Investment Lessons From An Energy Tech Scout
By Ryosuke “Ricky” Sakai
Today is made for energy tech scouts. Increasing urgency to address climate change is driving more money than ever into climate-related technologies. Global investments in the energy transition grew to $500 billion in 2020, up 9% year over year, even in the face of the pandemic.
That means more startups, more technology and more innovation.
For companies looking to invest, the environment is both target-rich and highly competitive. They need effective tech scouts to find the right investments — those that not only represent potentially game-changing innovations, but also, with the right support, can be commercialized and deployed at scale. I believe this work has never been more important and inspiring: Scouts who identify effective climate technology investments are helping drive the post-pandemic economic recovery while literally helping to save the world.
In 2020, MHI established a new fund to capture this once-in-a-lifetime opportunity and invest in some of the most promising solutions for the energy transition. My job is finding them and ensuring that they align with our mission of accelerating decarbonization. Here are my keys for successful scouting.
1. Prioritize your value, not simply theirs
More than 1,200 climate tech startups have launched since 2013, according to PwC. Many of their technologies do thrilling things, from capturing tidal energy to managing electrical transmission and distribution with AI.
Developing a clear idea which technologies you can support best helps to focus your investing efforts.
But as enticing as these opportunities may be, investors should approach them judiciously. Successfully commercializing new climate technologies takes more than a sophisticated new concept and promising engineering. It also demands well-placed partners with deep expertise and strong connections in the right parts of the industry.
Developing a clear idea which technologies you can support best helps to focus your investing efforts. At MHI, we start by thinking about where we can add the most value, and we look to invest in technologies that match our expertise and business strategies. Our expertise across both the upstream and downstream sides of the energy sector positions us to help certain kinds of technologies realize their promise.
A strong network of industry experts is another key to finding the best investment opportunities. Successful scouts keep their eyes and ears open, so they can recognize the right opportunity when it presents itself. When you make sure everyone in your network — including industry contacts and other investors — understands what you’re looking for, you can put their eyes and ears to work for you as well.
For example, we invest in Monolith Materials, which uses methane pyrolysis technology to produce hydrogen. That investment came about because we shared our strategy with one of the company’s investors, who thought we could help the firm realize its potential. And we found C-Zero, which developed a turquoise hydrogen technology, through the venture capital fund Breakthrough Energy. The Breakthrough team introduced us after we inquired about another of its companies.
Conferences can also be rich scouting environments if you’re well-connected with key players. Many startups see such events as perfect opportunities to present their solutions, so it can pay dividends to spend some time and energy seeking them out there. Take our investment in Infinium Electrofuels: I’ve done business with the firm’s parent company, Greyrock Energy, for many years, and we first discussed Infinium at a gas monetization conference.
Partnering with accelerators is another way to meet and interact with early-stage start-ups. Recently, we partnered with Greentown Labs in Houston, Texas, a nationally recognized climate-tech accelerator. The partnership not only enables us to engage with local startups, but also introduces us to like-minded investors with whom we can forge collaborations to advance decarbonization.
2. Explore both short- and long-term investments
Decarbonization will take decades, but market pressure to decarbonize quickly is mounting. This situation has created urgency for incremental solutions that can have an immediate impact, including those using existing technologies. Investors need to balance opportunities for market-ready decarbonization technologies with longer-term solutions.
Investing now in the production of blue and turquoise hydrogen represents a way to strengthen the ecosystem before green hydrogen production becomes a mature technology.
Companies with capital to invest can be patient, but not infinitely so. Investing in companies across a range of development stages can provide the quicker returns on capital necessary to remain patient as you wait for the longer-term opportunities to ripen. Our goal at MHI is not only to earn investment returns, but also to create new lines of business — and we want to establish them as soon as possible. So we try to invest in both longer-term solutions and the shorter-term solutions they will build on.
Take green hydrogen. It will undoubtedly play a key role in the energy transition when it becomes more economical to produce and transport. Investing now in the production of blue and turquoise hydrogen represents a way to strengthen the ecosystem before green hydrogen production becomes a mature technology. Monolith is about to commercialize its hydrogen production technology, so it was a natural fit for us as a shorter-term investment. C-Zero is at an earlier stage of technological development and won’t be completing its prototype unit until the end of the year. Infinium lies somewhere between the two.
The resulting portfolio gives us multiple opportunities to grow and evolve with the space as we gain insight into the practical applications and potential promise of these new technologies.
3. Find people you can help to succeed
Innovative technologies are essential. The people behind them are important, too. After all, they’re the executives and technologists you’ll be collaborating with. Experienced leadership and a strong management team vastly increase the likelihood that a startup will be successful in developing and scaling technology.
At MHI, we focus on identifying smart people doing promising work and leverage our expertise to help them succeed. We prefer to do this work on-site: Even during the pandemic, we’ve continued to meet with leaders of the companies we’re considering for investment. As engineers, we sweat the details and want to continually find improvements, optimizing products and processes wherever possible. We seek out like-minded startup founders and technologists. Companies unwilling or unable to do that alongside us won’t be a good fit.
Financial results are critical, of course: We look for early- and middle-stage startups to produce positive cash flow within roughly five years. But the process is about more than ROI. The synergies between startups and our highly experienced teams create better solutions faster than either organization could develop on its own.
In many ways, one success breeds another – and given the global crisis at hand and the short time frames we have to deal with it, we need to multiply our successes as much as possible. This sense of purpose, combined with enormous talent taking aim at ambitious and sophisticated innovations, makes this a golden era for tech scouting. The opportunities and potential rewards have never been greater.
About the author
Ryosuke “Ricky” Sakai is Vice President of New Business Development at Mitsubishi Heavy Industries America (MHIA), based in Houston, Texas.