Generating sparks between investors and energy startups

As you may have read, on 26th May, Shell and our partners will host an Energy Fest event during Startup Fest Europe. Startups in the energy sector will visit Shell Technology Centre Amsterdam for their own energy boost, covering technology and business model innovations. Energy Fest promises to be an inspirational day comprising everything from pitch competitions to keynotes from leading entrepreneurs. You can register for Energy Fest here.

I’m very excited to be part of this event, both personally and through Shell Technology Ventures (STV). Since 1998, STV has been investing in young energy technology companies, helping them grow and rise to their full potential. We are always scouting for those startups that show tremendous potential and are a good fit for Shell. There are several factors that generate that ‘spark’. It’s not just about the solutions the startup bring, the size of their addressable market or the value generation potential from deploying their solutions at scale, but equally about the quality of their management team and of their investors. Do they collectively have the talent, experience and stamina to grow small companies into big companies? And in the energy industry, big is very important, as I will explain.

Why does it take more time and capital for startups to make it ‘big’ in energy?

Let me start with summarizing the journey startups will make as honestly as I can: Is it going to be difficult? Oh yes! Is it rewarding? Absolutely!

Building ventures in the energy industry generally takes more time and capital than in the traditional ‘tech’ industry. The energy industry is a huge sector, which touches everyone’s life in a profound manner. We need energy for almost every aspect of modern day life: transportation, cooking, heating, refrigerating, lighting, manufacturing or even surfing the web. Therefore scale is important. The problem with scale is that it can be expensive and hard to reach in the energy industry. Unlike Apple, who have the luxury of rolling out their latest version of iOS software to millions of customers in a matter of days, it can take 6-10 years to reach an equivalent scale in the energy industry. First, the energy industry is very asset – and therefore capital – intensive. Secondly, scale-up means learning by doing, which simply takes time in the energy industry, as my colleagues Gert-Jan Kramer and Martin Haigh eloquently describe in a Nature article of December 2009*.

This is the main dilemma which startups in the energy industry face: whilst the size of the prize is potentially huge, it usually takes lots of capital and stamina to make it ‘big’ in this sector. Besides years of development in the lab, it can usually take an energy industry startup 6-10 years to make it through various rounds of qualification testing, secure a first pilot project in the field, get an industry design standard approved and released, get on your customer’s ‘approved vendors’ list, negotiate a (global) purchasing agreement with the Procurement folks… and then convince asset managers, project directors and discipline engineers to actually deploy the stuff you invented. Does it sound like a daunting task? I’d say yes.

Is it rewarding? Absolutely! Ask Rod MacGregor, CEO of Glasspoint, who secured a $600 mln contract with Petroleum Development Oman in 2015, and is building the world’s largest solar-thermal plant in Oman. But, as I’m sure Rod will testify, it has taken time, capital and hard work from him and his team to get there.

Now, the good news is that most corporate venture units and professional VC firms in the energy industry understand this, and therefore often provide active support to the startups they invest in. Besides funding, the corporates genuinely help the startup teams to ‘navigate’ their corporate organizations, making introductions to key stakeholders and influencers inside their companies. Furthermore, they will help in trying to secure pilot or demonstration projects, bring the necessary energy industry expertise into the boardroom and make introductions to other potential customers, suppliers or co-investors. If anything, the energy corporates know how to scale things up, as this is their bread and butter. The VC firms bring ample knowledge of how to grow small companies to profitability and prepare them for exit. They can bring a large ‘rolodex’ of contacts in the venture and financial industry and of experienced management candidates (if needed). Together with the corporates, they bring financial rigor to the startups, helping them to focus on the right product and market segment for their launch and subsequent stages of growth. If anything, I have learned the right syndicate of corporates and VCs is absolutely critical to the success of any startup in the energy industry. Together with the quality of the management team and the materiality and uniqueness of the solution, they make up my top three.

During our last 17 years in corporate venturing, Shell Technology Ventures have learned some important lessons ‘the hard way’: quite frankly, some of them through failure. And whilst we normally hear more about the success stories of ‘unicorn’ startups, I have personally learned more from failures. I’ll be sharing some of our own lessons learned with the startups at Energy Fest. Please visit the Energy Fest website for the event programme and to register.

Geert van de Wouw

 * Gert Jan Kramer and Martin Haigh, “No quick switch to low-carbon energy”; Nature, Vol 462|3 Dec 2009