The Hot Demand For Energy Business With Neal Dikeman Of Energy Transition Ventures

All the press right now is about the energy business. With the unprecedented demand for all kinds of technological innovations, securing enough power to keep them alive and running is a must these days. Neal Dikeman of Energy Transition Ventures is focusing on this particular industry, which is one of the hottest and most promising spaces in this modern era. Joining Scott Kelly, he shares how disruptive technologies move beyond policy-driven investments to create the most exciting advancement in the energy sector.

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The Hot Demand For Energy Business With Neal Dikeman Of Energy Transition Ventures

Scott, we’re going to talk about the energy business. I know this excites you.

It was intriguing. I got introduced to Neal by one of our previous guests, Chris Howard. When he said energy, I’m like, “This is going to be boring,” but then, almost simultaneously, all the press now is about energy. Energy is the big thing. I remember someone was telling me, “We have to get involved in these data centers, AI, and all that.” I go, “Yeah.”

The real player is energy because they all need more power. You’re finding all these energy companies. The public company stocks are blowing up. The industry has been around the oil fields. The coal mines have been around for 100-plus years. Energy is invoked because it’s powering these massive companies. I think it was Amazon. I forgot the name of the company. They bought one of the towers at Three Mile Island.

I saw that. It was crazy. It was easier to renovate something than it was to build it from scratch. It was faster. It still took a decade to get it up and running.

It was interesting talking to Neal because he knows that business. He’s been in the oil field. He has worked for Shell. He knows that business. His business was always important, but now, it’s massively important because there’s not enough power to power the next generation of technology, which is pretty cool.

You have Neal Dikeman from Energy Transition Ventures. I like that transition part. It sets them apart in a unique way. He’s the General Partner of early-stage fund, Energy Transition Ventures. He formally helped launch Shell Ventures and Jane Capital. Those are big players. Energy and cleantech-focused venture capitalist involved with amazing founders and great exits at every step. He’s a six-time founder with multiple IPOs. He started in energy, and then went into dot-com. He has broad experience. He won the Libertarian nomination for US Senate in Texas, but he lost in the general election pretty badly, he admitted.

It was an interesting conversation with him because he’s got an upbeat, crazy personality. My first job out of college was in Lafayette, Louisiana, in the middle of the oil and natural gas field. They’re not the most exciting guys.

I’m going to say this. I know because my dad was in the oil industry.

Neal has a bubbly personality. He’s funny, but he knows this stuff cold. He understands that energy isn’t just in the ground. It’s in the air. It’s in the ocean. It’s in the sun. It’s everywhere else. He gets that. It was an interesting conversation. He put a new tech spin on an old tech industry.

Let’s go to this interview with Neal Dikeman.

My name is Scott Kelly, founder and CEO of Black Dog Venture Partners, and your host for the Emerging Managers Podcast. I’m excited to bring on Neal Dikeman of Energy Transition Ventures. Neal, welcome to the show.

Thanks for having me on. As we were talking earlier, you happened to have a guy on who was an old good friend of mine, so I had to be on your show. I’m excited to be here.

Neal Dikeman Of Energy Transition Ventures

It’s great to have you following up on Chris Howard. Before we get into the funds themselves, share a little about your background prior to launching the fund.

That sounds good. I’m a Texas boy originally. I’m back here in Houston. After a short stint in investment banking, I ended up out in the valley in 1999, doing manufacturing turnarounds at the height of the dot-com boom. I was out working for a fund out there. That was dumb. Everybody I knew was working in a software startup of some sort or other, and here I am working in a tube-bending plant.

It was an awesome shop. I learned a lot. We had fun. I got to be the Corporate Secretary of Ocean Pacific. If you remember the OP Surfer brand, that was us. We had a successful turnaround in that, but I needed to do something different. That wasn’t going to be a career stop in 1999. I ended up jumping to the fund behind YellowPages.com and a few others, and ended up getting into tech, startups, and venture capital back then.

