ImpactAlpha, May 28 – WattTime is much like many other Silicon Valley tech software startup, building software interfaces and machine-learning algorithms and a software-as-a-service business model.
And like an increasing number of tech startups, it’s mission-driven: WattTime’s technology has the potential to drive major reductions in near-term greenhouse gas (GHG) emissions.
It can help accelerate the transition of electricity grids from fossil fuels to renewables.
And just like many other startups, the organization needed growth capital to be able to scale up more quickly. The company has raised most of a $900,000 financing round, led by RSF Social Finance.
But in designing the terms of the financing, WattTime and RSF had to accommodate a feature that is unusual for a tech startup: nonprofit status.
The innovative revenue-participation agreement WattTime and RSF structured could help other investors and entrepreneurs to think differently about fundamental questions: How can a nonprofit find the capital it needs for R&D, product development and the growth of a sales team? How can any company attract investors and compensate them for enabling the organization’s success without diverting resources that increase impact?
The WattTime-RSF structure demonstrates a blended approach that we hope leverages capital as effectively as possible toward impact over the long run. It also demonstrates that there are emergent structures to help investors and earlier-stage enterprises achieve their mutual goal: long-term impact.
WattTime’s origin story does not follow the typical narrative arc of a nonprofit. Instead, it starts with a diverse group of engineers, analysts, UC Berkeley academics and coders at a climate hackathon in San Francisco.
The hackathon’s focus was to create a scalable software product that could “see” when the grid was cleaner or dirtier in real time and thus — empowered with such new information — unlock the potential to reduce the electricity grid’s carbon emissions.
The technology delivers a signal to smart devices — thermostats, batteries, electric vehicles, refrigerators — telling them when the grid’s electricity is cleaner or dirtier. That “demand flexibility” lets the devices choose to use cleaner energy.
A WattTime analysis shows that the new technology has the potential, if adopted in 10% of the devices in which it can be used, to save 38 million tons of CO2 per year, equivalent to taking nearly 8 million cars off the road. That potential impact will grow as more devices become Internet-connected. Market analyst firm Gartner forecasts 26 billion smart, connected IoT devices by 2020. Adopted at scale, such signals could eliminate hundreds of millions of tons of carbon emissions.
In the Silicon Valley tech startup model, this narrative arc typically ends with a capitalization structure focused on an exit at a multiple and a relentless focus on revenue growth and customer acquisition.
WattTime’s founding community wanted to emphasize the development and widespread adoption of the most impactful products, not necessarily the most profitable ones. As its solution started to generate interest, the team formed a nonprofit to orient the effort toward the greatest environmental impact possible and avoid misuse of the technology. The organization would hold the technology in the public trust and leverage it to achieve maximum impact.
Last year, WattTime merged with Rocky Mountain Institute as a subsidiary organization. The move bolstered WattTime’s credibility but came with only a fraction of the needed financing — WattTime would have to raise the rest.
To fully bring the software to market and thus maximize its impact, the company needed to build robust systems-architecture, hire engineers and spin up a sales operation. With a growing customer list that includes Microsoft and Enel, WattTime needs all of this to happen at the speed of a tech startup.
Early customer experiences also suggested a strong ability to repay. Its technology, if deployed at scale, could generate the kind of revenue that would make it a successful venture even by traditional equity investment standards. As a nonprofit, however, it structured itself in a way that future excess revenue will be reinvested into development of additional, high-impact data products.
Funding that growth in a nonprofit requires a specific kind of investor and investment.
RSF Social Finance, founded in 1984, has for decades supported social enterprises — primarily with loans and grants — in the areas of sustainable food and agriculture, education and the arts, and ecological stewardship.
In the past few years, RSF pioneered the concept of Integrated Capital, or the “coordinated use of different forms of financial capital and non-financial resources to support enterprises and strategies that address complex social and environmental problems.”
One outgrowth of this approach is RSF’s Regenerative Economy Fund. The fund supports social enterprises aligned with RSF’s ecological stewardship focus area, but who may not qualify for RSF’s core loan fund, with catalytic, flexible, and creative forms of capital.
WattTime proved very much aligned with the goals of RSF’s Regenerative Economy Fund. It is working to catalyze a movement to give anyone the freedom to choose cleaner energy easily and automatically.
As both organizations worked through diligence, they collaborated to design a revenue participation agreement that struck the right balance between compensation for risk and a mutual goal of supporting WattTime to achieve its mission.
So the question became: How could WattTime raise capital that would allow it to maintain its impact orientation, control the applications of its technology, and share upside with investors who facilitated the initial development of WattTime’s technology?
As an organization held in the public trust, WattTime couldn’t — nor did it want to — sell equity.
Instead, RSF is the lead investor in a $900,000 revenue-participation agreement, with a $200,000 investment from the Regenerative Economy Fund.
The round now has commitments from four impact investors and will close upon the identification of one to two more. Investors willing to assume the risks of unsecured impact investments have the opportunity to earn an attractive return.
Under this structure, each dollar loaned earns the rights to a fraction of WattTime’s revenue from software and consulting sales over the next five years. Returns to the investors are capped at a multiple that decreases if the loan is repaid in the first two years. (WattTime’s grants and other philanthropic revenues are excluded.)
For an investor such as RSF, the structure allows for participation in the upside as WattTime’s revenues grow over time. Additionally, it tightly aligned with RSF’s priority to be a values-aligned Integrated Capital partner. In other words, doing more than just imposing an investment structure and writing a check.
Meanwhile, the round gives WattTime much-needed funding and retains payment flexibility that matches the vicissitudes of startup revenue models. The structure helps avoid the challenges of most loans: fixed payments tied to pre-negotiated schedules based on principal and interest. Finally, the multiple cap on investor return ensures that additional revenues, after repaying investors, are leveraged toward impact.
The WattTime round, now 80% subscribed, has attracted a diverse group of forward-thinking impact investors including the Grantham Foundation for the Protection of the Environment and the Edwards Mother Earth Foundation.
As impact opportunities in software proliferate, and as the lines blur between nonprofits with scalable revenue models and impact-oriented businesses, impact investors and organizations alike have opportunities to think creatively about funding. The hope is that this note structure, and the collaboration between investor and investee towards impact goals, can provide a template for future impact investments, particularly in high-growth nonprofits.
Matt Evans is managing director of WattTime. Stu Fram oversees RSF Social Finance’s Regenerative Economy Fund.