Richard T Stuebi

AN OVERVIEW OF ENERGY VENTURE CAPITAL Richard T. Stuebi President, NextWave Energy November 18, 2004 Energy Advancement Leadership Conference, Houston

TOPICAL AREAS
Overview of venture capital
VC in overall energy finance spectrum
Facts about energy VC marketplace
1

FAILURE RATE OF NEW VENTURES Percent Source: U.S. Department of Commerce, New Jersey Institute of Technology 2

TYPICAL VC PORTFOLIO # Invested $ mm Return multiple Year 5 value $ mm “ Dogs” 3 $3.0 0 x $0.0 “ Walking Dead” “ Cash Cows” “ Home Runs” Source: Venture Capital Online Return CAGR NA 4 $4.0 2 x $8.0 15% 2 $2.0 5 x $10.0 38% 1 $1.0 10 x $10.0 58% TOTAL 10 $10.0 2.8 x $28.0 23% Only 3 out of 10 investments produce favorable returns 3

VC CONCERNS
Misguided strategies
Excessive reliance on government support to spur/sustain market
“ Me-too” strategies, no differentiating advantage
Customer needs not urgent enough to adopt new technology
Implausible analyses
Overoptimistic or unwarranted assumptions
Insufficient research in pricing and attainable market share
Excessive technical orientation
Inadequate marketing and sales experience
Questionable management skills
“ Perfect is the enemy of the good enough”
4

WHY VC’S INVEST
Huge, rapidly growing, real market
Market size: multiple millions per year desired
Market growth: 10% + per year
Demonstrated customer willingness to pay
Compelling business model
Recurring revenue streams vs. large, one-time sales
Sustainable advantage over competitors
Solves urgent customer “pain”
Attractive, realistic financials
Logically supportable assumptions
Plausible revenue, cost and profit projections
Reasonable valuations of venture
Solid capital formation plan
Strong management team
“ Bet on jockeys, not on horses”
Deep commercial orientation and business acumen
Demonstrated successes in related fields
Most important factor 5

TOPICAL AREAS
6

ENERGY SECTOR FINANCE Asset-based energy infrastructure projects Energy technology venture capital Businesses involving energy services Energy sector finance 7 Increasing risk/return

ENERGY FINANCE ALTERNATIVES
Windfarms
Cogeneration
Energy efficiency
Hydrogen infrastructure
Examples Key success factors Risk/reward profile
Well-structured contracts (especially off-take)
Favorable economics
Management team with strong development/ operating experience
Technology risks assessed/accepted
Modest upside (20% equity IRR max?)
Minimal downside (assuming technology risks nil or hedged)
8 Asset-based projects
Green energy retailing
Mass-market retailing of energy technologies
Networking of distributed generation
Hydrogen sales
Solid general management team, with marketing/sales expertise
Clear evidence of customer willingness (ability) to pay to solve a clear need
Barriers to competitor mimicry
Minimal technology risk
Possibly attractive upside…
But significant market and execution risk
Service businesses Technology VC
Nanotech for PV
New wind turbine concepts
Stirling engines
“ Exotics”
Acceptable technology development risks
Modest market adoption challenges
Time to exit/ liquidity acceptable
Strong patent position
Big potential upside (3-10x)…
But significant possibility of total loss

IMPLICATIONS FOR VC INVESTORS IN ENERGY TECHNOLOGY PLAYS
Typically make inroads in niches (rather than address the overall market)
Often rely in some degree on government subsidies
Often entail higher upfront costs in exchange for lower annual costs
Often require a long time to fully develop technologies
Face high customer inertia and obstacles from incumbents
Attract relatively few investors (because of these issues)
Understand customer needs/ economics in those exact niches
Assess future “firmness” of government supports
Research customer acceptance of “paybacks”
Be willing to accept longer time horizon to exit/liquidity
Evaluate these obstacles accurately (conservatively?)
Consider risks associated with subsequent financing requirements
Because new energy tech’s...: … VC investors must: 9

RECENT ENERGY DEVELOPMENTS AFFECTING VC INTEREST
California debacle  deregulation?
Enron debacle  trading? generation?
Premature hype (microturbines, fuel cells, hydrogen?)
Lack of consistent transmission policy
“ Negatives” “ Positives”
High oil/gas prices
Energy security post-9/11
Increased recognition of grid vulnerability (Aug. 03 blackout)
10

TOPICAL AREAS
11

Source: Nth Power, U.S. Dept. of Commerce, U.S. Energy Information Administration, NextWave Energy analysis SMALL SHARE OF VC TO ENERGY Percent 7.1% 100% = $9.8 trillion (2000) 2.3% 92.9% 100% = $18.2 billion (2003) 97.7% U.S. VC investments U.S. GDP 12

U.S. ENERGY VC INVESTMENTS $ millions Source: Nth Power 13

WORLDWIDE ENERGY TECH VC $ millions Source: Nth Power 14 -10% $526.2 $583.6 Total -34% $32.5 $49.5 Other +42% $17.0 $12.0 Grid optimization -10% $46.5 $51.7 Power quality -51% $23.7 $48.4 Services +191% $94.2 $24.1 Customer energy management +27% $87.6 $68.9 Power IT -32% $224.7 $329.0 DG & storage Change 2003 2002 Sector

PROFILE OF GLOBAL ENERGY VC DEALS $ millions Source: Nth Power More, smaller deals (risk diversification) 15 $526 $6.26 84 2003 $584 $10.61 55 2002 Total investment Avg. deal size No. of deals

LEADING ENERGY TECH VC INVESTORS
Altira
Arete
EnerTech
Alliant
Avista
Chevron
Cinergy
DQE
Enron
FA Tech Ventures
Kinetic
Nth Power
Perseus
Exelon
Hydro-Quebec
OPG
PG&E
Reliant
Shell
Advent
Altira
Braemar
ChevronTexaco
Cinergy
ConocoPhillips
Eastman
EnerTech
Nth Power
RockPort
Hunt
OPG
Shell
Alta
Benchmark
DFJ
JP Morgan
Mayfield
Mohr Davidow
RBC
Sevin Rosen
Technology Partners
USVP
JP Morgan (Beacon)
RBC
Sevin Rosen
Technology Partners
Strategic investors Energy VC’s General VC’s “ Then” (2000/2001) “ Now” (2004) Source: NextWave Energy assessment 16

CONTACT INFORMATION
Richard T. Stuebi
President
NextWave Energy, Inc.
1600 Broadway, Suite 2400
Denver, CO 80202
(303) 352-0377
(303) 573-1830 fax
[email_address]
www.nextwave-energy.com
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Richard T Stuebi

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