In 2001, after the tech wreck, my boss and I at that firm pulled the team, hooked up with Macquarie Bank, and launched a company called Jane Capital. We were the advisor to Macquarie Bank’s tech fund back then. We ended up advising ConocoPhillips, a few others in Shell, and a few others along the way. We were doing seed investing out of the Jane Capital portfolio and did well. We ended up with three IPOs out of seven deals there.

Shell caught me at a weak moment. I’d moved home to Houston for family reasons, and they managed to convince me to come over and help launch Shell Ventures in 2013. I was the guy brought in to launch that thing. We had a great, fun ride. Shell Ventures has done extremely well since then. I had three deals there, all exited, and one IPO. That was a fun group of people. I got to work with guys with over 100 patents to their name. It was a fun time, but not a long-term spot.

After about three years there, CBC was not going to be a long-term play for me. I ended up leaving. I took a short break because I was burned out and needed some time off. I filed to run against Beto O’Rourke and Ted Cruz in the 2018 Senate race in Texas. I won the Libertarian nomination and then lost to Ted, as did Beto. Our track record is about the same there. Mine is a little bit better than his. I’m 1 in 1. He’s a little under 500. It was a great time. I did that.

In 2020, an old friend of mine, Craig Lawrence, who was at Excel Partners back in the cleantech days, called me up and said, “I’m working with this large LP, a Korean international company called the GS Group. They want to get into CBC. They want to get into energy. Do you want to help me?” The conversations there ended up being us helping launch GS Futures, which is a CBC in San Mateo, operating globally in construction, retail, and energy. We set up ETV, and they were our anchor investor in the first fund.

Craig and I had been trying to do business for years. This guy is the smartest dude I’ve ever met. He has a PhD from Stanford. He worked for Excel to launch their cleantech group. He was an ideal product designer in the early days. When he got to Excel, I was bogging. I met him when both of us were a bit younger. The dude hit Opower and Sunrun, two of the category creators in our sector. Those were the only two deals he did. I tried to hire him, and he turned me down. I tried to get him to do a startup with me a few years later. He told me it was stupid and turned me down.

Finally, he and I got into business together and launched this fund. We came out in ‘21 in the teeth of the biggest runup and valuation boom in history, turning out to be an awful vintage for everybody but us. We were doing great. We’ve got to work together. We’re now out back with some pretty awesome founders and having fun. That’s the short story.

I appreciate that. Great background. You already have a better sense of humor than your friend Chris. I’ll give you that already. Thanks for that background again. Let’s talk about the fund. Talk about your thesis, how you’re investing, where you’re investing, and why you’re investing.

It’s called Energy Transition Ventures. We picked it as a term of art. The goal, broadly, is anything that benefits from or drives the energy transition is in the thesis. We’re early-stage folks, but we do cheat on that a little bit. We have what we call a growth sleeve. We’ll do this in all of our funds. We’re as early as I can get, meaning $100,000, $1 million, or whatever pre-seed. Two guys in their garage, we’ve done that a couple of times. We’ve spun out of the adversity.

I like to be the very first check and lead, but I will go as late and as small or as big as I have to go to get into the category killer and creator in that particular sector. We’ve done that several times. That works because we’re a specialist in energy. If we can’t find a company that we’re excited about in that particular subcategory or genre of energy transition, we’ll skip it. We want to play the guys that we think are going to win. That’s got us in some super interesting companies. We can talk a little bit about some of those.

In 2010, 2008, 2006, or whenever, the story that we invested in, and both Craig and I did this, was that the policy was stupid. We called it alternative energy because it’s more expensive than conventional. Therefore, you invest in things that have good policy support. There’s no disruptive technology. It’s disruptive policies. Even things like Tesla have benefited from that thesis.

It has become different. What’s changed is that it doesn’t matter what the policy does. There are tariffs and other stuff that cause kerfuffles, but in reality, it’s cheap. Energy tends to be about commodity prices. Solar is so cheap. I was talking to a friend of mine at RPE. He happened to be at BP Solar back in the day. He worked for an old friend of mine in 2000, in that timeframe.

