CORPORATE SPEAK: GE Making Big Push With Energy Start-Ups

August 9, 2011 

[CORRECTION 8/9/11: The original version of this story misstated the month in which General Electric Co. launched a joint venture with NRG Energy and ConocoPhilips. The joint venture launched in January. Also, the GE Equity team is involved in many venture investments by helping to structure the transactions, but not every transaction as the story originally said.]

[EDITOR'S NOTE: This is one in a series of profiles that analyze the strategies of publicly traded companies plugged into the start-up community, whether through investments, acquisitions or partnerships.]

With 16 venture deals in the energy space under its belt already this year, General Electric Co. is pushing more aggressively into working with start-ups, even as the big company is pouring resources into its struggling, yet core, energy business.

"This year is shaping up to be our busiest in number of deals since the formation of our VC investing group," said Kevin Skillern, head of the group, which is housed within GE Energy Financial Services, a GE business unit.

Of the 16 deals, ten were first-time investments in start-ups for GE, and the rest were follow-on investments. For Skillern's unit, the previous record was 11 venture deals for the full year of 2007.

GE relaunched its venture activities in 2006 after pulling out of such investing, having lost $167 million in its GE Equity unit in a single quarter of 2002. The company was a heavy investor in software and telecom start-ups, but decided to wind down its activities in that year.

"What we have learned from prior VC investing is that we should be prepared to hold energy technology investments through multiple stages of the business cycle and to focus on companies with sustainable business models generating revenues and profits, and in many cases with strategic value to GE," said Alex Urquhart, president and CEO of GE Energy Financial Services.

The pace at GE's energy venture unit is accelerating for several reasons. The creation in January of a $300 million joint venture with NRG Energy and ConocoPhilips, called Energy Technology Ventures, is funneling new deals to GE. The companies haven't said how much each is investing in the unit, but NRG Energy has revealed in regulatory filings that it expects to invest up to $100 million in this joint venture over four years.

Skillern said that he expects to have $40 million invested in start-ups by end of August via the joint venture.

GE's energy venture unit is also handling investments for a technology competition GE launched last year, called Ecomagination Challenge. "I had a personal estimate of 700," said Skillern about the submissions for the competition that seeks to find the most innovative technologies that also can be useful to GE's business units. More than 5,000 responses came in, easily beating Skillern's estimate.

The venture unit is more active than usual, even as other parts of GE Energy Financial Services, such as its renewable energy project investing unit, are doing less.

Debt and equity financing of renewable energy projects, especially wind, is difficult this year, because there are many financiers and returns are lower. At the same time wind projects are competing against cheap gas alternatives, and are therefore getting low prices for the power they sell to utilities.

Poor sales of wind turbines also hurt GE's energy infrastructure segment. In the first half of the year, energy infrastructure was the second largest in the company, following GE Capital, in terms of revenue, hauling in $19.9 billion on $2.9 billion in profit. Yet its profit, in the quarter ended June 30, was down 19%, prompting Chief Financial Officer Keith Sherin to call the period "the low point" for the business unit.

Yet energy is "one of the most interesting and promising parts of [GE's] portfolio," said Daniel Holland, who analyzes the GE stock at Morningstar. "Our ability to get to fuel sources gets more complicated, as we deplete more of them. That requires more high-tech equipment...That creates higher profit margins for equipment manufacturers," said Holland.

Even as it was selling the majority of NBC Universal, GE has deployed some $11 billion in mammoth acquisitions over the past 12 months, with the bulk in the energy space. It's not planning to make any more big buys.

"Our story will be fitting the pieces together," said Sean Gannon, spokesman for GE Energy. But the company still has firepower for smaller deals and venture-type investments.

'Tentacles In Everything'

Within energy, GE is likely looking for all kinds of technologies. "You have tentacles in everything," said Holland of GE's approach. "No matter which way the world shifts in terms of energy policy and no matter how the world thinks about consuming energy, GE will have a position in that market." It offers technologies for natural gas, nuclear, wind, and more recently solar power plants.

The energy venture unit is making investments in a gamut of technologies, backing solar, biofuels, lighting, small-wind, energy efficiency and grid technology start-ups.

GE Equity is also investing again, but its equity deals are for later-stage companies in a variety of sectors, such as aviation, health care, security, transportation and water, as well as energy and clean-tech, though not telecom.

