A new fund is channeling philanthropic dollars into early-stage clean technology investments in the hopes of catalyzing major climate-change impacts.
The Prime Impact Fund closed a $50 million raise in recent weeks and has already made eight investments. The fund uses an unusual structure: It screens prospective investments for their carbon-reduction potential in order to direct investment to high-impact technology companies that might struggle to find funding through conventional means.
The investment team is professionally trained in hard sciences; it is looking to cut checks up to around $5 million for the sort of hard-technology startup that would scare the Patagonia vest off a typical Silicon Valley investor.
“It's a really exciting time because it looks so different than it did 10 years ago,” said Managing Director Matthew Nordan. “You have a different generation of investors who are approaching the field on its own terms and have learned from what didn’t work in the past.”
This effort spawned out of the nonprofit Prime Coalition, which developed software to calculate emissions-reduction potential and served as matchmaker between qualifying startups and impact investors. Prime syndicated 10 investments for a total of $24 million; eight of them went on to raise subsequent funding at an increased valuation.
By raising a fund of its own, Prime gains the ability to price and lead rounds for companies that pass its climate impact assessment. The goal is to take risks that wouldn’t appeal to venture capitalists looking for the next big software unicorn.
Nordan saw the barriers to cleantech investment firsthand working at Venrock, a long-running investor (formed to invest Rockefeller family money) that picked Apple and Intel. Venrock was willing to go in on Nest, the smart thermostat company that Google acquired for $3.2 billion, but other cleantech pitches didn’t land. For software investors, cleantech often “looked like biotech without a clear exit model,” Nordan recalled.
“I do think there's real evidence that there's something unique about energy and climate,” Nordan said. “It really does require having a longer timeframe and a higher risk tolerance.”
The Prime fund is unusual among venture capital firms in its connections to philanthropic funding sources, which tend to be comfortable thinking in long timeframes.
One-third of the funding came from the investment capital of foundations — and individuals, such as actors Jada Pinkett Smith and Will Smith — that want to invest in sustainability. The rest came from grant-making organizations using mechanisms such as a “program-related investment.” That legal term refers to cases in which grant money flows to for-profit initiatives that serve the grant-maker’s charitable mission — in this case, a priced venture capital investment that supports long-term decarbonization efforts. Any proceeds from an eventual exit go back to the grantor, which must use that money for additional grants.
The Sierra Club Foundation, for instance, invested out of its endowment, while the David and Lucile Packard Foundation and the John D. and Catherine T. MacArthur Foundation used their grant-making bodies to make program-related investments.
Some early Prime Impact Fund investments are already bearing fruit. Lilac Solutions is commercializing materials that efficiently extract lithium in order to replace the resource-intensive and environmentally damaging evaporation ponds currently used. Prime invested early, leading a prefunding round in October 2018, and worked closely with the founders on team-building and developing a business structure, Nordan said.
By this February, the startup had six pilot customers on three continents and raised an oversubscribed $20 million Series A led by Breakthrough Energy Ventures and MIT’s tough-tech investment arm The Engine.
“That's the playbook we want to run over and over again,” Nordan said.
It’s also a data point to suggest there are more pathways now for risky hardware businesses to grow and raise money and tackle hard climate problems. An ecosystem of investors has emerged with explicit climate and energy interests — and the technical expertise to assess risk in those sectors.
Still, Nordan said, the sector needs an order of magnitude more funding to really tackle the challenge of global emissions.