When revelers watched the Times Square New Year's Eve ball drop in New York City on December 31, few would have realized that light-emitting diodes, the light bulbs festooned to the ball, would one day bring light to their homes and offices.

LEDs have become popular recently for more than just electronics. They're used in traffic signals and automotive lighting, and now some enterprising startups have turned their gaze indoors.

One such company is AlbEO Technologies, which wants to replace those old fluorescents in commercial and industrial settings with LEDs. The Boulder, Colorado, startup on Wednesday closed a $1.5 million first round of financing led by Green Spark Ventures.

"What is disruptive about our technology is the integration of optics, LEDs, and fixtures to deliver an integrated system with increased performance," AlbEO CEO Jeff Bisberg said.

The result is reduced cost over the lifetime of AlbEO's LEDs—the biggest obstacle to industry growth in the past for the technology. In one example, Mr. Bisberg said his lights and fixtures could save an industrial company more than a $1000 just on two lights over a 15-year period. The savings would come from reduced energy consumption and lower labor and replacement costs.

The Orange County Convention Center is convinced of the savings and is now using AlbEO's lighting in its west wing, Mr. Bisberg said.

"Getting cost down will be the key to getting into the commercial and eventually the consumer market," Freedonia analyst Mike Deneen said. Making LEDs compatible with the existing base of installed light sockets—for retrofit jobs—will also be important for growth, he said.

Freedonia predicts the U.S. market for LEDs in buildings will rise 21 percent annually to $130 million in total sales by 2011. The research firm predicts that demand for all advanced lighting products, which includes among other things LEDs and compact fluorescent lamps (CFLs), to reach $4.4 billion by 2011.

But most of that growth has been driven by the surge in demand for CFLs, the biggest competitor to LEDs over the long term.

Large, established companies have also recognized the potential of LEDs in applications beyond electronics. Companies such as Philips and General Electric have groups focused on the sector, and both have shown their willingness to gobble up smaller outfits that produce technology they want.