The GE Equity team is also involved in many venture investments made by Skillern's team by helping to structure the transactions. GE also created in 2009 a $250 million fund to invest in early-stage and growth companies in the health-care sector, called Healthymagination Fund. And its business unit sometimes makes equity investments--with GE Energy buying into photovoltaics developer Primestar Solar and, most recently, investing $40 million in solar thermal technology developer eSolar.

GE's energy venture team's first investment was a deal for battery maker A123 Systems. The company made $25 million of investments in its first year of such deals, in 2006. That went up to more than $50 million in 2007, and up to $100 million was set aside for 2008, although it's not clear whether GE invested that full amount as the recession hit.

Andrew Katell, spokesman at GE Energy Financial Services, declined to say how much the unit invested in the past three years.

As of the end of June, GE Energy Financial Services' venture unit backed 35 companies, and four of those have conducted IPOs, according to Skillern. Those companies are A123 Systems, Codexis, Orion Energy Systems Inc., and China High Speed Transmission Equipment Group, trading on the Hong Kong stock exchange.

"That was a huge win," said Skillern of the Chinese company. The company wasn't supplying to the wind business, but quickly became a major supplier to GE's wind turbine unit, which helped the company stage a successful IPO.

Skillern's unit hasn't been successful all the time. It had to write down its investments in Soliant Inc., a concentrating solar photovoltaic start-up, and electric vehicle company Think. And the other IPOs haven't necessarily generated grand returns. GE holds most of its shares in A123 to date, while both Orion and Codexis are trading at prices below their public debut.

Still, Skillern expects that his unit will bring in venture or better returns. The goal of his unit, he said, is not just to provide investments, but also to connect start-ups with GE's various businesses, as was the case with the Chinese transmission products supplier, as well as with start-ups like SynapSense and Ioxus.

Thorny Issues For Portfolio Companies

But there are also pitfalls in working with GE, according to some start-up companies. GE's venture unit invested in the Series C round of smart grid company Tendril Inc. about two years ago, and has been reinvesting in additional rounds. But, "there's no real tangible business piece yet," said Tendril CEO Adrian Tuck about the relationship of his start-up with GE at large.

Tendril took the lessons learned in working with GE to heart when it recently brought in Siemens Corp. as a strategic investor. "We made sure that the Siemens deal had much more tangible commercial pieces along" with the financial investment, said Tuck. Tendril's product is now distributed along with some Siemens products to the bigger company's customers.

Part of the reason the relationship with Tendril is taking a while may be that a GE unit has developed a product similar to Tendril's after the venture unit had invested. "In some of our products we are more competitive than compatible," said Tuck.

The issue of competition is a thorny one when dealing with a conglomerate that has its "tentacles" everywhere.

"There's a fine balance towards cannibalizing their current base, versus coming out with new and leading technology that can change the world," said Morningstar's Holland.

Skillern said that in the case of Tendril the commercial relationship didn't go as far as it could have, but that the introductions to business units took place as planned.

Most often GE's energy venture unit takes a minority stake. The company has also been able to use its leverage to structure deals differently. For example, said Skillern, his unit has come into companies mid-round, taking some equity at the previous round's valuation and some in the form of a convertible note.

"Companies normally wouldn't do that, for normal financial investors, because you're just bringing money," said Skillern. "Whereas we bring a lot more and they want the partnership value."

As GE's energy investing evolves, the company has expanded from first looking at just growth equity deals, to increasingly investing in earlier stage technologies. At the same time the company has also set its sights abroad, making two deals in Israel, for example.

Emerging economies in Brazil, China and India are gaining importance for GE. "You'll see a lot more activity in emerging markets," said Holland. "Brazil, for example, it's a market where GE has a presence now but could be much much bigger than it currently is."

The overarching goal of GE's energy venture activities, as well as its efforts such as the Ecomagination challenge, are not just financial.

"Culturally, the company is very aware that its large size can get in its own way as it regards innovation," said Terry Darling, analyst at Goldman Sachs who covers the GE stock.

http://www.ge.com

The conglomerate has made 16 VC deals in the space so far this year, already easily topping its record for a full year. A key joint venture is quickening the pace, as is a tech competition launched last year. But due to the company's sheer size, relationships with start-ups can sometimes be thorny.

(c) 2011 Dow Jones & Company, Inc. 

Article By Yuliya Chernova