Energy venture capital is provided by investors to start-up companies within the energy industry as a way of helping them to survive and compete in the market. Such capital is generally provided by investment funds or firms that spread their capital around the entire energy sector or to one narrow portion of the industry. Venture capitalists offer their investments in an attempt to get in on the ground floor of a young company with the potential for much bigger things. In return for the energy venture capital, investors often get the opportunity to dictate the future direction of the company.
The energy industry has been dominated for a long time by well-established companies that have staked out big portions of the market. Recent technological advances and new initiatives like green energy have opened the door for new companies to break into this market. For these young companies to compete with established titans of industry, they must secure capital at early stages of development. Energy venture capital is one such way that companies can secure those funds.
On the investor's side, energy venture capital allows him the opportunity to invest in companies that have potential but may be private and therefore not yet traded on the open market. Such investment usually takes place via investment firms that concentrate on the energy industry and the new companies within it. These firms are professionally managed and pool investments from multiple individuals, targeting companies that need capital to grow.
Many energy venture capital firms make such significant investments in these companies that they gain significant power in their operations. The firm can play a passive role, or it may step up and decide future directions and make management hires. Ultimately, the goal of the investment is a huge payoff if the company is able to step up into the upper echelon of the industry. When that happens, the company may go public or be resold at a higher value, either of which represents a financial boon for the venture capitalists.
Of course, there is no guarantee that the company will ever reach that level. Since many of these start-up companies have little or no track record to use as a measuring stick, investors may be taking a huge chance in their energy venture capital investment. Innovations within the industry and the growing demand for environmentally sound energy sources have opened up the industry significantly, so the opportunity for nascent companies is stronger than in the past. That means that the energy industry is often the focus of venture capital operations.