Finding Fertile Ground in Energy’s Valley of Death

For anyone conjuring up a likely list of early stage energy investors, Monsanto, Novozymes and Bunge Limited probably wouldn’t be top of mind. The companies, best known for genetically engineered seeds, custom enzymes and food processing, aren’t exactly heavy hitters in the industry.

For the past year or so, however, the three companies have been enmeshed in an unlikely coalition, forming energy startups through a partnership called Nidus Partners. The St. Louis-based group scouts research labs for promising energy technologies, forms startups to commercialize a few, and provides seed funding to tide them over till they can raise a venture round.

Although it’s too early to tell whether the partnership will yield any venture-scale success stories, portfolio companies have already gotten far enough to consider follow-on rounds. Electrochae, a Nidus-backed startup that develops technology for converting stranded electric power into methane, is currently seeking Series A funding. And X-tend Energy, a developer of technology for producing high performance cathode materials for lithium ion batteries, is looking to hit the fund-raising road in the second quarter of next year.

“We’re moving them pretty fast,” says Vicki Gonzalez, a Nidus managing partner, adding that the group counts four startups to date.

In addition to Electrochae and X-tend, it has backed Six Convert, a developer of a technology for wastewater-to-energy projects (which subsequently merged into Electrochae) and will soon be adding the developer of a valve that manufacturers can use to reduce energy consumption. Nidus also announced last week that it has added three new entrepreneurs-in-residence.

The effort is unusual in part because Nidus ventures head-on into an area most investors try to avoid – the dreaded “valley of death” between laboratory research and commercialization.  The approach can work for Nidus, Gonzalez says, because the companies funding the partnership are already looking for ways to expand their footprint in the energy industry, so they have a strategic interest in learning about these technologies anyway.

Gonzalez estimates that about 5% of the laboratory technology offerings it reviews make it to the formal due diligence process. For the most promising ones, Nidus forms an LLC, manages the company, and invests up to $250,000 in seed capital. The hope is that after a year or two, they’ll be ready for Series A funding.

It’s a low-budget effort by venture standards. Partners put in $500,000 a year for a minimum of three years to pay for overhead and some seed investments. Though currently there are just three partners, the plan is to have as many as eight. To ensure companies in the partnership aren’t directly competing, each member has the right to block a new partner from joining.

Though the current partners are more visibly connected to the agriculture industry, Gonzales says it’s a logical move for each to be considering expanding their footprints in energy.

“There is certainly the thought process that the crossover between energy and agriculture is growing,” she says, pointing to the biofuel industry and biomass conversion projects that have raised capital in recent years.

That said, Nidus isn’t limited to agricultural crossover technologies, and is looking at energy storage and efficiency plays as well. Also, its next partner is likely to have little to do with agriculture. Currently, Gonzalez says, an IT company, a utility and oil and gas company currently under consideration for membership.