First published in Cleantech magazine Sept/Oct 2009. Copyright Cleantech Investor 2009

VCs get smart

The smart grid has emerged as a key sector for cleantech venture capital. Tim Chapman rounds up the past year's deals. 

The so-called smart grid has the potential to radically change the way that electricity is distributed and used, affecting everyone from major utilities to household consumers. It's also emerged as one of the busiest areas for cleantech venture capital. Total VC investment in smart grid companies topped that for biofuels last year, and the deals have continued in 2009 despite a quieter overall market.

The smart grid involves a host of different technologies, from utility-scale distribution hardware and control software, to smart meters and energy management systems in homes and businesses. Many areas offer the market characteristics that VCs like, such as long-term contracts with utilities, large untapped markets, and government support. Potentially, it offers the same growth potential that IT enjoyed in the 1980s and '90s.

The biggest VC investments to date have been for US-based companies developing network technologies to help utilities take a smarter approach to balancing supply and demand.

Late last year, Virginia-based GridPoint raised a $120 million round from existing investors, who include Goldman Sachs, New Enterprise Associates and Quercus Trust. GridPoint positions itself as a technology partner for utilities, offering a software-based platform for controlling a network of distributed generation and storage facilities.

And rival group Silver Spring Networks raised a $75 million round in October 2008, led by Kleiner Perkins Caufi eld & Byers. The California-based company confi rmed it had raised an extra $15 million in March of this year, with an undisclosed portion coming from Google Ventures.

Silver Spring is developing a suite of smart grid technologies that use the internet to connect utilities and consumers, and has been called 'the Cisco of the smart grid'. The firm's CEO recently declared that Silver Spring would hit profitability in the third quarter of this year.

Another California company, Grid Net, announced an undisclosed third round in July led by Braemar Energy Ventures. Other investors include corporate venturers GE Energy and Intel Capital.

Grid Net provides a range of network management software and communications products for utility customers, and is working with ICT majors including GE, Intel and Motorola to develop a secure wireless smart grid network.

California's eMeter, which raised a $32 million second round led by Sequoia Capital in June, is also commercialising energy management software to connect utilities and households.

Smart grid products and services for the consumer market have been one of the hottest areas for cleantech VC this year. Energy monitoring devices are becoming ever more common, allowing households to measure and manage their electricity use in real time. More sophisticated systems also monitor gas and water consumption.

Smart meter production is dominated by established players such as GE and Itron, but VCs see these as likely partners or buyers for younger companies with innovative metering technology.

Some smart meter start-ups have signed up with smart network developers. In February, London-based Onzo, which is backed by Sigma Capital Group and Scottish and Southern Energy, signed a technology partnership agreement with Silver Spring.

Another consumer-focused UK company, AlertMe, raised an £8 million second round in June from Good Energies, Index Ventures, SET Venture Partners and VantagePoint Venture Partners. Cambridge-based AlertMe produces a range of sensors, smart plugs and monitors based on the Zigbee standard.

AlertMe shares several key investors with US 'energy ecosystem' developer Tendril, which raised a $30 million third round in June. Colorado-based Tendril uses a mix of software and hardware to connect utilities with customers, and could be a natural merger partner for AlertMe.

Other US companies raising VC for consumer-focused smart grid services this year include EnergyHub, with an undisclosed first round from .406 Ventures and Physic Ventures; Advanced Telemetry, with an undisclosed second round from Quercus Trust and 21Ventures; Control4, with $17.3 million from Best Buy Capital and others; and Positive Energy, with $14 million from New Enterprise Associates.

Other companies are focusing on the corporate market. Regardless of the climate change argument, many businesses can see that improving their energy efficiency makes solid financial sense.

One of the biggest areas for business is in data centres, which globally are responsible for more emissions than the aviation industry. Operators can reduce the amount of hardware they need through 'green IT' technologies such as virtualisation, but smart grid-style solutions can also help slash energy use.

California-based Synapsense produces wireless monitoring systems which it says can help data centres cut their energy use by a fifth. Synapsense raised a $7 million round in March led by Germany's Robert Bosch Venture Capital. Previous investors, including Emerald Technology Ventures, Sequoia Capital and DFJ, also joined in.

California-based Sentilla is also developing wireless sensor networks for data centres and other industrial applications, and raised a $7.5 million round from Onset Ventures and Claremont Creek Ventures in January.

And start-up Power Assure, which raised a $2.5 million first round from DFJ in July, promises to help data centres cut their energy use by up to half by actively managing server capacity.

Smart grid companies serving the general industrial and commercial sectors have also won VC support. New York-based CPower announced a $10 million VC round in April, plus undisclosed extra investment from Intel Capital, to commercialise its energy management and demand response services.

Massachusetts-based OutSmart Power Systems, which uses the electrical wiring of office or industrial buildings as a communications network for smart grid applications, meanwhile raised a $2 million seed round in May from Bainco and others.

VC interest in the smart grid arena is likely to remain strong, with political and regulatory support as one of the key drivers. The US is aiming $3.9 billion of stimulus funds towards smart grid technology and transmission infrastructure, and there are plans for 40 million new smart meters to be installed in homes across the country. The UK is preparing to unveil proposals for rolling out a smart grid, and is also planing to deliver smart meters to every home. Other countries are pursuing similar programmes.

The smart grid looks increasingly like the smart place to be.