The head of General Electric's venture-capital arm talks about what the company hopes to accomplish
By MARA LEMOS STEIN
It's well known as a major investor in wind- and solar-energy projects. But General Electric Co. also hopes its growing role as a venture capitalist will give it an edge in a broader spectrum of emerging green technologies.
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Since its first investment, in lithium-ion battery maker A123Systems Inc. in January 2006, the venture-capital group at GE Energy Financial Services has put $160 million into a portfolio of 20 companies focused on renewable energy, power-grid and energy-efficiency improvements, and, to a lesser extent, advanced oil and gas technologies.
GE sees these later-stage, clean-energy start-ups as a way to get a sneak peek at emerging technologies. Through its venture arm, it also gets a piece of the ones it believes will be ahead of the pack in the global shift to a reduced-carbon economy.
Kevin Skillern, the VC group's managing director, says it's too early "to tell if we've turned one dollar into two or three dollars." But at GE, there's another key metric: technology. Mr. Skillern says GE is also interested in how the portfolio companies can help its businesses.
"This is a vehicle that provides our larger company with a window into what could be a $15 billion to $20 billion industry in emerging energy technologies," he says.
Mr. Skillern, who grew up in Houston and worked for more than a decade in the oil industry, got his M.B.A. at Stanford University in Palo Alto, Calif. He went back to the oil patch after he graduated, at a time when many of his classmates were pursuing Internet start-ups. But the seed of venture investing had been planted, and GE Energy Financial Services' venture capital was the perfect new patch to let it grow.
We met with Mr. Skillern at GE Energy Financial Services' offices in Stamford, Conn., to discuss how the large conglomerate is influencing the clean- technology industry through its venture investing. Excerpts from that conversation follow.
Seeking Relationships
THE WALL STREET JOURNAL: Were there any particular challenges for GE to get into clean-technology venture-capital investing?
Julian Puckett
Kevin Skillern of GE Energy Financial
KEVIN SKILLERN: We've had to upgrade the relationships with the major investment firms. In this type of investing, we're doing it as a group of investors, as a syndicate, so relationships are paramount. Only about 5% to 10% of the investments make the vast bulk of the profits, ultimately, so clearly you want to be having relationships with the best investors, the best firms.
When we started this endeavor, we were not well known as an investor in this domain, and the big companies are not always perceived positively by other financial investors. There's a lot of suspicion and concern, and we certainly didn't have a reputation of being a world-class partner. Another aspect to that is, as one investor at a top-three firm told me, "Aren't you the ones we're trying to beat? Aren't we trying to disrupt GE?"
There's been a change in philosophy toward GE and other large companies from the investment community, as well as the companies, as they realize the challenges of scaling up these businesses into very large, challenging markets. And I don't think it's just the market environment that has been the catalyst for this change.
WSJ: What is your investment selection process?
MR. SKILLERN: We see probably 1,000 to 1,500 business plans a year, and the selection process is similar to other financial investors. There are three simple factors that are the drivers of valuation: Is the market large and compelling? Is the technology transformational? And are there an adequate number of A-players in the management team that will build an enduring business?
The extra factors that matter for GE have to do more with the scope [of the technology] and how strong a fit it is with different aspects of GE. Ideally we'd love to see both a technical collaboration opportunity, where there is some value to be added beyond the capital, as well as a commercial collaboration opportunity in markets that matter to us.
Adding Value
WSJ: What value is added by GE?
MR. SKILLERN: There's a commercial value that we add, of trying to sell their products to GE and to GE customers. There's getting access to senior decision-makers. There are joint going-to-market programs.
On a technical basis, we have what's considered one of the world's leading corporate research centers that really is our secret weapon in valuation of companies. Then, on the expertise side, these companies are scaling up, looking for project finance, looking for how to fund themselves, to access government grants. So we're pretty smart advisers on some areas where conventional investors wouldn't have that kind of expertise.
As an example, there's a company in California called Soliant Energy. They're an emerging leader in rooftop concentrated photovoltaic systems. When you put the system together, you have to solder, and whiskers [stringy threads resulting from the heat] come up. That causes a problem, because too many of them could lead the unit to short circuit. We were able to go to our appliances business that has the exact same issue, but had already studied it. So we saved [Soliant] months of work and thousands of dollars to provide a quick insight because we are connected within our company.
WSJ: With GE being such a vast company, it's hard to imagine that there aren't silos that prevent the collaboration you talk about with the portfolio companies.
MR. SKILLERN: GE is a very progressive company and very thoughtful about what's going on in the world. If there's a better mousetrap, we want to know about it, and we want to work with the people who have the better mousetrap.
People are interested in trying to be involved and seeing what's happening at the leading edge of these areas. What that enthusiasm has enabled, is that through our vehicle, we fostered relationships with what we call the top 100 emerging technologies stakeholders across GE in all these different areas that matter—from carbon capture, to biomass, to wind and solar, even biofuels and water.
Battery Bet
WSJ: One of your group's major investments has been in the lithium-ion battery maker A123Systems—a $70 million investment. Is that a bet in the electrification of transportation?
MR. SKILLERN: Our view is that this electrification trend is obviously a significant and enduring one.
Ultimately, the question for the electric vehicle is whether or not the capacity that's being installed and the technology development make the cost come down in a way that gets to that price point that allows very deep penetration. The magic number in the U.S. market: If it would end up with a price premium over conventional vehicles of $5,000 to $6,000 for the batteries, the uptake on that type of price premium, we think, would be very high. And our collective view has been that the likelihood of that panning out in the U.S. market is pretty high.
WSJ: How do you view the rise in government policies to regulate carbon emissions?
MR. SKILLERN: It is a driver of the macro opportunity but in very specific instances; it's almost never the individual driver of any of these technologies today. I'd predict that over the next several years you'll see more opportunities that are driven specifically by the carbon policy.
We're starting to see some compelling technology in this area. You have companies that are developing alternative carbon-capture approaches, you have companies that are developing infrastructure that's designed to help move carbon dioxide around the world, you have companies that are developing services to account for carbon footprint.
It's not something that our group has made an investment in to this point, but I'd be surprised if we didn't make an investment or several investments in this area over the next 12 to 24 months. —Ms. Lemos Stein is a reporter for Dow Jones Clean Technology Insight in New York. She can be reached at mara.lemos-stein@dowjones.com
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