Venturing into the spotlight: Investors look to state for energy innovation
BYLINE: Alejandro Bodipo-Memba, Detroit Free Press
Apr. 9--Compact Power Inc. represents the new breed of companies that are beginning to pop up around Michigan.
The Troy-based firm, which makes advanced lithium-ion batteries for hybrid electric vehicles, is one of a growing number of high-tech operations attracting attention from venture capital funds interested in developing new technologies in alternative fuels.
Investment funds with deep pockets are searching the world for opportunities to invest in the next big thing. In Michigan's case, many believe that innovation will be found in the energy sector.
With increased interest in the energy market, particularly transportation fuels, Michigan and other Midwest states have positioned themselves to become viable alternatives to start-up companies on the coasts for funding.
"Three different factors that are converging -- the future supply of oil, greenhouse gas emissions and geopolitical tensions threatening oil security -- are all helping to push the growing use of electric power," said Prabhakar Patil, chief executive officer of Compact Power. "There is a very strong interest by private equity groups who see very strong growth opportunities in alternative energy."
Venture capital is money provided by professional investors who back young, rapidly growing companies that have the potential to develop into significant economic contributors. Keys to attracting venture capital funding, according to financial experts, include demonstrating to potential investors that a company has a level of maturity in its product, a competent management team, a working production system and at least one viable customer under contract.
States like California and Massachusetts traditionally have been magnets for venture capital dollars in the life-sciences and nanotechnology sectors.
In 2006, venture capitalists spent about $2.4 billion to fund projects in the alternative energy sector, compared with $917 million the year before. The sharp rise is related to the growing interest in ethanol and biofuels.
It is projected that the combined clean energy sector (biofuels, wind, solar and fuel cells) will grow to more than $226 billion by 2016, according to the Clean Energy Trends report for 2007.
"We think the combination for investors looking for new opportunities -- California being a bit crowded and entrepreneurs in Michigan looking for new challenges using their talents -- could be the driver to some successful companies in Michigan," said Rodrigo Prudencio, a partner with Nth Power, a San Francisco venture capital firm that is partnering with NextEnergy and the State of Michigan on several deals involving renewable energy technology.
Experts suggest that Michigan's best hope for attracting big venture capital money rests in three areas:
--Advanced battery technology and research.
--Cellulosic biofuels research and production
--Solar energy production.
Some of the companies already on their way to becoming serious candidates for significant private investment are Ann Arbor fuel-cell maker Adaptive Materials Inc.; waste recycling and treatment company Advanced Resource Recovery LLC in Inkster, and Danotek Motion Technologies in Ann Arbor.
"Clearly, there are a number of companies in the pipeline that are about six to 18 months away from becoming VC ready," said Jim Croce, chief executive officer and chairman of NextEnergy, a Detroit incubator for technology companies. "As far as the money, I think we have a golden opportunity with this Nth Power deal."
The State of Michigan, through both its Venture Michigan Fund and the 21st Century Jobs Fund, is investing a total of $20 million in one of Nth Power's venture capital funds. Last year, there were 140 U.S. companies that were funded in the broad energy technology sector. In 2005, the number was 85, according to Clean Edge Inc., a Portland, Ore.-based research firm that provides services to companies, investors and policymakers interested in understanding and profiting from clean technologies.
Still, the amount of money being spent in Michigan on alternative fuel development is a drop in the bucket compared with what is spent on research and development in the auto sector.
Yet, Compact, a $10-million company with aspirations of growing to $500 million over the next 10 years, moved its headquarters from Colorado to Michigan because it wanted to be closer to the automotive hub where many of its current and future customers do business.
"There is very strong interest by private equity groups who see very strong growth opportunities in the area of advanced battery technology, and as they look at alternative sectors to invest in, this one area stands out," said Patil, who was the chief engineer overseeing the development of the Ford Escape Hybrid. "It remains to be seen how sustained the momentum will be, but venture capitalists see this as a sort of bright spot in an automotive sector."
Contact ALEJANDRO BODIPO-MEMBA at 313-222-5008 or abodipo@freepress.com.
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