Energy has been the domain of a handful of specialized funds whose managers bring their own industry expertise to the table. Nth Power is an excellent example. Nth Power started its first energy investment fund in 1996, when all eyes were on the software industry. Today they hold one of the largest energy portfolios, with 20 energy companies.

Traditional sectors -- software, manufacturing, biotech -- remain competitive for venture investors, who find it difficult to differentiate themselves. Meanwhile, the less-saturated energy technology sector is getting a boost from high oil prices, renewable portfolio standards, blackouts and other factors.

As energy tech emerges as a business opportunity and more capital-intensive technologies are commercialized, more VC firms are entering the sector. Energy investments comprised 2.4 percent of all venture investments in 2003 -- up from practically nothing five years earlier.

What kinds of support are needed

Like other new technology sectors before it, the energy space is strong on engineering expertise. When combined with entrepreneurial experience and the right industry connections, the potential is compelling. Companies nonetheless fall short of expectations.

"There aren't very many experienced entrepreneurs in this space," said Kirk Washington of Yaletown Venture Partners, at the MIT Enterprise Forum on Smart Energy. Why the dearth of early-stage management talent? In part it's because founders with the requisite technical expertise come from the research arms of large companies or universities, where top-management skills aren't emphasized.

Energy entrepreneurs need more than general management and financial advice. Energy is a diverse scientific field with complex business relationships. It takes a team with industry, technical, and managerial expertise to succeed. The VC needs to be ready to contribute to that team as needed.

The appropriate type of contribution depends on the company's exit strategy. An R&D play with an acquisition strategy might need engineering support and industry connections. If a company plans to go to market, its investors may offer sales and marketing expertise, channel access, cross-pollination or roll-ups.

The VC "Plus"

Not every VC firm can offer the type of support needed. Some have purely financial investors, such as institutions and pension funds, who are interested solely in financial returns, and that is what the firms must deliver.

A few firms are particularly well suited to provide strong support, and those firms have deliberately built that capability through their partners or investors.

Nth Power, perhaps the best-known energy fund, has put considerable effort into being just such a resource. Its first fund was made up mostly of strategic corporate investors, and today its investors are half strategic and half financial.

"Strategic investors have been great resources to our portfolio companies," says Nancy Floyd, co-founder and Managing Director of Nth Power. "They're early adopters of the technologies, channels to market and R&D resources." Nth Power chairs the boards of companies in their portfolio and takes an active role in leveraging every available resource. One of the most powerful is access to the big industry players.

"We establish relationships with strategic investors at the CEO level," says Floyd. "Our entrepreneurs have access at any level in companies like Emerson Electric, ABB, EDF and Chevron-Texaco, that they wouldn't dream of having otherwise."

Filling in the gaps

Despite the specialized resources offered by some investors, seasoned CEOs can be wary of VCs. In his keynote address at last month's Cleantech Venture Forum, Mossadiq Umedaly, chairman of Xantrex Technology, contended that VC oversight can encumber management and take up board seats that should go to directors who could provide better strategic counsel to the company.

That sounds like the voice of experience. Unfortunately, few startup management teams come with all the necessary qualities. Investors need to communicate that they can fill in the gaps, however large, rather than taking up space.

"This is the way VC was done years ago," says Nth Power's Nancy Floyd. "People invested in areas they knew. They leveraged their networks and didn't spread themselves too thin." That philosophy benefits entrepreneurs and, we hope, investors.