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How Venture Capital Investors Are Changing the Clean Energy Landscape
By admin May 30, 2019

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At its inception, venture capital (VC) investing was huge in clean tech, pledging billions of dollars to eventually produce a wave of startups between 2006-2008. However, VC investment in clean technologies plummeted in 2012, after investors took a number of losses from bad bets, as well as dealing with fallouts from the 2008 financial crash. Yet, since last year there has been another, new surge of VC-investing in the energy space. In fact, where overall investment in clean energy has seen an eight percent drop from 2018, VC and private equity investment has risen 127 percent over the same time period, totaling 9.2bn USD. According to Bloomberg New Energy Finance, this is the highest its been since 2010.

Matthew Nordan, the managing director of the Prime Impact Fund explains that traditional venture capital was “never a good fit for energy technologies…[as they] take longer, cost more, face more risk and return less.” Their small profit margins mean everyone involved ends up making less money than they would from an end product in a different value chain. Yet, there are new types of VC investors entering the energy space today, and many of them have secondary motivations to their capital, thus using a model that is not purely financial.

These investors include:

  1. Asset-Light Investors

This type of investment generates significant cash flow by investing in ‘asset-light’ businesses in the early years of the company and is considered the ideal business model for start-ups. At its core, this model allows companies to keep their costs low. Since their capital does not have to be poured into big manufacturing facilities, they have relatively few capital assets compared to their actual operations. Software companies are considered to be an asset-light investment.

  1. Strategic Investors

Strategic investment is a transaction similar to joint ventures in that one company will invest in another, entering into an agreement that serves their shared business goals. In clean tech, these partners tend to be utilities or large energy companies as they have the strategic motivation to deploy capital in addition to financial aspects.

  1. Foreign Investors

Here, capital flows move from one country to another, allowing a foreign actor to have an active role in management as part of the terms of their investment. Cross-border investment from countries where electricity and resources are more expensive has the potential to become a lucrative trade in clean tech, as by channeling money into Western startups, investors are able to drive innovation and trade which is a bonus to each country involved.

  1. Philanthropic Investors

This acts as a tool for socially and/or environmentally conscious investors who wish to make more than financial returns. For many in the clean tech space, this mandate is to reduce greenhouse gas emissions and applies to both for-profit and nonprofit entities.

  1. Place-Based Investors

Another type of impact investment, this refers to the local deployment of capital to address the needs of marginalized communities while also bringing about social and/or environmental changes. This ultimately allows investors to affect beneficial changes in their city or state while also having the potential to influence larger systemic changes by empowering local entrepreneurs and community stakeholders.

  1. Creative Partnerships

This model partners startups with later-stage funds who can help them to get investment returns at an early stage. This also means that investors do not get ‘washed-out’ if they are unable to invest increasing amounts of money in the same company later on.

  1. Patient Investors

These investors do not have the constraints of a normal investment fund. Essentially, patient capital is another name for long-term capital. This means that the investor is happy to make a financial investment into a business with no expectation of turning a quick profit. Most of these types of investments will not see returns until at least five years later.

Since these types of VC investment are so tailored to the clean tech sector, they have the potential to keep startups afloat when owners may have otherwise needed to leave and find more secure jobs. Ultimately, according to Nordan, VC investments “bring a capital source that has an appropriate, right level of mission alignment, risk tolerance, and long time frame that’s well suited to funding these companies.”

 

For more information:

Asset Light Business Model is the Key to Success for Start Ups

Clean Energy Investment: BNEF Analysis

Clean Tech Venture Capital is Back

New Types of Investors Fueling Clean Energy’s Venture Capital Renaissance

Why the Silicon Valley Model Failed Clean Tech

6 Common Investment Strategies of Fund Managers


Thanks for sharing !


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