Where Angels Shouldn’t Fear to Tread in Smart Grid Investment Opportunities

I recently sat down with a group of angel investors in Silicon Valley to review some of their most promising investment opportunities in the Smart Grid business sector. Angels typically invest in very early stage startup companies in smaller capital amounts than venture capital (VC) firms, and with fewer strings attached to that money.
Silicon Valley got its start with semiconductors and other silicon chip technologies, but since then has morphed into ground zero for innovations in anything that is software-based, including communications, cybersecurity, and data management. Happily for Silicon Valley, these software categories align very nicely with some of the most important areas where the Smart Grid evolution needs both game changing and incremental innovations. Here are three promising investment categories:

Cybersecurity – this $14B* category includes hardware and software and services for intrusion prevention, intrusion detection and data encryption for a dynamic proliferation of IP-enabled and interconnected generation, transmission, distribution, and consumption assets and devices. Utilities have traditionally relied on “security through obscurity”, but that won’t fly as M2M (machine to machine) communications and Smart Grid initiatives add monitoring and most particularly actuation (control) capabilities to equipment that generates, transmits, distributes, or consumes electricity. The 2010 Stuxnet incident illustrates how a targeted cyberattack against a software program can cripple industrial facilities.  Substitute a large generation facility or major transmission substation as the attack target, and you can imagine the economic disruption and threats to security and safety that result.  Utilities are now identifying cybersecurity concerns as business risks in their SEC filings.  Couple that with federal requirements to protect assets identified as Critical Infrastructure Protection (CIP), and the result is a huge market potential for solutions that “harden” networks, assets, and the data residing in them.

Grid Management – this $5B+ category includes software to manage converged, hybrid communications networks AND power grid operations.  Communications can be wireless (public or private spectrum) or PLC (power line communications) and since utilities average between two and nine communications networks to manage grid operations, it is highly likely that any utility will have a combination of network technologies.  Rather than manage each network on an individual basis, utilities will find their best opportunities to wring cost out of operations through combined network and device management.   Utilities will need solutions that can distribute intelligent controls throughout networks and converge management of them into holistic views of overall grid and network operations.  This category also includes software to manage microgrids, residential demand response, and individual components like energy storage or other distributed energy resource assets.  In addition to pure technology plays, there will be opportunities to invest in companies that have disruptive business models that intermediate the utility/consumer relationships, although these are relatively riskier investments. 

Analytics – this $2B** category covers all the software and services needed to manage the data produced by power grids, communications networks, and the equipment used in these grids and networks.   Just like the need for converged network management, there is a real need for solutions that have proven abilities to handle extremely large volumes of data – commonly called “big data” produced by various grid management applications and assemble it into human-comprehensible information.  That means cleansing data so that it is time-synchronized to develop accurate snapshots from previously siloed applications and melding it with existing business intelligence tools for effective visual displays and presentment of information.  The initial opportunities are in solutions that enhance legacy applications for outage management, distribution management, and workforce management, but analytics to develop consumer insights have significant promise too.  Utilities are discovering that their outreach to consumers is improved with information that supports segmentation strategies for marketing and education.   Look for analytics companies that have proven expertise in related business sectors like communications or retail and can leverage these experiences to the benefit of utilities. 

Of course, not all angel investment comes from Silicon Valley, but that’s where a lot of the money is, so entrepreneurs with promising Smart Grid solutions need to make it a destination in their quests for funding.

* Pike Research

+ Lux Research

** Utility Analytics Institute