Investing in grid tech has never been more urgent. Aging infrastructure, severe weather events, and geopolitical instability spotlight the fragility of our current grid. At the same time, the proliferation of connected devices and the falling cost of renewable energy are driving more demand and new opportunities for grid innovation.
Meanwhile, the money is flowing. The Inflation Reduction Act and the bipartisan infrastructure law have signaled the federal government’s long-term commitment to grid modernization. And as a result, venture capital firms have poured roughly $35 billion into the energy sector since 2020. It was the sole subsegment of climate investment that saw deal volume increase year-over-year from 2023, a trend only experienced otherwise in the AI category.
VCs have flocked towards energy to invest in companies that are perceived to be both politics- and recession-proof — electrons will always keep flowing. Grid tech in particular has emerged as a subsector with potential to enhance resilience and return funds.
Some key areas that have caught VC attention recently include new infrastructure, like VEIR, TS Conductor, or Exowatt; maintenance and operations optimization, like LineVision, Noteworthy AI; and energy trading and service operations, like VPP provider Voltus, connected device enablers Enode and Texture, and other value-chain enablers like retail energy provider David Energy, energy exchange platform ElectronX, and utility-scale battery revenue optimizer Gridmatic. (Editor’s note: Cathay Innovation is an investor in David Energy).
Together, these pockets of innovation represent the future of what our grid and its operational state might entail.
Key considerations for founders
Innovation is required across the stack but not all types will be heralded equally by venture capitalists. When building and fundraising in this space, it’s critical to keep a few things in mind.
Consider the discounts — and the premiums
It’s impossible to discuss climate tech without reference to the government and its critical role in enabling the sector. This usually comes in the form of the well-understood green premium, but what about the domestic production premium?
With each major legislative act, there are consequent domestic content requirements that require a careful cost-benefit analysis — particularly for physical infrastructure. These range from 40% for the IRA renewables requirement, to 100% for the IIJA steel requirement.
The other side of this coin is the “discount” from customer de-risking. For instance, companies with the Department of Defense as a customer have the benefit of its relative price agnosticism for technologies developing resilient energy capabilities. This has been seen with portable and decentralized energy generation such as nuclear SMRs and can serve as a viable path for de-risking technology for commercial deployment.
Chase the right capital
Not all private dollars are distributed equally. VCs have a different risk/return incentive than a project financier and even a seed versus a Series B investor have different criteria. Come prepared with a clear financial prospectus and plan to allocate invested dollars appropriately. For instance, that may mean relying on debt for project builds and capex, and equity for product development and opex.
Know your customer
No sales process is one-size-fits-all. Working with utilities? Expect sales processes to be on the order of years, and unique from a standard enterprise given the regulated nature of the business.
The U.S. power market is largely bifurcated between regulated and deregulated regions, then further cut into Independent System Operators and Regional Transmission Organizations (RTOs) that provide wholesale electricity for local power utility groups like municipal utilities (munis) and electric cooperatives (coops). Each is likely to have their own needs and mandates based on energy demand profiles of their operating regions.
Now, compare this to the hyperscalers with a clear directive on adding quick, reliable energy supply and you get streamlined processes and buyer premiums — like Microsoft’s willingness to pay twice the standard renewable energy costs to reboot Three Mile Island in what would be one of the first examples of the reopening of a U.S. nuclear facility.
Realize the power of channel partnerships
Building credibility is a must and for startups, it must be done quickly. The adage “you never get fired for hiring IBM” rings true here. Working with Big Tech players like SAP or Microsoft on the software side or large-scale equipment and services providers like Siemens or Schneider Electric can help bring needed credibility.
Be realistic: Energy is a commodity
The household average cost for a kilowatt-hour of electricity in the U.S. is $0.177; annual costs average $1,644. The juxtaposition between the unit and yearly costs is emblematic of both the difficulty (unit economics) and opportunity (market size) in this space of occupying a position of value within the chain of delivery.
Articulating where you sit in the energy stack and working backwards from the end markets will give you the most realistic expectation for future market size and scale required to reach profitability. Fair warning, not all parts of the value chain are equally valuable from an investor perspective — plummeting costs on the battery side can lead investors to conclude that storage is nearly commoditized, for example, while dollars instead flow to the growing operationalization of the retail energy markets worth an estimated $400 billion in the U.S.
The energy sector is stagnant — it’s time to build.
When the space industry was falling behind, we got SpaceX. When the automotive industry faltered, we got Tesla. When the DoD refused to innovate, we got Anduril. With the energy sector stagnant, who will rebuild this market from the bottom-up?
A multi-billion-dollar outcome in this space likely won’t come from a methodical improvement of part of the value chain or a single innovative technology (barring superconductor development…), but rather from a redesign of the system itself enabled by the current decentralized transition.
Energy resilience challenges are complex and multifaceted, but not insurmountable. Underpinned by an abundance of public funding, the need for innovation across grid tech has never been higher.
National resilience in the energy sector is not a choice but a necessity. Now is the time to build.
Jonathan Healy is an investor at Cathay Innovation, a multi-stage venture capital firm. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.
