Early Traction: PRIME Coalition Investments Bridge Capital Gap for Early-Stage Climate Solutions

For venture capitalists, the urgency of climate action has been no match for the urgency of reaping returns from their investments before the end of their 10-year funds.

That has made venture capital a poor fit for many promising climate-change solutions, many of which may not pay off for a decade or more. And that has starved clean technology startups of the capital they need now to develop solutions that the world will need in 2025 and beyond.

fullstackEven after the breakthrough global climate agreement in Paris last December, venture capitalists invested barely $800 million in cleantech in the first half of 2016, out of $28 billion in total VC investment, according to the PriceWaterhouseCoopers/National Venture Capital Association MoneyTree report.

Rather than bemoan that capital gap, Sarah Kearney and the emerging PRIME Coalition have set out to show VCs and other investors how early-stage cleantech investing can be done. The Cambridge, Mass., nonprofit today announced investments in energy storage startup, Quidnet Energy and waste heat-to-energy venture, RedWave Energy.

Venture capital hasn’t failed. It’s just a highly optimized asset class.Fiona Murray, MIT Sloan School of Management.

Last year, PRIME facilitated its first investment into Quidnet, which stores energy in unused oil and gas wells by pumping water under pressure. That round was funded mostly by wealthy individuals through their philanthropic foundations, including the Sorenson Impact Foundation and Will and Jada Smith Family Foundation. After a successful field test in Texas, Quidnet’s new financing was led by Boston-based Clean Energy Venture Group, a commercial investor. Sorenson also made a second investment in Quidnet. The latest funding brings Quidnet's equity funding to just over $1 million.

“PRIME’s model is to inject philanthropic capital early to de-risk a new technology venture, and then draw in traditional investors as milestones are achieved,” said Dan Goldman, a partner at Clean Energy Venture Group. “That model is working for Quidnet.”

Catalytic Capital

PRIME's model is intentionally designed to help foundations deploy “program-related investments,” a mechanism through which philanthropic funds can be invested in market-based solutions. The model, in which PRIME sources, vets and presents early-stage energy ventures to a cohort of foundations interested in deploying PRIs to fight climate change, suggests a clear role for philanthropy in closing the funding gap for early-stage energy and climate-change technologies.

The $5.5 million financing for RedWave, which captures waste heat and converts it to electricity, increasing efficiency, was led by Energy Foundry and included EnerTech Holding Company (a subsidiary of the sovereign wealth fund of Kuwait), the Blue Haven Initiative, the Will and Jada Smith Foundation and other investors.

“PRIME has created an incredible network of visionary impact investors who see the value of funding high-risk, high-reward energy ventures than might actually move the needle on climate change,” Jason Blumberg, managing director of the Energy Foundry, said in a statement.

PRIME is the brainchild of Kearney, who for a decade has wrestled with the question of how to fund early-stage energy innovation. PRIME makes it easy for philanthropic families and foundations to support new clean energy ventures with program-related investments. PRIs have been around for nearly 50 years, but are still complex and poorly understood. They’re also risky for foundations — the regulations that guides them are opaque. (See “Making Markets Work for the Poor”)

From 1998 through 2009, PRIs to science and engineering projects comprised less than .01% of total grant-making.

Investment Blueprint

Kearney’s first crack at answering that question came as the executive director of the Chesonis Family Foundation from 2007 to 2010. Kearney and the Chesonis family funded clean energy research at university labs with grants from the foundation and then used the Chesonis’ private wealth to make equity investments into companies spun out of the research projects, enlisting other co-investors.

“We bulldozed through the capital gap,” says Kearney. “Nearly all of those ventures are now thriving.” But without more investors willing to back climate innovation in the early-stages, “many early companies are dying on the vine,” she adds.

In her 2012 thesis for a masters degree in engineering from MIT, Kearney identified PRIs as uniquely positioned to finance promising climate innovations so they can be tested and ultimately commercialized. Much science-based innovation, such as Quidnet’s energy storage process or RedWave’s waste heat-to-energy technology, is capital intensive to develop and test, carries a high risk of failure and requires a longer than typical time horizon to generate the level of returns expected by traditional venture capitalists.

Sarah Kearney, PRIME Coalition

Sarah Kearney, PRIME Coalition

Foundations, she wrote, “have the luxury of operating free of voting or fundraising cycles, allowing investment strategy to stretch beyond 4-year or 10-year.”

Kearney’s work attracted others interested in how PRIs could be used as a source of early-stage capital for climate ventures. In 2013 Priceline.com co-founder Jesse Fink, the Will and Jada Smith Family Foundation and the Chesonis Family Foundation backed Kearney to continue her inquiry.

Rather than deliver another research report, Kearney delivered a blueprint for an organization like PRIME to address the barriers keeping foundations from deploying more science-driven PRIs. The barriers: lack of awareness, operational capacity, and perceived regulatory risk. These barriers lead to high transaction costs and low levels of support for PRIs within foundations. If Kearney and her growing network of energy investors and experts could help foundations get past these humps, she believed, they could unleash a wave of capital to fund new climate innovations. Kearney formally launched PRIME as a nonprofit in 2014 and has attracted additional supporters including Echoing Green, the Blue Haven Initiative and the MacArthur Foundation.

Instagram or impact?

Most small and mid-sized foundations just aren’t staffed up to source and evaluate innovation energy ventures. PRIME curated a list of over 2000 ventures before presenting Quidnet and RedWave to its philanthropic partners. By covering the legal requirements for PRIs, PRIME relieves foundations of their regulatory worries.

PRIME investment opportunities must satisfy at last three criteria: have the potential to save at least one gigaton in carbon emissions, be able to eventually raise commercial capital, and yet be unable to raise alternative funds but for the participation of philanthropic capital.

“Venture capital hasn’t failed,” says Fiona Murray, an associate dean of Innovation at the MIT Sloan School of Management. “It’s just a highly optimized asset class.”

Kearney, Murray (who was also Kearney’s thesis advisor and is a PRIME board member), and Matthew Nordan (a managing partner at MNL Partners and PRIME’s investment committee chair) expanded on why venture capital was no longer a good fit for funding science-driven entrepreneurship in a 2014 Stanford Social Innovation Review post.

“It’s optimized to support Instagram, not impact,” wrote the trio. Venture capital's investment criteria are too narrow for energy startups that are often time and capital-intensive, they wrote: “Nothing too long-term, nothing too expensive, and nothing that involves too much technology or market risk.”

Quidnet is a case in point. Nordan, then a partner at the venture capital firm Venrock, passed on making an investment in the company, according to Quidnet co-founder and chairman, Aaron Mandell. Later, as chair of PRIME’s investment committee, Nordan took another look.

“Breakthrough energy ventures that have the potential to accomplish our climate goals need financial fuel to achieve escape velocity,” says Nordan. “Conventional venture capital isn't well-suited to the task.”

Disclosure

Image source: Fré Sonneveld 

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