I said, “What was your best target for solar costs or the module cost? Give me some metric anywhere in the future of a success case. Give me your wildest dreams.” He laughed and said, “Probably about $1 a watt for the module.” The industry makes them at less than $0.10. An order of magnitude better than your wildest dreams.

Batteries are close. We’ve changed everything. Rule number one is don’t bet against crystalline or lithium. Meaning, lithium-ion batteries and crystalline solar modules. We’re riding waves of success. We’re in second, third, and fourth-order opportunity sets. That has set the underlying theme of what we like. It is things that are changing the world, even if you have policy support, that have a native path to rewrite based on these huge mega trends.

Success Stories At Energy Transition Ventures

That’s interesting. You shared some success prior to the fund. Let’s talk about some of those success stories. Talk about some of these great energy transition investments.

To quote one of the co-investors in one of my biggest positions, “All of my children, I love them the same,” which is not true. For the largest position, we got one of our big favorites, because they’re all favorites, which is Ohmium. It’s one of the green hydrogen companies. It’s the ex-Bloom Energy technical team. We followed a gentleman by the name of Ahmad Chatila, who is the Chairman of SunEdison. He runs an investment arm. The two of them had cooked up in growing this business. We had a couple of gigawatt plants per year in India. The guys are doing great. That was one of those where we were coming in at a later stage in bigger rounds. We take a smaller piece and help support the business.

We’ve got a company out of Austin that we love called Resilient Power. This is a solid-state transformer play. It’s a tough technology. How do you fix the grid and bring something that’s not a 100-year-old copper and iron transformer and gobbledygook of electrical equipment to what’s supposed to be a modern digital grid?

It turns out, EV chargers need that thing. They need solar plus storage, not just grid utilities and data centers. You can imagine where that story is going. It blew up as soon as the data center market got there. We’re making big power equipment there in our Austin facility. One of the things I like to tell people about that one is that it is the first intrinsically EMP-hardened transformer ever developed. The nature of that particular design. It’s also one of the few transformer factories being built in the US.

Our first deal was a fun one. It’s called Zeitview. It was then named DroneBase. It’s a USV-backed portfolio company. USV and Upfront did this thing years ago. It came out of Y Combinator. It was a hot little drone company. It’s in the story we tell that the founder is ex-Military. He was going to be the Uber of drones. It didn’t work, whether it was platform work or software work. There was not a lot of business.

The guy’s name is Dan Burton. He is the CEO. They pivoted to say, “What does a customer need? A customer needs services, so we’ll do it.” They are one of the leading aero inspection companies out there. They’re serving solar, wind, buildings, telco, and utilities. They brought in a very large round with Climate Investments, which is a little oil company of cool kids investing together in climate deals.

They’re growing the heck out of the business. They’re 10x or 15x bigger by revenue than when we invested. It’s an amazing story. We’ve had a cool opportunity to back some awesome founders. You tell people that with venture capitalists, like you judge a cow by its calf, you judge venture capitalists by their CEOs and founders.

Characteristics Of An Ideal Founder

I’m glad you said that because that was the question I was going to ask. You’re in some leading technology in energy. Talk about the founders. What are the characteristics you look for? They’ve got to have great tech, but someone’s got to build a business and sell something.

We talk about that a lot. What is the archetypical profile? What do we like in a founder? Are there some weird biases in who we’re picking? You have to have enough EQ to think through your picks. To quote one of my old colleagues years ago, he knew who he was going to fund in the first 30 seconds, which is a little not true, but in some respects, it is. He has a pattern. What he’s saying is, “I have a pattern. I know what I’m looking for, and I can feel it. Let’s see if the deal holds water.” You do know, and you can feel it.

In our portfolio, we don’t have an archetype that we target, but there probably is one that we have picked on. We tend to resonate very well with technical founders. Not all of our founders are super technical, but a lot of them are. The last deal we did was Dandelion Energy, which is a Google X spin-out run by a guy by the name of Dan Yates.

