05/20/2008 10:39 AM

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Finding New Frontiers in Energy Investing Page 2

Deciding Whether to Invest

Before making an investment in this area, there are two major types of risk that must be considered. The first is the technology risk. Even though we believe the technology we are interested in is the best of its kind at the present time, we also need to consider whether it is the best solution that will continue to emerge over the investment horizon for the next five to seven years.

The second major risk factor in this investment area is what we call the "people risk." It is important for us to learn as much as we can about the company's people before we decide to invest in order to determine whether they may be capable of creating extraordinary returns for our fund.

Identifying these risks is an art. SAIL determines these risks by:

• Engaging in deep conversations with potential customers to understand their buying criteria, timing and process
• Reserving sufficient funds, because it always takes longer and costs more
• Focusing on teams that fully understand the financial model
• Ensuring business models are compelling without government changes in regulations or statutes, and
• Anticipating severe competitive responses if successful

Establishing accurate company valuations can also be very difficult as many of these technologies which have the potential to solve major problems do not yet generate significant revenues. In addition, we cannot predict how widely the innovation may be adopted. As venture capitalists, it is our job to analyze trends both within the invested company and without.

The energy sector also introduces another unique investment challenge, including the fact that this multi-trillion dollar sector is currently dominated by very large corporations and operates under many governmental regulations. Engaging with these major energy corporations presents an obstacle within the industry as they are typically in no hurry to innovate. These corporations are already generating record profits.

ORYXE Energy has confronted and continues to confront the complexities that governmental regulations can cultivate. ORYXE Energy's fuel additive dramatically reduces pollution, however state regulators have yet to be convinced that this particular technology should be mandated.

Another example of an energy investment facing regulatory approval is Ice Energy's Ice Bear^TM 50 technology. This company's innovation is worth billions, but requires government regulation for electrical costs and must be negotiated utility by utility.

In the resource sector, our present global resource problems are going to continue for a lifetime. With the Internet, TV, and satellite communications, Earth's 5 billion starving people are going to be increasingly frustrated with the 1.7 billion living well. It is our responsibility to find the pioneers of viable ground-breaking technologies so all can enjoy a full life.

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Tom Cain is founder and managing partner of SAIL Venture Partners. He contributed to "Best Practice for Energy Venture Capital in 2008," available from Amazon.com.

FROM Cleantech.com, a SustainableBusiness.com Content Partner

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