The first in a two-part series in which Breaking Energy asks a leading venture capital specialist about the intersection of two of the hottest parts of the economy today. Both are also are major contributors to hopes for increased hiring and accelerated tecnology innovation.
Q: What is the state of the venture capital industry, particularly in the energy sector, at the start of 2012?
Venture capitalists are cautious. They are investing in later stage, growth phases of development, at the expense of early stage investments. But what about some of the deals that don’t get funded – the real question is at what cost?
If you’re in social networking there’s an abundance of capital chasing those deals. It is almost reminiscent of 1999-2000 on how some of these deals are getting bid up and entrepreneurs are being given one day to decide.
When you get outside of social networking all of the other industries are struggling to find liquidity, to get IPOs or M&As. That’s slowing down the pace of investment and the appetite of VCs who are investing in those areas. We’re starting to see a little bit of a trend, not a major trend of caution, that’s entered the market. Clean tech quite frankly is one of those areas that is having a tough time.
See the results of a recent survey of clean tech venture capitalists that shows caution and realism on Breaking Energy here.
QC: How closely are VC trends linked to the economy and public markets?
The US budget crisis and EU debt crisis have definitely have impacted public markets and that does trickle down to VCs as the market itself is not supported for IPOs.
Venture capital can tell you how healthy the stock markets are because they are so heavily dependent on liquidity through the public markets. And the stock market is a general indicator of the overall economy. They all tend to move in the same direction. In the long term, the stock markets will adjust to the prospects of the economy. But there isn’t as direct a correlation as there is between VC and stock market volatility.
Q: Which segments in the energy sector are seeing the most activity?
Canada is a hotbed for energy because of shale oil. There is so much activity and a lot of dollars going into shale oil right now. Calgary and Alberta are booming. Most of the VC-backed stuff there is services related, seismic and geological companies.
Q: Why don’t we see the emergence of new players in the energy sector?
Major oil and gas companies are acquiring a lot of these venture-backed startups in the energy industry. It is more cost effective to bring it in-house than outsourcing.
Q: How is the energy industry preparing for future risk: technical challenges to extracting shale oil and gas and a potential price on carbon?
In general, people are looking at energy and anticipating that it’s going to get more expensive to get. A lot of the oil and gas companies believe that with quantum leaps in technology they can continue to find reserves necessary to fuel the planet.
But there are two schools of thought. The oil and gas guys, they’re not sure what the cost is going to be. They believe there will be enough oil and gas. But the alternative energy people believe, OK, there may be enough oil and gas but it’s going to be so expensive that it’s cost effective to use renewables.
The real answer for America is natural gas. We have the largest natural gas reserves on the planet by a wide margin. We could export LNG to everybody: we are the Saudi Arabia of natural gas and we’re not even exploring that because the oil companies aren’t at the point yet where it’s so difficult to find oil that they would change all the infrastructure to switch to an alternative fuel source.
Q: Do you anticipate energy infrastructure to shift soon?
In our children’s lifetime we’ll be moving to natural gas as a much more reliable fuel source. It’s much cleaner. It’s going to take some bold movement from the government to put the infrastructure in place so that you can fill up [with LNG] at gas stations.
Transportation is where we use most of our energy in the US. But the energy profile is already changing. Natural gas is already well used in the home heating markets, more utilities are switching from coal and oil to gas fired power plants.
China last year became the number one importer of oil and gasoline products, knocking the US off the number one slot. We’re in for a wild ride here.
Q: Should a federal energy policy include a national price on carbon?
There’s been so much controversy over whether the science has been conducted correctly, or whether it’s people just asserting their personal opinions without data to support it. Al Gore didn’t do the global warming debate any favours by putting out a lot of data that was not scientifically correct [such as the Hockey stick graph].
It was like a commercial. They made such a big deal about it by making claims and throwing stuff out there that wasn’t supportable. American people once they figure out this was a bunch of bull, it’s very tough to get them back with the same mindset again. That’s what happened with a lot of this global warming stuff.
Q: Is energy policy more of a driver in regions such as Europe where there is more aversion to risk-taking investment?
Large companies, in the US and EU, the track record in innovation is abysmal. Innovation happens somewhere else and they will go and buy it. If we have learned one thing in the US, which is one reason why VC-backed companies are so prolific here, is we as a country have learned that you cannot foster innovative thought and research and development in large company environment.
Q: What’s your outlook for the energy industry in 2012.
It’s going to be pretty much flat. I don’t see the US economy really taking off in 2012 because it’s an election year. Politics impacts the energy industry a great deal. The government could turn around tomorrow and say we’re not selling any more offshore leases like they did after the BP oil spill. They’ve started selling them again, but how do you run a business like that? You might suddenly not have access to new product, if you’re an oil driller or services company that depends on that for your lifeblood. It has a huge impact.
Tracy Lefteroff is PwC‘s Global Managing Partner of the Venture Capital Practice based in San Jose, California.