For Dan, this is his third time running a company. He came off the board to run this thing. That’s part of why we got excited to join. It’s cool tech and all, but we have a crush on Dan. Dan also happened to be the Opower CEO that my partner Craig backed many years ago. Until Dan, every company we had done, the first six companies were all first-time founders and first-time CEOs.

That’s interesting.

Half of them had founders over 40, and the other half had founders under 40. Several had immigrant CTOs. Two of our favorites, because they’re all favorites, are ex-Military founders. It is two out of seven, and they happen to be two of our biggest companies. It’s interesting who you go for. I’ve got a female founder in three-quarters of them. We don’t plan for any of this, looking at who you back.

The ones that have clicked with us tend to be very technical and know their stuff. They know everybody in their sector. You’re banking on their technical and engineering competency. You will build the rest around them. Maybe they happen to be executives like Dan was, moving from a software business to a hardware business. He’s an amazing executive who knows energy. He doesn’t put up with anything. The guy is super smart.

Our guys in Austin, our Resilient Power one, is a father-son team. It is one of my strongest startups. The age spread is quite generational. People don’t necessarily like father-son teams. It works out well. These are some of the best engineers in their sector. They wrote the book on solid state transformers for DOE. Those are the guys who have clicked with us. Maybe the others don’t like us. That’s possible.

The Rising Need For Data Centers

I’m going to go back to something you mentioned about data centers. I was talking to a fellow investor. He was saying, “I want to invest in data centers.” I said, “They all need energy.” Talk to me about how the revolution in terms of data centers, foundries, and all that is impacting the need for energy and the need for cost-efficient energy.

That’s a good segue. When we set up our first fund, the thing we talked about most was solar, batteries, and the big wave. We’re 36-odd months later or 40 months later. What has changed? What’s new? Data centers. AI. I look at my old pitch deck from 2020 and ‘21. We talked about AI. We might have mentioned the word data centers. It said AI/ML. It was a toolkit thing. You saw this in the 2015 to 2020 timeframe.

The concept of AI, generative, and what it does for data centers and power is new. How impactful is it? We have four of our companies that are heavily, heavily levered to AI and data centers. One of them is a grid software company that’s building an AI model for the power grid. It’s a terrific piece of tech. It could not be done until generative AI was real and probably not until compute was cheap.

Our solid-state transformer company has huge chunks of customer demand from data centers. We brought Amazon in as an investor in that, not just for that side, but also for the ED size. They happen to be one of the biggest purchasers there. The Zeitview guys are building huge amounts of AI toolkits on top. Why are they doing that? It’s because they’re doing image capture. You have to turn that into information, which tends to be an AI-type problem set.

What has changed across our sector when you ask folks what data centers mean to energy is that it’s driving power demand in OECD in Europe, the US, etc., in ways that have not ever happened in my lifetime. When I was growing up in energy, you could say, “What’s GDP growth?” That will be energy growth, full stop. All the demand came from emerging markets, like China, India, etc.

We have overloaded grids and new demand growth in Texas, Louisiana, California, Virginia, and the UK. We’ve never seen this before. We were always betting that the costs of technology are going to win. We’re even seeing power prices rise while the cost to serve power is falling. This is amazing, and it’s all data center-driven. AI has created this double impact. One is the toolkits that you see in everything else, as well as some amazing high-growth products. The other is insatiable power demand that may even be driven by cost. That’s weird, new, and awesome.

It’s amazing. You have companies like Amazon buying energy companies. You got the Three Mile Island reopening.

We probably shouldn’t go talk down other people’s stuff, but that is cray-cray.

Profile Of Neal’s Current LPs

It’s insane. Let’s pivot for a second. We talked about the industry and the opportunity on the investor side. In this show, we’re talking to a lot of folks who are interested in investing in ventures. It’s either LPs or RIAs that recommend alternatives. Let’s talk a little bit to those folks. Tell me. What’s the profile of your LPs?

