I've heard many cleantech investors say some version of the following: "Don't invest in any company that's totally dependent upon utilities as its customers."
The admonishment reflects a basic fact -- utilities move slowly. Terribly slowly. They move in "utility time", where purchasing decisions are made slowly, if at all.
I spoke with one entrepreneur lately who had been working with a utility to be included in a rebate system, and now looked to be locked out. When the entrepreneur spoke with a sympathetic exec at the utility, the answer was "oh, we know you should be included, but that's okay, you can just re-apply in six months."
Six months is an eternity to a startup. That delay could be deadly.
When I talk with entrepreneurs who are looking to work with utilities as a customer or as a channel, I urge them to look at other models. I see entrepreneurs get very excited about being included in a beta installation -- a few homes or a subdivision. The entrepreneur is often viewing this as a two-step process: If we prove ourselves out in the beta, then we get a big rollout opportunity. But what they don't know is that the beta will be done on Utility Time, and thus it'll be a couple of years before it is deemed a success or not. And even then, the response might be "Great, we'd now like to include you in a slightly larger trial project."
The cleantech startup landscape is littered with the carcasses of cleantech startups who had been successful at landing utility betas... and then ran out of cash while waiting for the promised large-scale rollout.
Thus, many cleantech investors learn to avoid investing in startups that are directly dependent upon utilities for success. But insidiously, the government dollars flowing in the sector are having the effect of EXPANDING the influence of utilities upon startups. These dollars often go into rebate programs and demonstration projects, which are basically expanding Utility Time to cover even more of the sector.
If a rebate program or a demonstration project is given federal dollars, the utilities are going to be a critical decision-maker, and often THE critical decision-maker, in determining who gets to be included. And they make their decisions in Utility Time. And they don't always make the right decisions to begin with.
There's an institutional bias at utilities against emerging technologies, for example. In an earlier part of my career, I was a consultant for electric utilities, and worked closely with senior execs in that industry. Good folks, well-meaning folks, often very dedicated individuals. But totally disincented to put their careers on the line by trying anything new. Even if "new" wasn't really that new. Cost savings are nice, but keeping the lights on and avoiding customer complaints were more important.
Let's see how this might play out: The cleantech VC puts in an investment into a company that isn't going to be selling to utilities. Let's say it's an energy efficiency technology sold to industrial customers. The economics are compelling. And then the local utilities are given significant rebates to encourage energy efficiency. Great, right? Not unless the VC-backed company is quickly included in the program. Otherwise, there's the scenario where someone at the utility decides that alternative approaches are given rebates, but the new tech isn't included in the rebate program. All of a sudden, the startups' compelling economics don't look so compelling when a lesser technology is granted rebates but the startup isn't.
Yes, this is suboptimal -- the utility sees less energy savings when lesser technologies are encouraged by selective handouts, and ratepayers therefore see higher costs. But that's not an unusual scenario, it happens all the time.
Or take another scenario, where the startup is happily included in the rebate program -- but the program isn't actually started for several months while the utility coordinates with other utilities or perhaps works through a regulatory approval process. Well, in that case, why would potential customers sign up for the startup's products or services before the rebate program kicks in? And so the startup experiences months of delay, thanks to the "good news" of being included in the program.
Again, delays can be deadly for startups.
Cleantech investors need to be aware of these and other ways that utilities insinuate themselves into the day to day operations of cleantech startups.
And utility execs need to understand this dynamic, and need to engage cleantech investors and startups to make sure that these obstacles aren't standing in the way of their corporate progress. Because at the end of the day, state public utility commissions are going to be asking "why did our ratepayers end up not seeing the energy savings they could have, and was it because of delays caused by utilities?" And "We tried, but we were too slow" isn't going to be an acceptable answer.
Utility execs need to talk with cleantech investors often. Otherwise, the road to energy hell will be paved with good intentions.