Where are the energy unicorns?

 By Chris Dalby

Unicorns has become an increasingly popular term used to describe startup companies which reach a value of $1 billion. These are seen as exceedingly rare (hence the name) yet also help investors to identify the next companies to follow…

In recent years, the tech industry, with Silicon Valley leading the charge, has seen the majority of unicorns. Snapchat led the charge in 2017 by being valued at $24 billion after its IPO. However, while certain sectors seem to spawn unicorns with near-mythical frequency, the energy industry seems largely absent. A complete list of global unicorns published in 2016 by CB Insights listed just two energy companies, Bloom Energy, a California company whose solid oxide fuel cell has proven a hit among American corporate giants, and ReNew Power, an Indian renewable energy company with over 1 gigawatt of installed capacity. In comparison, healthcare had 14 unicorns on the list; fintech had 24 and e-commerce had 36.

Unicorns in the energy industry are therefore a rarity, but why is this? Innovation certainly doesn’t appear to be an issue. A number of companies in the US are offering the market or customers something they have not seen before. Choose Energy, in San Francisco, allows energy users to choose their energy supplier based on their energy source of choice (oil, natural gas, wind, etc.). This is one of the rare companies allowing people to literally pay for the energy source they prefer. Arctic Sand, founded at MIT, is making revolutionary strides in power conversion, developing chips that are 10 times smaller and 75 percent more efficient, than traditional models. Aquion Energy, out of Pittsburgh, has been one of the leading companies developing power storage solutions, despite a skeleton staff.

Arctic Sand technology is based on exclusively-licensed MIT patents co-authored by Arctic Sand’s founder and Chief Scientist David Giuliano

In many “hot” industries, innovations place a startup firmly in the crosshairs of investors, allowing it to rise and make its innovations market-ready. Yet this does not appear to be happening in the energy sector. For Petru-Santu Acquaviva, a business development and M&A manager at French utility company, Engie, there is a real obstacle for startups operating real assets, such as energy storage or renewable energy. “These companies are capex-intensive from day 1 of their development. A wind startup for instance needs to pay for development studies, land leases, engineering, equipment and more,” he explains.

These startups therefore have to compete for access to the same funding choices as others who may not have this significant drag factor. According to Acquaviva, funders may be reluctant to invest in such companies since the returns on offer may not match the actual risk the face. “The most innovative energy startups will not offer the same disruptive leverage as a pure tech startup, thereby hampering their optional return,” he says. For instance, a seed investment in Facebook would yield a near infinite return given the company’s low capex costs and its revenue generation. In comparison, investing in a startup that has an innovation set to disrupt the entire energy storage market still means paying for raw materials, engineers, salespersons and creating other elements of a supply chain.

Source: CB Insights

A second, even larger obstacle, is presented by utility companies who like to ensure that nobody pulls the rug out from under them. The power wielded by Duke Energy or Con Edison is such that any startup with the potential to affect them will soon face severe scrutiny. Protecting their turf is something utility companies have become very, very good at. A mixture of lobbying, regulatory requirements and deep pockets lend them a great deal of protection. As pointed out by the Huffington Post, “the utility industry is…heavily regulated. The heightened regulation also provides a barrier to entry for smaller entities thereby entrenching the utilities even more. For example an average utility is required to have cash reserves that most technology startups can only dream of. To bring to market a technology that would disrupt the utility business model would require a lot of money and a lot of time (sales cycles of close to 1.5 years).”

Another tactic of utility companies may at first glance actually seem to benefit energy startups. “Utilities remain, I think, key investors in energy startups, perhaps explaining their slow take-off as compared to their tech counterparts.” An investment by a utility may provide the capital injection an energy startup needs but likely at the cost of its flexibility. That capital injection may come accompanied by a sales-and-purchase agreement (SPA) so restrictive that the startup is left either straight-jacketed for further innovation or is restricted in finding other sources of capital. This setup means that that it is unlikely to see an energy company replicating the rise to fame of Uber, which disrupted the stagnant taxi business model.

KR Sridhar, co-founder and CEO of Bloom Energy, poses next to Bloom Energy power servers at eBay offices in San Jose, (AP Photo/Paul Sakuma - Source: LA Times))

Even when these acquisitions are not made by major energy players, success can still be quickly lost. When Google bought Nest Labs in 2014 for $3.2 billion, it was looking to give a boost to Nest’s smart learning thermostat and smoke detector. Two years later, things are not rosy. Bloom Energy, the only American energy unicorn on CB Insights’ list, sidestepped this by selling directly to large corporate clients. Its fuel cell technology has shaved up to 50 percent off customers’ power bills, and while this was unlikely to delight utility rivals, having a client list that includes Google, Wal-Mart and Apple probably helps.

But all is not lost. Peter Fusaro, Chairman of Global Change Associates and a pioneer in the understanding of energy financial markets, believes to dismiss the chances of an entire sector is too simplistic. Dismissing the idea that energy startups have struggled to reach high valuations, he points to several examples of the contrary. “There have been a number of strategic acquisitions of startups that reached maturity such as Opower by Oracle, Altenex by Edison Energy, and Renewable Energy Choice by Schneider Electric, to name a few,” says Fusaro, while adding that public equity markets are basically closed to startups and large energy companies are following the big pharma model of gobbling up the competition early.

These regulatory and market hurdles may not clear anytime soon but there are new pressures being felt. Finally, the energy sector always has a few surprises up its sleeve. “Cost reductions in capex budgets for both wind and solar are reaching grid parity, with those sectors no longer needing subsidies. But while most analysts continue to focus on solar and wind, which are more mature sectors, the spaces to watch are nanotechnology and energy storage,” concluded Fusaro.

SEE MORE: California’s cleantech revolution by Andrew Burger

about the author
Chris Dalby
Journalist. Editor. China, Mexico, Latin America, Asia, place branding, Olympics, oil and gas, mining, renewable energy, international politics.