Venture capital is an indicator of future economic trends, which suggests that there will be a shift away from IT and telecommunication towards energy, biotechnology and medical technology. The share of VC investments in startups from the energy sector in particular reacts strongly to oil price movements.
Deutsche Bank Research economist, Thomas Meyer, says that those who only think of oil majors and big utilities when it comes to energy sector companies miss out on many exciting startups. In the last few years venture capital funds have increasingly shifted their investments into energy sector startups. Such startups work on new ways of tapping traditional sources of energy and are often pioneers in the use of alternative energies. In Q3 2009 venture capital funds invested, for example, $285m in one startup manufacturer of solar technology and $82.5m in a maker of electric sports cars. The microblogging service Twitter was the only internet startup that managed to secure a similar capital injection - - to the tune of $100m.
In December 2008, DBR drew attention to the close correlation between venture capital investment in startups from the energy sector and the oil price (Economic downturn hits start-ups in multiple ways). When the oil price topped the $140 mark in summer 2008 - - and was even expected to surge a great deal higher - - interest also increased in innovative startups with fresh ideas about how to solve our energy problems.
Meyer says in the meantime the oil price has taken a rollercoaster ride. One year ago DBR had surmised that the slump in the oil price from its high could also impact on the interest of venture capital funds in energy sector start-ups. In the interval, this has occurred. The share of investments in the energy sector nosedived in the US to about 10% of all venture capital investments, whose volume had already been drastically reduced by the financial crisis. The funding of solar companies in particular almost completely dried up in Q1.
Since the spring of 2009, the economic situation has stabilised and the newfound optimism has buoyed venture capital investments as a whole in the US (they rose 44% between Q1 and Q3 2009). The oil price has also resumed its upward trajectory (rising 60% over the same period). Startups from the energy sector have thus also become more appealing to investors: their share of total investments increased by 77% between Q1 and Q3. Apart from the higher oil price the expectation of public subsidies for alternative energies has also played a major part; it gives rise to additional investments.
Thomas Meyer says that venture capital funds are currently investing in the lucrative business models of the future. In addition to energy issues, biotech and medical technology have made considerable headway in recent years, whereas investment in IT, software or telecommunication has fallen constantly since the turn of the millennium. Unlike many of their internet counterparts, energy sector startups frequently possess a clear business model. They develop and market, for example, solar technology or electric cars, whereas many an internet startup is still unsure of how it can also generate revenues from its users.
Meyer says venture capital is an indicator of future economic trends. The growing role of startups from the energy sector underlines the significance of fresh, innovative companies in devising energy solutions. Whether these initiatives are sufficient to solve all these challenges is open to question. Without innovative startups, however, facing up to these challenges would undoubtedly be more difficult, more expensive and more boring.
