy. "We believe this network approach can help us to cost-effectively identify and benefit from promising new energy solutions."
Proving that it is serious about the companies it pitches to the big guys, Broadscale will take an equity stake in the startups and to avoid any financial conflict of interest will do so only after its members have had an opportunity to invest. Pegasus Capital Advisors, a $2.7 billion private equity fund manager, has joined the network and will provide capital from its current fund to back opportunities identified by Broadscale.
One challenge facing Broadscale: why would competing companies want to share the next, hot, new thing? Shapiro says that he is starting out mainly in the regulated utility sector where companies really don't compete with each other. How he handles this issue once Broadscale grows is yet to be seen, but a problem that Shapiro probably wouldn't mind having.