Digital Energy: Science Is Cool Again for Venture Investing, But This Time It's Different...

Science is back. Not that it ever really disappeared, mind you, it's just that sometimes the astounding capabilities that can be harnessed are not always commercially viable. Which is not all that different from any other innovation.

But the point is that things have both eased and tightened sufficiently to foster more interest in exploring what might be done in this very large space.

They have eased to the extent that the broader economy has made technologically enhanced devices of interest to consumers interested in improving their lives while managing the expense of doing so. They have tightened, as the following article explains, because the app world and its extensions has simply become so congested that few can make a breakthrough, let alone make money.

There is also an element of growing self-knowledge in this. An awareness that despite tech's - and venture capital's manifold extraordinary successes - there are some things it does optimally. And some it does not. So that investing in those, like digital energy, which is about identifying, aggregating and managing data, can make a lot of money because it relies on processes from which vast profits have been wrung before, meaning easier learning curve, bigger margins and a greater chance of goal achievement. Deductive reasoning meets opportunity. JL

Katie Fehrenbacker reports in GigaOm:

The resurgence has more to do with the consumer web space becoming insanely crowded with a wave of startups, as well as a recent “correction” away from avoiding all things related to cleantech over the last couple of years.
Science innovations are back in vogue for Silicon Valley investors. The trend can be seen via a series of investments by firms mostly associated with backing consumer web companies now putting small rounds into more hard core science tech startups, like those building new modular nuclear reactors, or new space ventures.
But we should keep this trend in perspective. The resurgence has more to do with the consumer web space becoming insanely crowded with a wave of startups, as well as a recent “correction” away from avoiding all things related to cleantech over the last couple of years. Basically, there’s been enough distance from the VC-backed huge disasters like Solyndra and Fisker (though there are still more out there) that investors are starting to dabble in this space again. It’s also just the natural way that trends ebb and flow (see Gartner’s hype cycle).

As the New York Times noted, venture capitalists put $1.24 billion into industrial and energy startups in the first half of 2014, which was more than twice as much as in the period a year earlier. However, in reality, this isn’t all that much funding. In 2008 — at the peak of a cleantech investing bubble — there was $4.64 billion invested in industrial and energy startups.

Most think that size of “bubble” will never be repeated again for energy startups. Most venture capitalists now realize the difficulty of investing in energy infrastructure, like solar and electric cars, and those new companies that are getting funded are actually often times getting very small (experimental really) amounts. Nuclear startup Transatomic raised just $2 million from Founder’s Fund, which is a drop in the bucket on the way to commercializing its technology. Likewise nuclear startup Helion Energy raised $1.5 million from Y-Combinator and Mithril Capital Management.

But for most investors that backed cleantech companies through the bubble, and are now figuring out their strategy post-bubble, if they want to keep investing in cleantech-like companies, they’re — more often than not — turning to digital energy companies. Those are companies that make energy software, water management software, and other web and mobile technologies and big data tools that can manage resources more efficiently. This trend has been happening for awhile, with some groups calling this “cleanweb,” and some calling it digital energy.

A metallic case called a hohlraum holds the fuel capsule for NIF experiments. Target handling systems precisely position the target and freeze it to cryogenic temperatures (18 kelvins, or -427 degrees Fahrenheit) so that a fusion reaction is more easily achieved.

I had lunch earlier this month with Steve Westly, of the Westly Group, which has been investing in cleantech companies since the beginning, and which invested in Tesla Motors. If a firm has backed Tesla Motors, the clout is the equivalent of being an investor in Facebook, or Google or even Apple for the cleantech space (though probably the returns are different). It’s the hottest company, hands down, to come out of the cleantech bubble.
But even investors in the hottest cleantech company around are not really repeating that strategy. They realize how risky, how difficult, and how capital intensive these companies can be. Westly told me during lunch that the Westly Group is really excited about investing in cleanweb, and that it has mostly moved on from making those types of energy infrastructure deals that were done back in the bubble. The firm doesn’t really even use the term “cleantech” anymore when it is talking about its portfolio and future deals.

SolarCity panels, image courtesy of SolarCity.

Draper Fisher Jurvetson — which also backed Tesla early on — is likewise also much more focused on a digital strategy around energy. DFJ didn’t just back Tesla, but also another huge win in cleantech, SolarCity.
So essentially even the VCs that had big wins in cleantech aren’t continuing that same strategy. And I think these new investors in nuclear startups and other science companies, outside of energy, know this and will continue to only make small investments in these types of firms.
The resurgence of science investing won’t be a repeat or return to the cleantech bubble, as I’ve seen some headlines claim. Long gone are the days where major firms will invest a third of their funds on big capital intensive infrastructure plays (like Kleiner and Khosla did years back). As we now know, it’s just not a smart investment strategy for venture capitalists.