Most first funds are pretty high net worth and all that. We ended up being lucky. We have some amazing LPs. The GS Group out of Korea was our anchor. We have several of their entities or investors. That’s half of the old LG. They had split apart many years ago. GS is the gold star of Lucky Goldstar if you remember that brand. They have invested in dozens of funds, and then their whole CBC as well. We were in their first position. We got a couple of institutions involved in the fund, which is probably fairly rare for a first fund, but it has worked well for us.

We have a pool that we call our founders’ pool, which includes smaller checks from some family offices and, more importantly, individuals who know their stuff in our world. Instead of having this big fat advisory board and all that, we’ve got some amazing executives inside. When I need to do power electronics, I have one of the best power electronics people in the world, who happens to be an LP in my fund. I have a couple of old friends who have been in venture for a long time and are out now or are retired, investing for themselves.

I know I can call folks that have been doing it for a lot longer than me, that know their stuff, and that are lights-out good. I can get a little bit of brainpower when I need it. That’s been the mix. Our next fund will probably look a little bit more classic. A few more institutions, and then we’ll try and broaden it to hit some of the family office and high net worth markets that are frankly carrying a lot of what we think is the future of venture.

Why Choose Energy Transition Ventures

Let’s talk to those potential investors in either fund 1, if it’s still open, or fund 2. Why your fund, and why now?

Number one, if you like energy, and you should, there are two things worth investing in, which are AI and energy transition. There’s not much else that’s worth your time. Hopefully, that’ll change in a couple of years, but that’s the dynamic. We are specialists. If you need to be in energy transition, we’re one of the few people that have been doing it for a long time and have been through multiple cycles. Our numbers, which we can’t jump into on a call like this, speak for themselves.

We are one of the top-performing funds of any vintage, let alone the ‘21 vintage. We know our stuff. We’re specialists. If you’re looking for that type of exposure, we’re a good fit. We happen to be one of the few funds that fit between both Texas and California. Energy capital, but there are not a lot of startups and ventures here. There are some. We’re all trying. The valley, both Craig and I spent our time there. Our networks are there. We have an office there. We’re one of the few funds split across both places. We’re a good option for people interested in getting into the sector. We’re always looking for good partners to talk to.

The Right Time To Invest

Anything else you want to share with our audience?

We’re in a weird time for venture, but that’s when you want to be investing. This is an asset category. It’s not going away. Things like AI are generational. I had a big, long argument with a friend of mine at a dinner party. He and his wife do not like AI. It feels value-destructive to them on a societal level. I’m not sure if they’re right or wrong. Without getting into that, it is amazingly cool what’s happening.

We have a quote in ETV. “Energy is life. The rest is just details.” This is a pretty special time to be investing. I don’t think we’ve ever been more bullish on our end of the world. Even when we set up in ‘21, it was a long discussion of, “What should we be investing in? Which lane should we look for here?” It’s daylight to run. It’s a running back downhill type thing. It’s a pretty exciting time. Whether you’re doing business with us, our strategy, or any dozen pretty cool strategies, this feels like a time to play.

Get In Touch With Neal And Energy Transition Ventures

Where can people find out about your fund and you?

Remember, our fund name is picked as the term of art. EnergyTransitionVentures.com. That’s us.

Thanks for being on the show. For all of you tuning in, I encourage you to learn more about Neal and what he’s doing. Neal, again, thanks for being on the show.

Let me add one more thing. I have to say it. We need more founders. We are open for business. I need more founders. Nothing runs in the world if you don’t have great founders, so send them to us.

You read that first here, everybody. Thanks again, Neal. I appreciate it.

Thanks.

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Scott, one of the most interesting things that Neal talked about, which is something we haven’t covered before, is this later-stage investment model called category killers. He mentions it. That’s something worth uncovering a little bit more here. Does that mean that oil is going to be gone? What does that mean?

