The Changing Landscape of Cleantech Venture Investing
Venture investing in energy cleantechs has always been challenging. Most notably, in the 2008 crash, cleantech venture capital (VC) performance suffered, and investors were extremely slow to return to the sector. This underperformance can be attributed partly to a few poor technology bets, such as biofuels or thin film solar cells, which attracted huge amounts of investment and never panned out, but there have also been fundamental challenges in applying the traditional venture model to energy technology investing. Over the past few years, we have seen the cleantech investment space evolving to overcome these challenges, leading to more interesting deals, more varied capital solutions, and a shift in the funds providing early-stage capital solutions.
There are distinct qualities of clean energy solutions which make growth challenging making it difficult for VCs to profitably invest, including long sales cycles, complex regulatory environments, and difficulty in convincing early customers. In addition, many clean energy technologies struggle because they are highly capital intensive, and expensive to develop, test, and pilot. This capital intensity lies at the core of why cleantechs have made difficult investments.
The venture capital model requires that each funded company have the potential to grow ten times or more in a 6 to 10-year period. For a capital-intensive solution, this growth trajectory is extremely challenging, particularly when you consider that those companies need a huge amount of capital very early on in their growth. For example, convincing first customers is critical to commercializing any product. When your product is a very expensive piece of energy equipment that has never been tested commercially, it is difficult to convince early customers to accept that risk. As a result, many cleantechs are forced to bear the cost of those early sales and need to raise investor dollars to make up their loses. Furthermore, at this early stage, companies often still need to finish product development, conduct testing, and expand production processes, all hugely expensive activities which are required to scale the business. All this capital is needed early in the growth of the company, meaning that companies who take equity investment to raise this money are saddled with huge valuations from day one, making 10x growth into the future unrealistic. These challenges in scaling early stage cleantechs have historically made it difficult for venture investors to profitably fund these companies and are forcing firms to think more flexibly about how to invest in the space.
Greater flexibility and financial innovation are needed to meet the capital needs of these early-stage companies. Over the past couple of years, we have started to see more interesting deals, new funds with innovative early-stage investment models, and larger asset funds moving further upstream.
A clear area where the early-stage energy investment landscape is evolving is the growing number of funds with innovative capital solutions to help cleantechs scale. One example would be Spring Lane Capital, who offer “Catalytic Project Capital.” This approach combines both project capital and growth capital, supporting the deployment of projects and the internal needs of the company at the same time. As a result, the portfolio companies can deploy projects more quickly and efficiently, while simultaneously keeping dilution low and setting the company up for long term success.
Another fund which has set out to solve early-stage investment challenges for hardware focused companies is Perl Street. Perl Street offers startups the capital resources to transform their transaction-based revenue model into a service-based model. Rather than sell a customer a hugely expensive piece of equipment or a project, Perl Street lends the cleantech the money to cover the cost of the equipment and allows them to charge their customers a much lower recurring payment, transforming their transactional business model into a service model. This enables companies to lower upfront costs to customers and increase conversion, and simultaneously increase margins through secure long-term contracts.
Larger asset and infrastructure funds are also providing more flexible investment vehicles to early-stage companies. Two recent deals which highlight this shift were the investments in OhmConnect and BlocPower. OhmConnect raised a $100 million series C from Sidewalk Infrastructure Partners, an Alphabet-backed firm which invests in “technology enabled infrastructure.” This deal was structured as $20 million in equity investment for the company, and $80 million to scale a 550-megawatt virtual power plant over three years. Similarly, BlocPower, a smart efficient heating and cooling solution, raised a $63 million series A structured as $8 million dollars in equity, and $55 million in debt backed by the Goldman Sachs Urban Investment Group. This innovative investment vehicle solution allows BlocPower to provide their technology to building owners to improve their energy efficiency for zero out of pocket costs. It also allows BlocPower to scale more efficiently by providing them with investment purpose built to their needs as a company, enabling them to do as many projects as possible while keeping dilution and valuation low.
These types of deals are becoming increasingly common, with infrastructure and asset investors writing checks for cleantechs earlier, lowering the amount of equity investment these companies need to raise, keeping valuations manageable, enabling more projects to be deployed, and ultimately allowing them to scale much more efficiently into commercial viability and success.
As the need to scale sustainable energy solutions continues to rise, financial innovations play a critical role in the efficient and consistent adoption of these technologies. These innovations are not only instrumental to cleantechs, but to everyone who benefits from the deployment of more sustainable and efficient technologies.
