Catching a breeze

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Published March 28, 2008 at 12:00 PM

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A gathering wind is helping to propel the shift toward clean energy production.

Indeed, although the market for wind-generated electricity is nascent in North America, the wind industry is an attractive area for project finance and structured-debt deals, particularly compared with biofuel development, which has been hit hard by the volatility of feedstock prices.

But as an industry dependent on working with traditionally stodgy public utilities, and with technology dominated by a "Big Five" (some of the largest industrial companies in the world), the wind sector has been a tough nut for venture capitalists to crack. Of the record $2.5 billion invested in 159 renewable energy deals in the U.S. in 2007, only $32.8 million, or 1.4%, went into wind energy, according to Dow Jones VentureSource. That places the category below obscure cleantech sectors such as treatment processes, recycling and industrial products and growth.

Thanks largely to government subsidies, the sector has fared marginally better in Europe, drawing ¤14.3 million ($22.2 million) in venture investment in 2007, accounting for 6% of cleantech investment, but still lagging far behind the dominant sectors of solar, biofuel and transportation.

As the wind energy business begins to take shape, a handful of venture capital firms--early investors in the proverbial early adopters--are seeking deals in niche wind products and services, and they are confident that, as in all technology-heavy industries, such innovation will drive innovation.

Velocity Venture Capital
One such pioneer is Velocity Venture Capital, which despite its forays into cleantech, continues to maintain its traditional focus on dealflow in information technology and life sciences. Founder and general partner of Velocity, Jack Crawford Jr., says the firm's location in Folsom, Calif., has helped the firm capitalize on the region's growing concentration of academic, government and industrial resources to build a significant business in clean technologies. "There is a lot of innovation being done here in cleantech because of the University of California at Davis and the impact of government regulation at the state level, and because of the support CalPERS [California Public Employees' Retirement System] funds," says Crawford. "All these factors put this region in the position to establish a leadership position in cleantech."

Velocity raised its second venture fund of $17 million in 2006 with a mandate to look for transactions in wind energy. But after attending an industry financing conference, Crawford realized there was little opportunity for early-stage venture investment in traditional wind energy development. Shopping close to home, however, Velocity discovered a local entrepreneur affiliated with the UC Davis California Wind Collaborative Initiative, a partnership between the university and the California Energy Commission aimed at fostering wind power in the state, who had developed a type of wind turbine suited to rooftop installation. Marquiss Wind Power was born.

"We hooked up with a local inventor, Case van Dam, who is an expert in wind patterns, and he was in the process of filing a patent for a turbine to take advantage of the turbulent atmosphere of rooftops, where wind speed increases as it goes over the top," Crawford says. "We helped form the corporate entity and built out the management and incubated the company in our offices."

In January, Velocity closed a $1.6 million Series A round for Marquiss, joined in the deal by Strategis Early Ventures of El Dorado Hills, Calif. Today, Marquiss uses the money to go to market with ducted wind turbines that gather multidirectional wind flow created around tall buildings. The company will sell its products to building owners and operators, with a sweet spot in facilities with large, 24-hour power requirements, such as hospitals, hotels and casinos. The technology is geared to the same market as distributed solar energy systems but has a potential payoff period of as little as two years, comparing favorably with solar installations, Crawford says.

Marquiss is still developing its business model and may explore distribution deals with resellers. One possibility is to operate small electrical grid systems in business parks or campuses, selling excess capacity to the local utilities.

Meanwhile, Velocity is raising a third fund targeted at $60 million and planning additional investments in wind energy. "From the standpoint of innovation, I'm sure there is opportunity, but the industry is dominated by big companies," Crawford says. "In the centralized segment, there is a lot of investment in innovation by the incumbents, but there is also a lot of opportunity in small wind and room for new companies."

Good Energies
As a unit of the Swiss retail and holding company giant Cofra Group, Toronto's Good Energies is a deep-pocketed investor in a broad array of renewable energies. The firm was named the top clean energy venture investor for 2007 in league tables published by market researcher New Energy Finance, with a total of $100.6 million invested in 20 deals. But the firm has emphasized wind energy development, putting its financial clout to work in backing equity investments for wind power project startups as well as enabling technology and services for the wind energy industry.

Good Energies managing director Jean-Louis Brenninkmeijer says the firm makes venture investments in solar, green building, load management and wind technologies as part of a focus on renewable energy sources established when it was formed in 2001. The firm has a mandate to invest $350 million a year in clean energy and a project finance and development arm that invests in wind projects, among other areas.

