EnerG2, Backed by OVP and Firelake, Wants to Own Energy Storage in the Electricity Economy
Two weeks ago, Xconomy broke the news of the Seattle startup EnerG2′s $8.5 million first-round venture deal with Kirkland, WA-based OVP Venture Partners and Palo Alto, CA-based Firelake Capital Management. Today, the energy storage and advanced materials company is officially announcing its approach and giving the story behind its financing. I had a chance to speak in-depth with EnerG2 chief executive Rick Luebbe and OVP venture partner Rick LeFaivre about the company, its strategy, and what it could mean for the future of cleantech ventures, particularly in the Northwest.
As we reported before, EnerG2′s technology originally comes from the University of Washington. It revolves around synthetic carbon powder and “nanocomposite” materials that have novel properties on the molecular scale, such that they are extremely efficient at storing various kinds of energy—electricity, natural gas, and hydrogen, to name a few. I wanted to find out more about how the technology works and how it will be commercialized (think better batteries for tools, vehicles, and mobile devices), but I also wanted to hear the deeper story about the ideas and motivations of the key players and how the deal came about.
The story goes back to 2003, when Luebbe and his business partner Chris Wheaton first got into the energy game. Luebbe had been the co-founder and CEO of the Seattle software firm Hubspan, while Wheaton had been vice president of North American operations at Silicon Valley-based Loudcloud (now part of Hewlett-Packard). “We got interested in energy storage because we recognized no matter which direction the energy economy went, storage would be a critical, critical component,” says Luebbe. And whether it was electrical storage or gas storage, local or mobile applications, the future was in energy. “I really enjoyed my previous career from a business perspective, but I didn’t have same passion I have for clean energy,” Luebbe adds.
Luebbe and Wheaton began looking for renewable energy technologies at the University of Washington that were practical and could be readily commercialized. “We weren’t interested in science projects,” says Luebbe. At the same time, they thought “the most practical way to enter the space was to find a technology that was a market changer,” he says. In other words, they had to swing for the fences. So they met with various department heads at the UW, and were introduced to Guozhong Cao, a professor in the materials science and engineering department, and his graduate student, Aaron Feaver. Cao and Feaver were focused on developing novel materials to generate and store energy. It was a good match.
The status quo in energy-storage technology, roughly speaking, is that you try different natural materials and see if they work. What Cao and Feaver did was use advanced nanotechnology andprocessing steps to “craft these materials at the molecular level,” Luebbe says, thereby optimizing their structure and properties for particular energy storage applications. “We really want to innovate the materials from the ground up,” he adds.
For the first few years, EnerG2 was funded through the Washington Technology Center and other sources in the region, including Seattle-based WRF Capital, the Sustainability Investment Fund of Portland, OR, and members of the Northwest Energy Angels. As the technology matured, Luebbe says, the company worked with UW TechTransfer on the licensing and sharing of intellectual property. He also began to look for greater funding opportunities through venture firms.
Enter Rick LeFaivre and OVP. In June 2006, LeFaivre says, he had been “roaming the halls” at the UW, and was introduced to Luebbe and Wheaton, and then Feaver. (Wheaton is EnerG2′s chief operating and financial officer, while Feaver is vice president of research and development.) The initial meeting took place at the Washington Technology Center, and LeFaivre says UW TechTransfer helped set it up. “Here’s a couple of refugees from the IT world who said, ‘I’ve been in a couple IT-oriented startups and frankly that was getting kind of boring,’” he says. “I began to advise them on, here’s what you need to do to get funding, and I kept meeting with them.”
At the time, OVP didn’t have much expertise in cleantech. LeFaivre himself is a former professor of computer science and a veteran of the tech giants Apple, Borland Software, Silicon Graphics, Sun Microsystems, and Tektronix. So he spent time talking with energy experts, faculty, and graduate students at the university. “Our own strategy evolved here to have an actual focus on the cleantech space,” he says. In some respects, OVP applied the same strategy as in biotech. “When you’re an investor, you’re looking for emerging areas that have promise, that are hitting the inflection point of the S-curve. Both in the biology space and energy, we’re hitting those,” LeFaivre says. “We decided this is definitely an area we need to develop points of view on.”
Which is all well and good, but EnerG2 wasn’t ready for venture funding just yet. The first issue was finding the right market. The startup initially focused on hydrogen storage, says LeFaivre, but that didn’t pan out. Instead, EnerG2 quickly refocused on electrode materials for making better batteries and “ultracapacitors.” These are devices that can store and release electricity 1000 times faster than conventional batteries and have much longer lifetimes—all because there is no chemical reaction involved. Luebbe says the market for ultracapacitors is $600 million, and is growing by 70 to 100 percent per year as costs come down. Ultracapacitors are commonly used in elevators, cranes, and forklifts, but they could spread to more everyday uses (more on this in a minute).
The second issue was scale. As LeFaivre puts it, “there are a lot of university projects out there.” He looked at perhaps eight to ten projects—such as making an ultracapacitor using carbon nanotubes—where the technique could be demonstrated in a lab, but “there is a lot of skepticism about whether it can scale” to industrial applications. In other words, can you make a ton of the stuff, instead of just a few grams? “I want you to prove you can build the material on your dime instead of mine,” says LeFaivre.
EnerG2 got to work on that, linking up with a large, undisclosed chemical company to manufacture in bulk its patented carbon-based material for making better batteries and ultracapacitors. The material itself looks like a fine, black powder. “It doesn’t sound very sexy, but take a step back and it’s an amazing, amazing material,” says Luebbe. “Messing with the way those molecules are assembled at the elemental level has enormous impact.”
Crucially, in the past year, EnerG2 demonstrated it could make an oil drum’s worth of the material, about 1,500 pounds of it, and tests in the lab showed it had the right stuff. Apparently, that is the critical threshold amount of material that indicates the company’s process engineering—the “secret sauce of dials and levers,” as LeFaivre puts it—is ready for prime time.
So OVP turned up its due diligence and went for the deal, bringing in Firelake Capital because of its expertise in cleantech and energy investments. The $8.5 million Series A round closed at the end of October, with OVP managing director Gerry Langeler joining the board of EnerG2, and LeFaivre joining as a board observer. “Some deals get done fast, but here’s one that took two years,” LeFaivre says.
One more point on the technology front. Surely these venture firms aren’t betting the farm on niche applications of ultracapacitors like forklifts and cranes? It turns out ultracapacitors could be used to get 150,000 miles out of a plug-in hybrid car battery, says Luebbe. They could be used to make more efficient electric rail systems and power tools. Further down the road, they might even be used to make mini electricity generators that charge your phone or mobile device while you’re walking around. What’s more, ultracapacitors could be used for distributed generation and storage of power on the electric grid—a large-scale application in which batteries have major problems.
“We are moving towards an electric economy. That means energy storage is a very, very key part of the puzzle,” LeFaivre says. “A lot of investors are drawn to [energy]. There’s always the challenge of a frothy environment, sort of a bubble. The challenge is to sort through everything.”
I asked Luebbe for his thoughts about the deal’s broader impact on energy ventures—particularly in the Northwest, where there have been pockets of activity in biofuels, geothermal, and solar, but little in the way of broad-based leadership in cleantech venture capital, for instance. “There’s no reason why Seattle shouldn’t be a cleantech hub for innovation,” he says. “With OVP’s commitment, we’re going to see Seattle get much more traction to establish itself.”