Tread Carefully When Investing in Energy Startups

With gas prices averaging around $4.88 per gallon, people are clamoring for a solution that both drives costs down now and keeps costs down in the future. The problem is that a fuel crisis is the worst time to search for a quick fix. There are few — if any — levers the private sector or the government can pull to immediately solve a fuel crisis.

The current crisis is a prime example. U.S. refineries have little capacity to process more fuel quickly. Fuel companies are worried increasing production will create long-term problems (like this). And any new wells or leases would take years to come online. As a result, they’re more focused on rewarding investors and paying down debt.

Gas tax holidays do bring some benefits to drivers. But the savings that get passed on to consumers are small. And federal gas tax relief will likely be less effective than state gas tax relief.

The time to think about solving energy issues is years in advance. That’s startup territory. Startups are building for the future. And there are plenty of energy startups out there.

Last year, venture capitalists (VCs) invested $10.1 billion in cleantech and clean energy startups, according to Crunchbase. And this year, Crunchbase reports that VCs have already invested $5.5 billion in cleantech and clean energy startups.

Carbon transformation company Twelve just completed a $130 million Series B round. And Electric Hydrogen just raised $198 million through a combination of equity and debt.

The startup energy sector is hot. It’s also very risky. Some of the risk is obvious. The technology needs to work and be used at scale. And user adoption is a massive hurdle to overcome. No matter how good the idea is, neither of those factors are guaranteed.

But much of the risk is less than obvious. The best sources of solar energy are in the southwest — far away from population centers. The best sources of wind power are in the midwest — far away from population centers. Solar, wind and even hydroelectric power can’t be transported from their sources to where customers are. They need to enter the grid to be transmitted and used.

But the current energy grid and fuel infrastructure system isn’t built to handle new forms of energy at scale. The power grid needs to be upgraded to accommodate renewables. And a vast charging infrastructure needs to be built out in order for electric vehicles to fully replace gasoline-powered cars. 

Building out the infrastructure is incredibly difficult. Traditional power suppliers and companies actively push back against efforts to make it easier for renewable energy to get to consumers, including spending millions on lobbying. Environmental concerns often delay or stall the construction of new additions to the grid. Local politics and NIMBY (not in my backyard) concerns also slow or halt construction. Maine has experienced every bit of this in an (as yet unsuccessful) effort to upgrade its grid to accommodate more renewable energy.

So as you evaluate new energy startups, keep in mind that there’s nothing “straightforward” about investing in the energy sector. Determining whether the new technology works — or is going to work — is just the first step in your due diligence process. It might also be the easiest step.

The more difficult parts of the due diligence process will be determining whether the startup has a viable and realistic go to market and scaling strategy. Investors need to examine everything from sales to market acceptance, regulatory acceptance and political/societal obstacles to success. 

Investing in the energy sector can be lucrative. But there is nothing easy about disrupting this space. So make sure you do your homework.