Good Energies also maintains a separate wind technology group that makes direct venture equity investments in startup developments and enabling technologies. All of the investments from the wind energy group are equity investments, and while the firm will use its connections in the industry to source and secure supplies of turbines and other equipment for wind development projects, it views them as venture investments with a clear path to exit. The firm already created and sold G3 Energy LLC to Babcock & Brown Ltd., a global investment and asset management group based in Sydney, for an undisclosed amount in 2005 after amassing a portfolio of wind development sites. More recently, Good Energies last July sold developer Ventus Energy Inc. to Suez Energy North America of Houston for $124 million.

Good Energies also has venture investments in three other wind generation development companies--Sequoia Energy Inc. of Winnipeg, Manitoba; Everpower Renewables Corp. of New York; and Eolectric Inc. of Longueil, Quebec. In addition, the venture firm has invested in wind-related companies 3Tier Environmental Forecast Group of Seattle, which specializes in assessing and forecasting the availability of weather-driven renewable resources, including hydro, solar and wind; and Second Wind Inc. of Somerville, Mass., which provides electronics and software for the utility-scale wind energy industry.

Brenninkmeijer says venture investment in large-scale wind equipment has been difficult because wind turbine manufacturing is dominated by Germany's Siemens AG, General Electric Co., Japan's Mitsubishi Heavy Industries Ltd., Suzlon Energy Ltd. of Mumbai and Randers, Denmark-based Vestas Wind Systems A/S, but that shortages in recent years allowed for venturebacked upstarts, including now publicly traded Clipper Windpower plc of London, to enter the market.

Despite such competition, fertile areas remain for wind startups to focus on. "There are opportunities for technology innovation, particularly in smaller-scale wind, and with the problems of intermittency and improving the performance of turbines with different generators and blade design," Brenninkmeijer says. "Certainly, from a project development side, as the industry matures, it is getting away from venture capital to private equity and even utility financing, but we see a lot of dealflow in technology to improve existing technology."

Brenninkmeijer says the large companies addressing the utility-scale market have done a good job of maintaining active internal research and development programs to keep up with innovation. As such, he expects the greatest investment opportunities to be in small-scale wind power.

RockPort Capital Partners
As an executive at Kenetech Corp. from 1991 to 1995, Hap Ellis helped build the San Francisco wind energy company into one of the most successful multiproject developers in the industry, providing him a bird's-eye view of the web of government subsidies and tax incentives, utility deals and project finance arrangements that currently constitute the world of large-scale wind generation.

So after joining the merchant bank RockPort Capital Partners of Boston in 1998 and helping found the firm's venture capital fund in 2001, he had no illusions about the role of venture capital in the industry.

"There is a pretty good and well-developed project finance structure in the wind industry, so we don't compete on the project side," Ellis says. "We have focused on technology in power electronics and turbines, and there is always opportunity. But the concern we would have is that big companies have the market and you have to be big to work with them."

Ellis says that since the beginning of the 1990s, utility-grade wind energy generation has focused on creating bigger and bigger machines, making it difficult for startups to compete in the area. "Wind is dominated by GE and Siemens and other companies that sell stuff for $1 million a unit, and it is very different from solar, which has had many VC-backed companies that have created a great deal of wealth," he says. "If you look at the whole value chain in materials, inverters and so forth, VCs may look for entrepreneurs with some opportunity upstream, but even there it is more likely to be a private equity play for growth equity in an established company that might provide a 2 to 3 times return."

RockPort has one investment in the wind power area, and Ellis expects the firm to intensify its focus on small-scale wind development. The firm in 2006 invested $8 million in a Series C round in Southwest Windpower Inc. and reinvested in a $6.5 million round last May.

Flagstaff, Ariz.-based Southwest has been developing small wind generation systems with a capacity of 300 to 400 watts for 20 years and has produced more than 100,000 generators for homes, telecommunication transmitters, offshore platforms, water-pumping systems and sailboats. Ellis says the company has proven that there is a market for generation systems for use in areas not served by the electricity grid and also as supplementary generation tools.

In late 2006, Southwest introduced a residential grid-connected wind generator it believes is competitive with the retail cost of electricity, particularly with federal tax incentives now in place that promote wind power. --Clifford Carlsen

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