Retail Energy Provider Stream Energy Raises $10M In Growth Capital
Posted On: February 24, 2006
By Jonathan Shieber
Dow Jones VentureWire
02/24/2006 - Looking to leverage the opportunities it sees in the deregulation of the Texas energy market, retail energy provider Stream Gas & Electric Ltd., which does business as Stream Energy, has raised $10 million in private equity.
"This is simply capital to pursue our 2006 growth plan," said Stream Energy chairman Rob Snyder. "If we just decided to shut down customer acquisition today, we'd have more than enough funding."
The capital came from the private equity energy investor NGP Energy Capital Management, an Irving, Texas-based fund managing over $3 billion. As a result of the deal, NGP Energy will take a 10% stake in the company, but will not receive a seat on the Stream Energy board, said Ken Hersh, NGP Energy's chief executive and an associate of Snyder. "We've been invested in the power sector in the past and had our eye on this sector, but had been looking for a good entry point," said Hersh. "[Stream] had a really strong growth stretch and was really ripe for institutional capital."
The reason for the capital infusion was that Dallas-based Stream was becoming a victim of its own marketing success. The company buys power from utility companies and then sells that power to retail consumers. The issue, for Stream, was that it has to buy power in advance of getting the initial payment from its customers.
That lag between Stream's power purchase and the payment from its own customers would have been manageable if Stream hadn't signed up so many people 150,000 in the 11 months that the company has been in business, Snyder said. And he projects that Stream's revenue could reach $350 million by the end of the year.
The company has been able to gain ground quickly by relying on a multi-level marketing platform similar to that used by Avon Products Inc. and Mary Kay Inc. Instead of cosmetics, Stream sells power.
The company set up a marketing subsidiary, Ignite Inc., and for $329 and a crash-course in the Texas energy market after deregulation anyone can begin selling Stream's power services.
It's a model that generates a lot of skepticism from the public, and from potential investors. "A lot of network marketing firms, where they make money, they stick their associates with inventory, that the associate has trouble selling," said Snyder. "However energy, by contrast, is the perfect network marketing product, he said. "All our associates are really doing is educating."
The draw of Stream's business model was strong enough to lure Battery Ventures as a potential investor. Although the Boston-based venture firm ultimately turned down the deal for structural reasons, how the company marketed itself wasn't a factor.
"We were interested and spent a reasonable amount of time on the deal, we ended up with a structural problem that prevented us from investing" said Tom Crotty, a partner with Battery Ventures. "The variable cost method... that makes a very attractive way to leverage the business. As long as [Stream] is not asking people to commit big dollars... it's kind of no harm, no foul in that regard."