ImpactAlpha, August 14 – A contrarian story is emerging in cleantech venture capital. After a decade of flare ups and flameouts, climate-savvy investors are making long-term bets – and finding profits.
Newcomers have joined cleantech veterans to start to provide the continuum of capital needed by cleantech and climate entrepreneurs. Oil and gas companies facing up to the low-carbon future have stepped up their corporate venture investments in carbon capture, electric-car charging and alternative energy. And data from Cambridge Associates suggests returns from investments in cleantech companies between 2014 and 2017 have rebounded to the highest level since 2000-2004.
To be sure, many of the recent gains are still unrealized, venture funding for cleantech companies remains well off its 2008 peak, and high-risk, high-impact, early-stage innovators face a persistent capital gap.
“You now have investors who are approaching this space on its own terms,” says Matthew Nordan, the managing director of the Prime Impact Fund, a new fund from Cambridge, Mass.-based Prime Coalition.
Today’s cleantech fund managers are raising capital from limited partners with a more patient orientation – and a mission to fight climate change. The amount of capital is still no match for the urgency of the climate crisis. But the new investments have a recipe for success that Nordan says “is better than trying to do a skin graft of tech venture capital onto energy and environment.”
Venture funding for cleantech companies is still off its 2008 peak. Still, accessing capital at each stage of venture growth is getting easier for cleantech and climate entrepreneurs.
New capital sources are arriving. Early stage venture firms Congruent Ventures and Radicle Impact in San Francisco, growth equity fund ClearSky in Florida, utility-backed investment funds like Energy Impact Partners in New York and San Francisco, and the Bill Gates and other billionaire-backed Breakthrough Energy Ventures are all new on the scene in the last three years.
“We have seen many funds come and go, most notably Silicon Valley funds that rushed in some years ago only to get burned,” writes Dave Kirkpatrick of SJF Ventures, which has invested in cleantech companies for two decades. “The incorrect media conclusion after that saga was ‘cleantech VC failed’.”
In a LinkedIn post, Kirkpatrick rounded up a host of capital sources now tailoring finance for cleantech startups.
Incubators and start-up labs include programs from LA Cleantech Incubator, Powerhouse in Oakland and Techstars Sustainability. Active early stage funds include SustainVC in Philadelphia and Durham, City Light in New York, Impact Engine in Chicago, as well as Prime Coalition. Long-time growth funds include SJF, along with DBL Partners in San Francisco and Renewal in Vancouver. Project finance: Jigar Shah’s Generate Capital, Spring Lane Capital in Boston and Ultra Capital in Philly.
Al Gore’s Generation has been joined by Bain Double Impact Fund, The Rise Fund and KKR Impact in competition for later stage and buyout deals.
“Everything is moving in the right direction,” says Prime’s Nordan. Yet there’s still an enormous amount more capital needed, particularly at the high risk, high impact early innovation stage where Prime invests. The firm has syndicated investments for 13 early-stage climate ventures, each with the potential to eliminate more than a gigaton of CO2 emissions by 2050.
Corporate venture capital is putting additional capital into cleantech innovation.
The top five oil and gas CVCs, including Shell Ventures and BP Ventures, have increased cleantech investment each year since 2015, according to new data from CB Insights. So far in 2019, cleantech deals account for a large majority of all oil and gas CVC deals.
“The oil and gas industry is facing a future in which a portion of the economy will run on newly competitive renewable energy sources,” says CB Insights. “In this scenario, an environmental sustainability-heavy VC portfolio is more valuable from both financial and industry knowledge perspectives.”
More interesting may be the Oil and Gas Climate Initiative, the $1 billion investment fund for climate mitigating technologies and business models backed by more than a dozen oil and gas majors. The fund, launched a few years ago, took a while to get operationalized but has now cut checks to a dozen companies.
“I think folks that are ‘impact first’ like ourselves welcome their dollars in the system,” says Nordan. “We try to think cautiously about how enduring they may be.”
One hallmark of the 2000s cleantech VC boom and bust is the disappointing financial results.
That too may be changing. Data on over 1,500 cleantech investments from Cambridge Associates suggests returns from investments in cleantech companies between 2014 and 2017 have rebounded to the highest level since 2000-2004 (though much of the recent gains are unrealized).
The uptick in returns has been driven by a shift away from capital-intensive manufacturing investments toward energy optimization solutions such as batteries, smart grid, and energy efficiency.
“It’s a contrarian story as old as venture capital as an investment category,” writes Spring Lane’s Rob Day. A hyped sector attracts lots of capital. Much of it is invested questionably. Most investors flee. Meanwhile, writes Day, “the sector continues to enjoy strong market tailwinds and growth, while a few committed investors continue their efforts and start figuring out how to actually generate strong returns off of the clear market opportunity and megatrend.”
Nordan is less convinced with the Cambridge’s analysis, with much of the recent gains still unrealized. It may not yet represent real change, he says. But “it’s a nice leading indicator.”