Follow the money! Carefully…


Compos Mentis

This column is to create a forum for ideas, passions and perspectives on our industry that are controversial, provocative and energising. The views expressed here may be unpopular, politically incorrect, heretical or simply humorous. They may be ideas that all of us have had but didn’t care (or dare) to articulate. The opinions expressed are those of the author alone, but are probably shared by many who have yet to say so.

Something unusual is happening!

Something new. If you have been in smart metering/AMR/AMI/smart grid/HAN field (take your pick) since the ’90s or ’80s or even the ’70s you are now noticing a new kind of animal that we haven’t seen before. They are stealthy, and tend to speak in hushed tones. You will see them at the industry conferences. They are asking questions. They’re reading our trade magazines. (Yes, including Smart Energy International!) They are calling utilities, speaking with vendors, communicating with regulators. Yes, something quite new and unusual is happening!

Who are they? They are the money people. They are the guys with the money; the investors, the angels, the venture capitalists, the mutual fund managers, the brokerage firms, the investment advisors, the business brokers. They have been virtually absent from our business for the last 40 years. Yes, there have been a few active venture firms such as Nth Power or EnerTech Capital, but nothing like the stampede of eager investors that we see today. Now, all of a sudden, they are climbing all over this business. At one recent conference there were more than 30 money people sniffing the air, kicking the tyres and trying to get the scent of where the next big score would be found. They have fat wallets full of other people’s money, and they are ready to spend it.

What draws them? It is the chance to make the “big score”, the “three bagger” or home run in baseball terms. The bait is the smart grid, and all that goes with it. These money people have heard the hype. They have watched the regulators and governments create mandates that require interval metering for all consumers. They have seen governments handing out “free money” to stimulate demonstration and to drive operational deployments. They have heard the music about a self-healing system, improved power quality, fewer outages, and extending the life of our aging infrastructure. These investors are listening, absorbing, analysing and trying to pick the future winner. Some have become firm believers and active investors. They “drank the Kool-Aid,” as their colleagues would put it. These investors are not the only people placing bets on smart grid. Most of us work for companies or clients that also want to grab their piece of this potentially lucrative pie, and are willing to invest to make it happen. So far, so good.

Venture capitalists don’t expect that every investment will be a “big score.” In fact, if only one out of five venture investments is a winner, most VCs will consider that a win. I recently counted approximately 50 emerging or established companies trying to find a foothold in the Home Area Network (HAN) field. How many of these will succeed? One out of five? Your guess is as good as mine.

Investors are looking for success. Success, to a money person, is simply being strongly profitable and growing significantly. I used the example of HAN startup companies. For a HAN company to be successful to a money person, that company must move beyond the development and pilot programme phases, and start shipping in the tens and hundreds of thousands of units per month. And yet the HAN companies are utterly dependant on utilities to create and promote the rate designs and justification that will support wide-scale adoption by consumers. They can’t do that on their own.

If VCs see that one of their portfolio companies consistently fails to meet promised performance the usual next step is to add more money and try to fix the company but, in doing so, to dramatically dilute the value held by founders and other investors; or to simply pull the plug and shut the company down. If large companies don’t see targets being met they too pull the plug, and close that division – sometimes stranding utilities with a technology that is no longer supported. For example, Motorola entered the prepayment business and later abruptly withdrew from it. GE, AT&T, Rockwell and Westinghouse entered and subsequently withdrew from the two-way remote metering business.

The good news is that there is plenty of money looking for people, promising products, superior technology, and valid market opportunities. The bad news is that some of the investments are being made with a naïve or misguided sense of reality, or a notion that smart grid and advanced metering infrastructure are streets paved with gold. For those companies, whose investors don’t understand the nuances and realities of the market, a harsh judgment awaits. It is just a question of when that other shoe drops. Some utilities, vendors and investors will get stuck holding the bag. Follow the money, but carefully!