Even if you don’t know the first thing about climate change, it’s likely that you’ve heard of Al Gore’s documentary An Inconvenient Truth. When the film was released in 2006, climate change took the mainstage and the investment world saw business opportunities in the clean technology sector.
That same year venture capital funds invested $1.75 billion into cleantech startups, dwarfing the hundreds of millions invested in previous years. Investments in cleantech seemed promising with higher oil and gas prices and favorable U.S. government policies. Startups – which were creating innovative solar panel, battery, biofuel, and other energy solutions – received investment. By 2011, VC funds had invested over $25 billion in cleantech startups.
However, these startups failed to generate expected returns and VC funds eventually lost more than half of their total investment. Although due in part to falling gas prices from fracking, a glut of solar from China, and a lack of exit opportunities for investors, these losses cannot be solely blamed on the cleantech sector.
Numerous studies have found that cleantech startups do not fit a traditional VC investment model. Argued by three MIT professors in a 2016 study, cleantech “does not fit the risk, return, or time profiles of traditional venture capital investors. And as a result, the sector requires a more diverse set of actors and innovation models.”
How can we remodel investments in early-stage cleantech startups for better returns ? Here are three needed improvements.
- Sourcing talent and ideas based on their potential
At an early-stage startup, cleantech founders rarely have both the science and business expertise required to bring their idea to market. Rather than focusing on the current skillsets of the entrepreneur, early-stage investors need to get better at evaluating the potential of an entrepreneur.
An entrepreneur’s current business knowledge is not a true indicator of their potential for success. For example, Bill Gates and Steve Jobs dropped out of college yet were successful entrepreneurs. If an entrepreneur is new to business, their potential to learn, grow, and lead are important indicators that investors can overlook.
In my experience at Echoing Green, the seed stage accelerator where I currently work, a founder’s potential is evaluated on the individual’s passion, leadership, magnetism, and resilience. Partnering with the right entrepreneur is critical. According to Alberto Gomez-Obregon, Director of Portfolio for Acumen, a global early-stage impact investor focused on low-income consumers, “at the end of the day, it’s all about the entrepreneur. It is crucial they have strong values alignment, character, grit and resilience before we consider investing.” These softer metrics can help identify the founder and company’s true potential for success.
Additionally, research institutions that fund cleantech ideas are not necessarily the best evaluators of how inventions will succeed in the market. Angelo Campus, founder of BoxPower (a current Echoing Green fellow) deploying modular solar microgrids, ran into trouble when his university’s priorities and the market’s needs didn’t line up: “My first prototype funded by my university developed functionality like speed of deployment, which I later realized was not a market need, and so I had to make later iterations.” Cleantech investors need to see beyond current product and market gaps and evaluate if a technical innovation can be transformed into a profitable product.
- Providing the right risk-tolerant and ‘patient’ capital
Early-stage cleantech startups generally need high amounts of upfront capital. A lot of this funding goes towards research & development to address the technology and market risks of the solution. This research & development takes time, does not guarantee success, and may require years to reach the market. Many investors are not willing to take these risks.
This raises the need for risk-tolerant and ‘patient’ capital, which provide longer time horizons for financial and social returns from cleantech ventures. Although not in high supply, funding like this is available through government grants, philanthropic grants, angel investors and other sources.
Cleantech investors are also working to design innovative funding models to unlock more early-stage funding. For example, the PRIME Coalition is working to increase Program-Related Investment (PRI) dollars and the Lab is investing in the design of innovative financial instruments to fund climate solutions. More cleantech investors like these are needed.
- Providing long-term depth and breadth of support to startups
Every cleantech investor has their own investment thesis with unique goals for what they’re looking to get out of the deal. When push comes to shove, cleantech investors need to answer to their investment thesis, which will affect the support a cleantech startup receives.
Traditional investors, who are driven by short-term above-market returns, may not have the time to give cleantech ventures the careful incubation and patient support required to achieve long-term success. Investors need a thesis that aligns with the long-term support needed for these cleantech startups.
Post-investment support also differs among cleantech investors. Each investor brings their own business networks and technical expertise to support their investees. No investor alone can give entrepreneurs everything they need to succeed. “We provide in-depth support for entrepreneurs on their sales, talent management and technology, and leverage global partnerships with consulting firms to provide further support,” mentions Golez-Obregon. Investors should build partnerships on top of their own expertise to provide the depth and breadth of support cleantech startups need to succeed.
Investments in cleantech startups are needed now more than ever. Even if current investments in existing cleantech solutions doubled, fossil fuels would still provide two-thirds of our energy needs by 2030, according to the IRENA’s REthinking Energy 2017 Report. Yet, there is investment opportunity as the cleantech sector grows alongside global energy demand.
The rise and fall of cleantech investments in the early 2000s showed the need for diverse funders, innovative approaches and targeted support to successfully bring innovative cleantech solutions from lab to market. If cleantech investors learn to identify the right talent, provide the right capital and support in the right ways, a 100% clean energy future could actually be possible.