BiGS Actionable Intelligence:
BOSTON—Investors are likely to favor climate technology companies that have successfully proven their technology through relevant pilots and early projects and can demonstrate a clear path to profitability as they scale.
Companies that have done so have more credibility in raising growth capital than those with promising technology still in the experimental stages.
So says Mario Fernandez, a Senior Partner at Breakthrough Energy which has invested more than $3 billion in more than 120 companies, one of three experts who spoke about the future of climate change infrastructure during a Harvard Climate Action Week panel held in June.
“That’s the big thing for us because if it's not profitable, people are just not going to invest money,” said Fernandez, head of catalyst at Breakthrough Energy, a fund that specifically focuses on investing in and supporting climate companies pursuing their initial project deployments.
The panel, which focused on strategies that companies can use to attract investors, also featured Lee Scott, senior associate at Trellis Climate, and Jonah Wagner, senior advisor to the director at the U.S. Department of Energy’s Loan Programs Office (LPO). The theme? To attract the trillions needed to finance a decarbonized economy, entrepreneurs must focus on going beyond early innovation stages to fully deploying at scale, according to moderator Jim Matheson, a senior lecturer at Harvard Business School, climate investor and entrepreneur for more than 20 years.
“I felt it was vital to have a conversation about what it will take to successfully accelerate innovative climate technologies from the early stages of their development toward deployment at scale” Matheson told BiGS.
$275 trillion in coming decades
The race to eliminate carbon emissions globally by 2050 will, by some counts, require more than $275 trillion in worldwide spending over the next three decades, with venture capitalists having already poured tens of billions of dollars into promising but early climate ventures in recent years. Climate experts say that investment in both innovation and deployment must expand to meet emissions targets.
As the ramp-up continues, companies that can successfully transition from innovation to deployment, scaling their technology and generating profitability, will be the most likely to access “first-of-a-kind” project financing, “first factory” funding, and other forms of growth capital.
“We are at an exciting but also critical stage of scaling climate solutions,” Matheson said. “We have myriad high potential climate companies that have raised meaningful early-stage VC investment, but now need to find strategies and structures that will enable these companies to demonstrate their ability to scale and become economically sustainable if we are to attract the trillions of dollars of infrastructure capital needed to solve the challenges of climate change.”
A ‘bridge to bankability’
Early stage climate and clean energy technology companies often face roadblocks to receiving bank loans because they have not been able to generate profits yet, Wagner told the audience. The Loan Programs Office steps in to provide a “bridge to bankability,” which is the process of transitioning from an innovative company with aspirations to “something that a bank will actually underwrite,” he said.
While a popular program, the Loan Programs Office can’t meet existing demand, he said. The office, he said, has about $290 billion worth of loan applications from startups in its pipeline that representing about $500 billion in projects. The program has already provided loans totaling tens of billions of dollars and has only seen losses on about 3% of its loans over the past decade, Wagner said.
“LPO has returned with interest a profit to the American people,” he said. “We have been very successful stewards of taxpayer dollars.”
Firms like Trellis Climate are also launching to help meet the demand. Trellis was launched in April by Prime Coalition, a nonprofit engaged in climate finance. Trellis helps companies with novel climate infrastructure solutions to achieve commercial scale and accelerate the deployment of original projects. It will fund “projects with significant climate impact potential, a clear path to scale, and a high dependence on catalytic capital for success,” according to a release.
“Trellis is going to address the next phase: scaling those hard tech companies and helping them to do their first-of-a-kind facilities,” Scott told the audience. “That can be an incredibly challenging period to fundraise for many different reasons. Trellis helps to bring together philanthropic capital to create catalytic solutions to finance those projects.”
‘Pitching to debt’
One problem the experts identified is that seeking project debt financing, as opposed to equity investment, requires startup companies to take a different approach. Often, founders fail to understand the difference and tailor their approach to attract lenders when “pitching debt financing.”
“The biggest sort of wakeup moment for these entrepreneurs is realizing how to pitch to debt and not equity [investors]because they come to us having gone to Breakthrough Energy, Trellis, and other venture shops,” Wagner said.
The LPO advises startup founders against “painting a picture of 10 or 100 times multiple on investment to project investors,” Wagner said. Instead, the goal is to show cash flow and information that will impact a company’s ability to pay back debt.
“When you pitch to equity, you paint a vision of the future,” Wagner said. “When you pitch to debt, we want to see all the skeletons in your closet and your worst secrets, because that's the thing that's going to tank the project and prevent us from getting paid back.”
Differing visions
Indeed, the experts said there are many differences between how startup entrepreneurs and their capital investors see the world. Often, part of a company’s transition to a more mature phase involves venture capitalists taking companies that are ready to build a project and “shaping them in a way that could be attractive to infrastructure investors,” Fernandez said.
One common change involves senior management. Often, companies need to evolve from a founding CEO to one who has experience in scaling up major projects.
“The person that got you from the lab to a pilot to a demonstration project is not going to be the person who builds the first $500 billion project if they don't adapt right,” he said.
CEOs must shift to a construction mindset and know how to spend the resources and hire the right people. That first demonstration project is an especially critical step, Fernandez said. Startup entrepreneurs who have “not proven the tech in the eyes of the investors” will not succeed, he said, no matter how much promise a technology shows in the lab.
Fernandez and his team work with startups to design project plans, set and meet deadlines, and overcome regulatory hurdles such as permits.
“The reality is unless you get your first demonstration project done, your company could die pretty easily,” he said, “because you have never really proven the tech.”