Catalytic Capital | May 10, 2022

Catalytic investors sharpen their tools to accelerate commercialization of climate solutions

Amy Cortese and David Bank
ImpactAlpha Editor

Amy Cortese

ImpactAlpha Editor

David Bank

ImpactAlpha, May 10 – The stubborn gap in financing for early-stage innovations for years was an obstacle to the development of breakthrough climate solutions.

To bridge that early-stage gap, pioneering and catalytic investors supplied patient and risk-tolerant capital, public-private partnerships leveraged university research and government grants, and entrepreneurial accelerators provided training, coaching and other support. 

Lo and behold, venture capitalists and other commercial investors swarmed to climate opportunities, pouring nearly $40 billion in financing into climate-related startups last year.

Now, the climate financing gap has moved downstream, as all those startups with early-stage innovations seek to commercialize their solutions. The movement of promising technologies, first into demonstration projects and then into large-scale production, remains far too slow for the rapid scale-up needed to meet the climate emergency.

To bridge these new gaps, new streams of catalytic capital and new models are emerging to de-risk “first of a kind” and other early projects, guarantee that there are buyers for critical climate solutions and otherwise mitigate risks and incentivize progress.

“Scaling early-stage solutions to widespread commercial adoption has historically taken decades (e.g., solar photovoltaics), but our planet no longer has time to wait,” Prime Coalition’s Sarah Kearney and Karine Khatcherian write in a guest post on ImpactAlpha. “We need to find our way to decarbonization faster than ever, and with solutions at all stages of technological development.”

When the Prime Coalition was founded in 2014, it focused on the acute gap it saw for early stage funding for climate startups. The Cambridge-based nonprofit aggregated philanthropic investment to back innovative solutions that were too capital-intensive, would take too long to develop, or held too much technology risk for traditional venture capitalists.

Now, there are “many hatchling companies that could dramatically reduce emissions if they can achieve commercial scale,” they write. Prime has identified specific project-finance interventions to accelerate promising approaches for green hydrogen, supply-chain efficiencies, carbon removal technologies and nature-based solutions.

Prime is looking to move into project finance to help finance those first-of-a-kind and demonstration projects. It has greenlighted two to three early infrastructure projects between now and December 2023 to “learn by doing,” Kearney said in an interview.  

“In 2014, we were unsure whether we’d be able to syndicate $500,000 into one business. In 2016, we were unsure whether we’d be able to raise $20 million for Prime Impact Fund (we ultimately closed $52 million)”, Kearney continued.

Now, backed by a growing network of funders, she says, Prime is positioned to consider “single transactions of that size for project finance.”

In moments of optimism, says Kearney, “I like to think that our experience is a mirror back on the momentum that’s building in the catalytic capital community far beyond Prime’s corner of the universe.”

Offtakes and advance purchases

Other investors, along with corporate customers, are committing capital to accelerate the commercialization of not-yet-ready-for-primetime technologies and nature-based solutions. 

Breakthrough Energy Catalyst, an initiative of Bill Gates’s Breakthrough Energy, launched last year to scale and drive down costs for early-stage climate solutions including green steel, aviation fuel, hydrogen and long-duration storage. 

The model combines blended capital up front to defray the costs of building a plant or project with corporate commitments to purchase the product or service once it is finished on the back end. Catalyst’s corporate partners agree to pay a premium for the green alternatives.

Catalyst has raised more than $1.5 billion from the BlackRock Foundation, Microsoft, Shell, General Motors, American Airlines and ArcelorMittal and other corporate funders. The latest partner, Mitsubishi, committed $100 million to the initiative last month. Catalyst is also partnering with European, U.S. and U.K. governments to build demonstration plants for national priority technologies.

Corporations are playing a key role as buyers of early-stage climate solutions, with an eye towards accelerating commercialization and helping to offset their emissions. 

The Brazilian personal care products maker Natura is acting as offtaker of forest-based products in a new model to support sustainable producers in the Amazon. 

The LEAF Coalition has signed up companies including Airbnb, Bayer, Delta Airlines, Nestlé and Amazon to purchase carbon offsets to protect tropical forests. The companies commit to buying a minimum of 1 million tons of sequestered carbon at a floor price of $10 a ton. These contracts, between sovereign governments and corporations, provide assurance to countries that they’ll be paid for their conservation efforts. 

Frontier, an initiative launched in April by payments company Stripe and other tech giants, is looking to supercharge the practice by pooling funds. Frontier will spend close to $1 billion on permanent carbon removal by 2030 via advanced market commitments, or AMCs. 

By guaranteeing to buy carbon removal services before they are ready, the companies hope to create a market for the carbon removal tech, which experts warn will be necessary to keep warming in check, and to speed up declining cost curves.

Project financing

To be sure, there are still gaps in early stage funding, and venture investors could yet pull back in a market downturn. Portland-based nonprofit VertueLab last year raised a $5 million Climate Impact Fund to fill the remaining early-stage capital gap, “that point when entrepreneurs are starting to transition research discoveries into new startup companies, a time when VC investments aren’t yet an appropriate source of funding,” VertueLab’s David Kenney wrote last year. 

“Bridging the gap with impact-first capital to help get startup companies ready for a massive wave of new climate tech venture capital is one of the keys to bringing new climate solutions to scale,” Kenney says.

Prime Coalition is moving downstream to address the new gaps as those early-stage companies get ready for commercialization. A year-long research project identified two main approaches for catalytic capital to help companies get early projects off the ground: pooling capital and funding 100% of a project’s costs, and selling when it it de-risked; or deploying smaller, more targeted capital, such as first-loss equity or guarantees for first-of-a-kind, or “FOAK,” projects. 

The report also identifies areas for further exploration. One glaring need is for catalytic solutions that blend project finance, late-stage venture capital and credit facilities. Venture and growth investors don’t typically fund project finance, and infrastructure developers tend to stick to widely adopted sectors, says Khatcherian, who authored the report. “If you don’t neatly fit in those buckets, there’s no capital for you.”

Among the potential solutions Prime has identified is an accelerator program specifically for climate project developers. “The venture space has a very tight-knit community of investors working with each other, investing together, and accelerators to support tech companies,” said Khatcherian. “You don’t have that notion at all on the project side.”

Many startups need support in developing projects, structuring commercial and financial agreements and even building financial models. “Tech startups may have brilliant entrepreneurs and engineers, but development is a different skillset,” she adds.

Another idea: panels of experts that can provide technical assistance and validation to ensure that projects have a pathway to lower costs and the ability to be replicated. First-of-a-kind projects are part of a learning curve to achieve the economies of scale needed to be viable without support. 

“The purpose of catalytic capital is to accelerate solutions to climate change, not just build one-off projects,” Khatcherian says. “You want to be a bridge, not a crutch.”