Category killers are people who are going to be a significant part of an industry. The reality is, Amazon is a category killer in online retail for everything. Walmart is a category killer. Facebook is a category killer. There are category killers in the energy space. There’s all this new technology that’s coming that is going to define who the people are that are in charge. As energy companies realize, “We’ve got to find more ways to get more power to more people,” you have to be a category to fill that need.

The interesting part is that you’re talking about how there’s a real opportunity for someone to become the player there. Not necessarily the tried and true who’s been there forever, like Shell or whatever oil company.

You’re right. There are people who are coming in for different reasons. Traditionally, energy guys were in the energy business. Now, you have technology companies in the energy business. You have data centers in the energy business. You have chip companies in the energy business out of necessity. It’s interesting that transition is an understatement of what’s happening in the industry. Neal has had a great career, but the next act is going to be more interesting.

He aptly named his fund Energy Transition. That’s what it is. What I also thought was interesting about what he was talking about is that they have this unique position operating between Texas and California, which are energy centers all the time. My father, in the oil industry, still worked in both states, as well as in Canada. In the Vancouver area, there’s a very large energy sector as well. In thinking about bridging that gap, there are a lot of funds that steer away from California. When you know that you want to be doing business there, that’s an advantage they have in their fund.

There are vast natural resources in both states and around the country, quite frankly. The Liquefied Natural Gas industry, the LNG industry, no one knew about it until a few years ago. The US is one of the biggest providers of that. It’s Texas, California, and Canada, but the reality is there are great pockets around the world that provide great opportunities.

Being open to being able to take investors in those areas makes a huge difference in terms of what their fund can do. Being open to the fact of “We’re going to be doing business in those states,” you can do business with the investors in those states, too.

The thing is, and your father knows this, it has always been about how to maximize the yield. There’s drone technology that they’re investing in. There are other technologies to find the best spot with the best opportunity. Not only are you driving technology, but technology is driving energy.

I’m curious about technical founders. This is a very specialty area, if you want to think of it like that. It’s specialized knowledge that you need. A lot of times, the funds and the people we talk to want this dynamic, amazing founder who’s going to sell the business and everything, but sometimes, you don’t want that. You need that technical capability. What do you think about their ability to understand whether or not the businesses are going to do business?

The good thing is that he has spent a lot of time in the industry, so he understands the components and the characteristics of people in the industry. Being in the field takes a different type of character. I remember way back when I was in Louisiana. I went to Louisiana when oil was $10 a barrel. In Lafayette, they had 25% unemployment because oil was so low. They had a campaign called I’d be Loving Lafayette, and everyone was on the silent saying, “I’d be leaving Lafayette.” Having that technical background allows you to overcome the lulls and the booms in the industry. They had that experience from what they’ve done. They know how to identify that experience.

I’m looking forward to seeing the energy transition. We’ve been talking about the AI centers for a while in my business because we’re looking at putting more data into it. That makes this energy crisis go even higher, if you want to think about it that way. You do have to think about these efficiencies and other things. The reality is, on the AI side of it, creating a much more efficient AI can be a detriment to the results that you get. Think of it like it cuts corners. You have less effective results. Using less energy is not necessarily the best model, but we all agree that you need to use less energy. How are we going to achieve that? Amazing innovations need to happen all around it.

We need more energy, and we need more efficient ways to produce it.

I look forward to seeing what Energy Transition Ventures does next and who they bring into their portfolio, because there are some interesting companies there. You’re going to have more in the EV sector and other things coming up because you’ve got a great interest there. We’re going to have more of those episodes here on Emerging Managers.

We’ve got some great people coming up. It’s been great that since we launched the show, we’re getting all kinds of great, unique fund managers reaching out to us. There’s plenty more good stuff to come.

Make sure you go to EmergingManagersPodcast.com. Check it out. If you are the right guest for us, make sure you apply.

Important Links

• Energy Transition Ventures
• Neal Dikeman on LinkedIn
• Neal Dikeman on X
• Venture Studios: The Tech-Fueled Future Of Funding With Chris Howard Of Softeq Ventures
• Black Dog Venture Partners