Energy venture capital is a challenging business in the best of times, but greater competition from large non-traditional players and lingering economic weakness in many of the world’s largest economies mean that, more than ever, finding and doing successful deals requires a disciplined, yet open minded approach.

The entrance of large companies into the energy venture capital space, the US elections’ impact on investment cycles, identifying opportunities and dominant sector trends were just a few of the topics Breaking Energy recently discussed with Dr. Wal Van Lierop, CEO of Chrysalix Energy Venture Capital.

“It’s a big boys game,” Van Lierop said, describing how there has been a considereable amount of merger and acquisition activity by Fortune 500 companies in the traditional energy VC space in recent years. Numerous large oil, gas and utility companies, including Chevron, ConocoPhillips, Total, GE and NRG Energy have created investment vehicles or devoted internal teams to evaluate promising nascent technologies and the companies pioneering them, with an eye toward identifying synergistic partnerships or outright acquisition targets.

However, as often occurs in business, with competition and challenge comes opportunity.

“Access to A-quality deals is sometimes hard for corporate VC’s,” Lierop explained, because they can run up against competition with their internal R&D divisions that may already be working on a similar technology or want to pursue development with their own in-house teams.

Symbiosis can be achieved if corporate VC’s can work together with early stage firms like Chrysalix, he said. “Integration and cooperation are key.”

Keeping an Open Mind

Bearing this in mind, Van Lierop’s firm holds what they call “deal flow review meetings” with relevant stakeholders on a monthly basis and the company opens the meetings to a wide variety of high-level industrials bi-annually. The idea is to share views on how other companies operating in various sectors spot deals and what they perceive as important medium- and long-term trends. They invite executives to discuss the innovation process and how cleantech plays a role, Van Lierop said.

He went on to explain that Chrysalix sees about 1,000 deals per year – 65% of which they are the first to evaluate. These potential deals originate from a variety of sources, like the Department of Energy, “angel funds” and the “Chrysalix Global Network,” which includes an affiliated fund established in the Netherlands in the 2007. The company is also planning to launch an affiliated fund in Asia in the near future.

This international strategy is important because, “early stage company development is local, but the energy industry is global,” said Van Lierop.

Some of the major energy VC trends right now include energy efficiency, waste to energy, new materials and the nexus of water and energy, Van Lierop said. Unsurprisingly, his firm has investments in almost all these areas.

Although cleantech has taken a bit of a beating on the public perception front recently with Solyndra and other high profile bankruptcies, Van Lierop is convinced “clean tech will be the way of doing business in the future.”

“This [cleantech] is not a money losing proposition – GE, Siemens and others are making a lot of money with clean tech.”

Solar cost curves have come down to the point where grid parity has been achieved in many European countries and parity is on the horizon in the US too. Solar for natural gas replacement makes sense in higher value gas markets like those in Europe where gas prices are still largely indexed to oil and oil product prices, Van Lierop pointed out.

Energy VC’s invested heavily in smart grid technology – so what happened?

“There are still many [smart grid] opportunities, although some people may have gotten ahead of themselves.” The US market, particularly in California, explained Van Lierop, got very crowded and many projects became bogged down in the regulatory process. This is part of the reason Chrysalix opened a Calgary office in Western Canada.

The need for better power infrastructure is clear and utilities have to invest in smart grid technology because it will be part of the future in about 10 years, he said.

Thoughts on the US Elections and Some Investment Profiles

Van Lierop does not see much difference between the Democrats’ and Republicans’ energy policies over the short term – they both agree the US natural gas production boom is a good thing. The Democrats go a bit further in with their long-term cleantech targets, he says.

The question that most interests Van Lierop is how the natural gas boom creates opportunites for energy VC’s. “Now that’s a debate I would like to participate in,” he said.

Acting on the belief that waste to energy will be an important component of the world’s future energy mix, Chrysalix has invested in a company called Agilyx that converts waste plastic into crude oil. “The company is building significant value and has two factories now,” said Van Lierop.

Agilyx is receiving support from Waste Management and counts the major French oil company Total as an equity investor. Total has also been closely involved with analyzing the quality of the crude oil produced at the Agilyx facilities.

The company currently uses natural gas as a feedstock to heat the plastic to a liquid state from which the crude oil is separated, processed and transferred to a storage tank. Agilyx has a unique offtake agreement – reportedly the first of its kind – with a refinery in Tacoma, Washington owned by US Oil & Refining Co. Agylix President Chris Ulum told Breaking Energy that his company currently produces crude oil for approximately $40 per barrel.

“We started the company in 2006 with some seed financing and are now moving from the R&D phase to commercial expansion,” Ulum said. “We have multiple projects in the planning/development stage in the northwest, midwest and southern portions of the US.”

Another Chrysalix investment is with a wastewater treatment company called Axine that specializes in removing organic toxins using a membrane-based solution. Axine is currently a small company, but large oil and gas producers are very interested in this kind of technology, said Van Lierop, given the large volumes of water used in hydraulic fracturing operations and the growing trend toward recycling frack water.

Van Lierop explained the Axine story optimizes what Chrysalix does, in that someone within the Chrysalix network discovered the company about a year ago, management found the technology attractive and helped recruit a CEO to run Axine’s business, essentially helping in building the company from the ground up.

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