Subscribe to our newsletter

Mercom Capital Group’s second quarter 2015 report into VC funding in the energy storage, smart grid and energy efficiency sectors made for interesting reading for the battery and storage space. As PV Tech Storage noted on 21 July from the report, VC funding almost doubled over the first quarter of the year and the sector saw Arnold Schwarzenegger put his money where his green credentials are, bringing some celebrity investor gloss to the proceedings. PV Tech Storage spoke to Mercom Capital chief Raj Prabhu to delve deeper into the statistics.

We’ve seen VC funding almost double over the most recent quarter – how is that accounted for?

To give you a short answer, the largest reason is the top deal. Regarding vanadium flow battery company VionX Energy for US$58 million. That was a huge difference maker, this big deal. Technically, their flow batteries are geared toward utility-scale type projects but on the flipside, these are all still up and coming technologies. In batteries, other than lithium-ion and to a certain extent lead acid, most of the other technologies are young and a lot are in the demo stage where they’re trying to prove their technology, commercialise and sell it to the market in large numbers.

Last time I blogged for you guys, I think I said battery storage is where solar was about seven years ago. Back then we used to have cadmium telluride CIGs, amorphous silicon, crystalline silicon, all these technologies. Billions of VC money went in, but eventually, we all know crystalline silicon won out. I think we’re in a similar situation where all these battery technologies are out there. We still don’t know who’s going to win out in the end. But that’s what VCs do, they fund emerging technologies and hope the technology they’re backing wins.

On the flipside, if you look at solar back in the day or some other technologies, the funding isn’t a huge number when you look at batteries. It’s not that high, you see anywhere between US$50 to US$100 million per quarter. Mainly because, again going back to the solar analogy, the reason why a lot of VCs got burnt [there] is because they funded technology companies all the way to manufacturing, which required hundreds of millions of dollars, which VCs don’t normally like to invest in. They like to invest in technologies.

So now you see that storage companies have learned the lesson and now most of them, they’re trying to develop technologies but not manufacture themselves. They’re outsourcing, so their funding and investment requirements are a lot lower than what is typical like in some other industries, including solar.

The top five list is interesting this time out, as of the five, only one, Advanced Microgrid Solutions, is one I’ve heard about through any kind of association with solar. Stem are also well known in solar as they’ve been behind one of the early rollouts of commercial storage in the US, but aren’t that closely tied with the PV industry. Is it fair to say it’s not just solar storage applications that are drawing the attention now?

Right, it’s not just solar at all. Solar is a big component because solar, well, you hear about storage versus storage-plus-PV; it makes a really good option to include a battery with solar. Obviously we know solar only runs for six hours a day or thereabouts, after that you need a battery to back it up, so the economics can work well, but the next step, the really big market, is going to be beyond that, where storage can work and it’s economical with or without PV. So yeah, there’s going to be a lot of focus on solar because it’s the immediate market, that’s available right now, but technically a lot of these companies are not just looking at solar at all. And you’re going to see more and more of that.

Mercom on corporate VCs, angel investors and the Will Smith effect in Q2 storage investment

Top 5 VC funded deals, Q2 2015, as found in Mercom report. Image: Mercom.

Who's investing?

What is it that these VC investors are getting excited about?

The way I see it is that [the market for] solar and storage can be more than what solar’s already seen. We know what the US PV market is, as of last year we installed about 6GW or 7GW. That’s the potential market. It’s going to grow as solar grows, but storage on its own, standalone storage used with or without solar, that’s a huge market, potentially every household, every business.

Terraform Power has made the first storage asset purchase by a yieldco, through its parent company SunEdison. What’s your take on that?

It makes sense. Everybody’s vertically integrated on the solar side now. You look at SunEdison’s acquisitions, they’ve obviously acquired a lot of developers but also solar sales companies, storage companies. They want to make sure they vertically integrate, it’s cost effective in terms of scale and they’re becoming one large company that does everything.

What kind of investor is attracted to storage at the moment?

I was looking at the list of VCs. The big thing was that nobody in this quarter is investing in more than one deal. There were no multiple transactions, the same company coming investing twice. So it’s kind of random. You have your regular VCs and you also have some angel investors like, the example of Will Smith, the actor. He was part of an angel investing team for [startup] Quidnet Energy (which aims to create a network for entrepreneurs, investors and start-ups). Then you have some actual, corporate, companies like Mitsui, GE investing in STEM, Iberdrola, so it’s kind of broad.

It includes typical VCs, it also includes what we call corporate venture capital where, like GE has it’s VC arm. Those are going to be mostly strategic, investing if they think they might partner with the company one day or there’s going to be some business association in the future. Then you have some angel investors who are trying to get into this field. So it’s pretty wide.

Mercom on corporate VCs, angel investors and the Will Smith effect in Q2 storage investment

One of 2014's strong VC performers, Stem, attracted around US$12 million in Q2. This and cover image: Stem Inc.

Hollywood connection

If investors are only in for one deal each, is it fair to say they are being cautious where they put their money?

Well, that’s this quarter. They might end up investing again or they may have done in a previous quarter. It will make more sense when we have the whole year to look at it, but this latest report is on the previous quarter (Q2 2015).

I saw your recent piece and you were talking about Arnold Schwarzenegger investing in one of the companies, you see stuff like that. There is obviously a connection, Will Smith, a lot of the Hollywood actors invest in early stage [companies]. But Arnold’s case is different as the founder of that company used to be chief of staff for him. Plus she was also in utilities, and the California Public Utilities Commission (CPUC, the regulator for California), so she was in the other side of this business, on the government side. Probably saw the opportunity while she was in the government side and then jumped over to start a company and take advantage of it.

Is it too early to draw trends for the year?

If you add up the two quarters, we’re close to US$200 million, not quite. We don’t know, the next two might tank, double or triple. I think by next quarter or so we’re going to start seeing the trends.

Tags: solar-plus-storage, power generation, investment, venture capital, vc, flow batteries, sunedison, will smith, arnold schwarzenegger, cpuc, terraform, yieldco, vionx, advanced microgrid solutions, mercom, raj prabhu