Energytech: A Portfolio Approach to Investing

Mayfield Fund News: 2nd Quarter 2009

In this issue:
» In the News
» Mayfield View: Navin Chaddha, Todd Kimmel, and Pedram Mokrian discuss Energytech: a portfolio approach to investing.
» Guest interview: Stanford professor James Sweeney discusses energy policy and market-related mechanisms.

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Mayfield View:

Energytech: A Portfolio Approach to Investing
Navin Chaddha, Todd Kimmel, and Pedram Mokrian

The energy industry has over $6T in revenues with very little innovation over the past 25 years. Global energy demand is forecasted to increase by as much as 45% by 2030. Meeting this new demand will command an estimated $26 trillion in supply-infrastructure upgrades. The venture capital industry invested over $8.4 billion globally in energy related opportunities in 2008. However, over sixty percent of that investment was in the support of renewable supply-side solutions such as solar and biofuels, which serve a very small fraction of energy needs. We believe that a portfolio approach across the entire lifecycle of energy generation, distribution and consumption is required to tackle the range, scale and scope of the energy challenges today.

In a phrase we want to bring technology to the energy industry. Here are some opportunities we see across the value chain in the energytech sector, a term we are using to describe the broad market:

• Consumption: there is need for energy efficiency solutions such as lighting, advanced building materials, intelligent demand management and control, and electrical device efficiency;
• Distribution: new energy distribution infrastructure, especially in developing countries, as well as a smarter, more nimble electricity grid worldwide. In addition, there is need for energy storage at both the grid and edge, and energy service providers who will manage the balance between supply and demand (as, for example, our latest investment CPower);
• Generation: there needs to be continued innovation in the development of renewable resources such as wind, solar and geothermal; as well as advanced exploration tools for new liquid fuel reserves and technologies for cleaner coal combustion.

In addition we see significant opportunities within the broader environment sector including water treatment, recycling, waste treatment, carbon capture, green chemicals, and bio-plastics.

Over the last 40 years, Mayfield Fund has witnessed and helped create paradigm-shifting IT companies. We believe that there is a similar dynamic at work in the energy market which has had very little innovation and where vertical integration is giving way to horizontal platforms. We see an opportunity for traditional IT entrepreneurs with engineering, materials, systems and scientific backgrounds to make an impact in the energytech sector. The investing model has to follow the principles that yielded decades of successful IT investments – capital efficient businesses that address a large existing market, with breakthrough innovations in technology or business models with very little dependence on regulations or subsidies (i.e. make economic sense on their own).

At Mayfield, we are adopting an end-to-end view rather than a one-off approach to investing in the energy sector. We are looking to partner with experienced IT innovators or new energytech entrepreneurs who have a passion for taking advantage of one of the most significant opportunities facing us today.

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Guest Interview:

Stanford professor and member of Governor Schwarzenegger's Council of Economic Advisors James Sweeney discusses energy policy and market-related mechanisms that will impact the energy sector.

James L. Sweeney, of Stanford University, is Director of the Precourt Energy Efficiency Center and Professor of Management Science and Engineering. He is a Senior Fellow of the U.S. Association for Energy Economics, a Fellow of the California Council on Science and Technology, and a member of Governor Schwarzenegger’s Council of Economic Advisors.

Mayfield: What would you consider to be the top three opportunities in the energy space?

James Sweeney: In general, I would say companies that can figure out how to market energy efficiency, including a new generation of lighting companies that can offer innovative lighting products. The introduction of zigbee enabled smart meters opens up new opportunities to exploit their capabilities for customer response, information feedback and smart management of appliances. Finally, there is a continued need for cost effective energy storage and battery technologies.

Mayfield: What are the emerging energy related policies that have the potential of making a significant impact on the business community?

JS: I think that we have a large number of opportunities in this sector if energy prices increase as a result of a price on carbon. Carbon policy will make a vast difference as it changes the price structure for everybody. More stringent building standards will place more impetus to changing the construction materials that are currently used. Similarly, efficiency standards for automobiles will push the envelope and will create a larger incentive for electric vehicles.

Mayfield: Do you see a role for market based mechanisms in addressing some of our energy challenges?

JS: More and more electricity markets are encouraging greater participation by the demand side, which is quite exciting. Markets for carbon offset credits, renewable energy credits and energy efficiency white certificates create financial opportunities for people to create novel business models. These markets will bring in more companies to help address the current market failures, by placing a price on the external costs that are not accounted for. Similarly, the proposed nationwide renewable portfolio standard (RPS) should have a trading structure to separate the "greenness" and sell it off from the generation component.