I had the pleasure of attending a briefing on GTM's new ocean power market report
last week. In their report, the authors make a compelling case that ocean power (wave power, tidal power, etc.) is poised to see rapid market adoption, eventually taking a significant role in the green energy generation mix.
The findings also served to reinforce in my mind, however, just how challenging this sector and others like it are for venture capitalists.
Venture capitalists don't back entire markets, we invest in individual companies. So even when there is an attractive market such as this one, choosing the right company to partner with is critical. And thus comes one of the major challenges for this market segment: The fact that there are so many wildly different approaches being used to capturing power from waves and tides.
This is a point that the GTM report really drives home. They've done a terrific job of segmenting out the market and the early players, by technology and form factor. We see efforts using linear generators, rotary generators, floating devices, underwater devices, single large units, distributed smaller units… If you can dream it, someone’s trying it. Unlike in wind power, where the large three blade horizontal axis turbine has now become the standard format, what's clear is that there is no standard format yet in ocean power.
Furthermore, it seems the only thing these various approaches have in common is that they are capital intensive. In other words, they are all going to take a lot of venture capital or other financing to build prototype systems, and much more to fully commercialize their systems.
A variety of approaches to a big problem and a lack of an existing industry standard isn't by itself a big problem for VCs, in fact it can be an opportunity to back the company that eventually defines the standard. And certainly some venture capitalists aren't put off by capital intensity, in fact some may even find it attractive, based upon where some investors appear to be putting their money these days (although it's not my own favored approach). But when you have such an unclear market development path, and each bet is going to require significant amounts of capital before the investor learns if it'll be a dead end, the combination of these two factors takes it very difficult for venture capitalists to get comfortable around any individual investment. To invest tens of millions of dollars in the development of large prototypes and initial systems, only to find the market has gone in another direction, is not going to make a VC’s limited partners very happy.
Note that this is another example of where the needs of venture capitalists diverge from the needs of society. The growth of an ocean power market could potentially be a great win for green energy, so the GTM report was very encouraging to see. Furthermore, at this stage, having such a variety of approaches is very healthy, and bodes well for the industry’s ability to find an eventual winning solution. Finally, as we've seen in wind power, capital intensive clean energy technologies can still be very profitable for entrepreneurs and project financiers once the technology reaches a critical point of maturity. But expect VCs to mostly wait on the sidelines until there’s more standardization around a couple of key form factors. The current capital gap, therefore, would be better addressed by government and other funding sources.
Venture capitalists have made and will continue to make bets in ocean power, I’m just painting a picture with broad brush strikes here, so read these generalities accordingly. And some of the venture bets made in the sector will end up as winners, so I'm not trying to shut the door on an entire sector – in fact I already have one portfolio company which is developing solutions that could be applicable to this market.
I'm just using this as a good example of one attractive cleantech market that nevertheless presents a challenge for venture investors.