Nancy Floyd is managing director and co-founder of Nth Power Technologies, a venture capital firm dedicated to making early-stage investments in energy-related companies. Its most recent fund was the $120 million Nth Power II, which closed last October.Prior to Nth Power, Floyd founded NFC Energy Corp., an independent power company utilizing advanced technology developed by NASA and Sandia Labs. In 1984, she helped found PacTel Spectrum Services, a network management company for private voice and data networks that is a subsidiary of Pacific Telesis.
Lets start with California. How dire, if at all, do you consider the current situation to be?
I consider it to be very dire, and you can?t necessarily blame deregulation for the situation California is in. The state has a basic supply and demand imbalance, and the power problems there would have occurred irrespective of deregulation. You lay that on top of a deregulation model that is fundamentally flawed, and you?ve got a recipe for disaster. This summer is going to be a mess in California, and it?s going to have a serious ripple effect throughout the Northwest.
Why are we seeing so many problems in California compared to other states with deregulation?
California has very stringent permitting and environmental rules, which means that there has not been a major power plant built in the last 15 years. Second, the technology boom has contributed to a very rapid and somewhat unexpected increase in electricity usage.
The short-term solution is a combination of very aggressive conservation and rapid deployment of what I call distributed generation, or very small on-site generation. So I think if we go down both that supply-side path and the conservation path, California will eventually be fine.
Do you think we?ll see any new power plants in California?
No way. I don?t think so in California, and I don?t think you?ll see them built up anywhere in this country.
Since the power crunch began, has your firm seen a significant increase in energy-related deal flow?
Yes. It?s exploded, and I characterize it in two ways. First, there is certainly more quantity. I think our deal flow has about doubled in the last nine months. Secondly, we?re seeing more and more management teams that are experienced and have a track record in another industry and have decided that the energy sector is interesting and potentially profitable enough that they?ve decided to try their hands at it.
When you raised your initial fund back in 1996, you said it was difficult raising capital. Do you think the historic lack of VC interest in the energy sector has contributed to California?s current problems?
It?s not really a question of funding so much as one of market opportunity. Funding has exploded ? our estimate is that $1 billion of VC was invested last year in energy-related companies compared to less than $50 million in 1996, but what?s caused that is that the VC model does not apply to regulated industries.
Until there was the possibility of deregulation, you weren?t going to have dollars flowing to innovative technologies. Once the handcuffs of regulation are lifted, however, consumers, and even suppliers have an incentive to adopt innovative technologies. It?s really just a different chicken and egg question.
Are you at all concerned that some of those regulatory handcuffs may be put back in place, if for no other reason than intense political pressure to do so?
California will not be re-regulated, at least that?s my prediction. It would be almost impossible to do because the utilities have already sold off their generation [facilities]. I think that California is hopefully going to fix its flawed model, although I have some concerns since you had too many cooks in the kitchen when the model was first put in place and you still have too many cooks trying to fix it.
One bright spot is that other states are learning from California?s mistakes and are doing deregulation a lot better.
Of the new deal flow you?re seeing, is most of it coming from the West Coast?
I?d say it?s pretty consistent with the numbers we?ve seen historically, which is about 2/3 of the deal flow out of the West Coast and one-third out of the East Coast. There?s also a small smattering coming from other places like Texas, Salt Lake City and Chicago.
What type of trends are you seeing with energy-related companies now looking for funding?
Certainly distributed generation and the many technologies that apply to it. There are a lot of early-stage companies like that, as well as companies that have commercial products already out there ranging from microturbans to fuel cells to photovolteics.
We?re also continuing to see a lot of deal flow in the information technology and communications areas related to energy. A lot of the infrastructure that needs to be in place for the energy markets to be open is out there, but it?s also that some information technologies can help businesses and homeowners manage their energy usage or make smart choices based on real-time information that?s never been available before.Power quality, of course, is something else that?s on the mind of anyone who?s a part of the digital economy. The power grids are designed for 99.9% reliability, which was considered an engineering marvel 25 years ago, but is simply not good enough for today?s businesses and homes.
Could you give an example or two of [private] companies in your portfolio that engage in some of those solutions?
Sure. One is a San Diego-based company called Metallic Power that makes a zinc air fuel cell so the fuel is zinc pellets to generate electricity in very small sizes that you could ultimately see in your home as a personal power pack.
Another is Silicon Energy, which makes Web-enabled software that allows business to see their energy usage in real-time across multiple facilities and then make some decisions based on both usage and cost. For example, the company may choose to dim the lights in all its Midwestern facilities by 25%, or turn down the thermostats a few degrees. Those types of measures aren?t disruptive or cause sacrifice on the part of employees, but they can save both energy and cost. Conservation does not have to be synonymous with discomfort.You brought up the issue of semi-established firms looking for venture capital. Nth Power primarily goes after early-stage deals, but are you now seeing more interesting later-stage opportunities?
There are plenty of later-stage opportunities we?d love to go after if the valuations are reasonable, but many of them are opportunities we saw four or five years ago. You want to diversify your portfolio, but be careful doing so.
Do you think the California energy crisis will cause many non-energy-dedicated VC firms to jump into the arena?
There?s no doubt there?s increased interest, but firms have to be careful that they understand the deals they?re getting into. It?s no exaggeration that I?m getting three or four phone calls per week from big generalist funds saying, “Hey, this is pretty interesting stuff. What?s a fuel cell?”
Energy is a very unique industry, and some of these technologies are not necessarily easy to decipher.
Does the same warning hold true for entrepreneurs in terms of not taking just the first capital offered to them?
You have to make sure that within a syndicate that you have someone who is smart money with experience in the sector. In our current portfolio, we?ve seen a few times when firms take later-stage money without such expertise.
Are you starting to see any more dedicated energy-related funds sprout up?
We are definitely seeing some more. These are not corporate funds, which we?ve seen ? especially ones affiliated with utilities ? but rather non-corporate ones that have outside investors.
Are there enough quality opportunities for there to be multiple dedicated VC players in the energy-related market?
I think today there is certainly room for five to seven dedicated funds. I think the opportunity is going to continue to grow and, over time, there might be room for maybe 10 or 20 funds dedicated to this area. We?re talking about market opportunities that are global and a number of market forces working in favor of companies in this area. It?s not just deregulation-driven, even though deregulation is going on all over the globe. You also have lots of people without current access to electricity, an overall digital economy need for high quality power and global climate changes.
There?s a VC market maxim that you should strike when the iron is hot when it comes to fund raising. Are you planning a new fund?
We have a list of people who want to be called the minute we decide to raise a third fund, but we?re trying to use willpower right now. What?s going to drive it is that, in less than a year, we have already approved 14 investments and have a couple more we?ll probably approve at our next partners meeting. We may begin raising a third fund in the third or fourth quarter this year.