March 18, 2010

With all the buzz today over smart grid grants, technology and standards, it is easy to ignore one hidden but powerful force shaping the market: venture capital.  And Foundation Capital, of Menlo Park, Calif, has been among the most influential smart grid VC firms, general partner Adam Grosser told us in an interview Tuesday.  “We've made a ton of investments on the demand side of the smart grid, all of which are doing quite well,” Grosser said.  The firm is “undoubtedly” the leading smart grid demand-side venture capitalist, he added.

          Foundation backed home-automation firm Control4, of Salt Lake City; back-office software-maker EMeter, of San Mateo, Calif; DR aggregator EnerNOC, of Boston, which is now public, and metering communications firm Silver Spring Networks, of Redwood City, Calif, which is readying for an IPO (SGT, Mar-02).

          Foundation is backing an as-yet-undisclosed start-up based on technology developed while its founder worked at Oak Ridge National Laboratory -- products slated to be revealed in June.

          In all, Foundation has invested about $200 million in smart grid firms, out of the roughly $3 billion it has under management -- about 7% of its money.  Grosser discovered and promoted most of Foundation's smart grid investments but colleagues Steve Vassallo and Warren (“Bunny”) Weiss are also active, Grosser said.  He sits on the boards of most of “his” investments but at Foundation, colleagues may switch board seats if a firm at any point in its development needs the expertise of one Foundation partner over another's.  “There's not a lot of ego here.  Most venture firms don't do that -- but we do it fairly often,” he said.

          Grosser arrived at Foundation in 2000 and until 2002, the firm focused on IT, semiconductors, data and telecom.  Then it took a hard look at major technology trends.

    “It was pretty apparent that if the '80s were about computing, the '90s about networking and early 2000s about the internet, the next 10-20 years were going to be about re-inventing energy sources” and use, he said.  “So we looked at the clean-tech landscape.”

          Unlike many VCs, Foundation took the countercyclical approach of avoiding supply-side investments such as biofuels, solar, wind, tidal or geothermal energy -- “pick your panacea for solving the energy-generation problem,” he added playfully.  The main reason for that decision was that “there was very little opportunity for a capital-efficient solution for any of them and the entrenched players were large, remarkably intransigent and had an enormous amount of money to market against you.  So our decision was to cut out that side of the equation.”

          That left demand-side reduction and energy efficiency.  Enthusiasm grew for that area of investment when Grosser heard a speech by GE CEO Jeff Immelt about how utilities have been buying basically the same equipment from it for 30 years.

          “We looked at that and said, ‘Wow, here is an opportunity to reinvigorate a market,'” he recalled.  Just as the telecom and cable markets were transformed in the 1990s by hundreds of billions of dollars in private investment, so too might the grid be modernized.

          The time was ripe, he said, because of three factors:

• Public opinion held that the grid was old, fragile and insecure;

• Networking standards, developed mainly for the internet, were extremely cost effective, with the cost of moving information especially across the “last mile” into and out of the home having fallen by several orders of magnitude, and

• Large firms already serving the utilities would be willing to cooperate, not compete, with VC-backed firms offering them opportunities for greater sales in a symbiotic relationship.

          “We could enable GE to sell hundreds of millions of new meters.  We could enable back-office systems to be revamped and brought out of the old client-server days,” Grosser said.  “And along with that, we would save a lot of energy and empower consumers.”

          Furthermore, once the smart grid was in place, “a lot of other things become more interesting, like how do you sell solar and wind back to the grid from your home? How do you intelligently manage your home from a TOU pricing perspective? So there were also opportunities to create a different social dynamic around the consumption of energy.”

          But not just any demand-side smart grid firm justified Foundation's investment.

          “We have a particularly disciplined practice,” Grosser said.  “We believe VC is successful when you combine large markets, brilliant and passionate people and disruptive solutions.  VC is particularly unsuccessful when you try to create me-too products or something that is better-faster-cheaper but from a relatively unknown provider.”

          EnerNOC was among Foundation's first smart grid investments and the relationship with EnerNOC's two founders began when they were students at Dartmouth.  They “came up after a school presentation to ask us a question,” Grosser said.

          Now “we have the best individual components and the best overall portfolio” in the smart grid, he added.

          The most important trend in the utility industry today, said Grosser, is the demise of proprietary protocols and the emergence of standards.

          “Things like Bacnet and Lonworks and SCADA networks are all grungy industrial protocols created by vendors to lock in utilities,” he said.  “But standards are emerging,” mainly though NIST (SGT, Jan-21).

          “We are looking hard at, and investing in, products that take advantage of those standards.” That includes “the higher-value part of the utilities: transmission and distribution” plus metering, he stressed.

          Foundation seeks new investments in numerous ways: visits to the few universities with power electronics programs such as the University of California -- Berkeley; trips to China to “talk with ministries about how they're going to connect a billion people to smart meters,” and trying to prognosticate industry trends.

          Those efforts seem to be working.  Foundation is among the top 10 of the 1,100 VC firms worldwide, as measured by return on investment, Grosser reported.  Its investors include major universities such as Caltech, Harvard, Stanford, the University of Chicago and Yale, and foundations including the Kaiser Foundation, Kauffman Foundation, MacArthur Foundation and the Wellcome Trust.

          Grosser has a background in engineering, computer science and art, and got started with venture capital at Foundation after starting and selling at least three IT firms.  He is building a hydrofoil based on a 1963 Russian titanium hull he found in Latvia.  He has built a biplane, restored a 1951 Korean fighter and converted a racing go-kart to electric power.

          “At 49, there's more behind me than ahead of me, so I need to keep growing and learning and having fun,” he said.