Clean technology venture capital investment strategies for the next decade will look much different than those deployed over the past two decades.
In the first wave of venture green technology investing, firms sunk billions of dollars into companies whose success depended on replacing entire industrial ecosystems. Think thin-film solar and biofuels, the two “big bad bets” that Shayle Kann, partner at Energy Impact Partners, identified in a 2020 conversation on The Interchange podcast.
Despite successful counterexamples like Tesla, Nest, Enphase and Silver Spring Networks, those failures, combined with the Great Recession starting in 2008, led to the loss of roughly half of the $25 billion in venture capital invested in the sector from 2006 to 2011, according to PricewaterhouseCoopers. That led, in turn, to a major drawback from big VC firms, with early-stage funding for climate tech companies falling to about $418 million in 2013.
But by 2019, venture funding had picked back up. Global tallies of VC and private equity investment into cleantech in that year range from $9.2 billion, according to Bloomberg New Energy Finance, to $16 billion, according to PwC. The difference in these tallies indicates, however, that measuring growth in the space depends greatly on how one defines “cleantech.”
These definitions matter particularly to investors in startups trying to compete in a world where renewable energy has become the fastest-growing source of new generation capacity, and where core clean energy equipment like inverters, batteries and smart meters have become increasingly commoditized products.
Heavy-duty investors such as Breakthrough Energy Ventures and Generate Capital are raising billion-dollar funds to sink into long-to-develop energy technology bets and major cleantech infrastructure. But firms focused on early-stage opportunities are targeting technologies as well as process and business innovations that can incrementally improve on an already existing ecosystem of competitive industries — what Kann called the "picks and shovels that enable the commodity to get to market.”
Bring incremental improvements to fast-growing cleantech sectors
Take Energize Ventures, which has directed its $165 million into investments into 14 portfolio companies over the past three years. Energize, whose limited partners include Invenergy, General Electric Renewables, GE Power, Schneider Electric and Wisconsin-based utility holding company WEC Energy, targets investments in the $5 million to $10 million range, focused on adding incremental value to large-scale energy developers.
“We consider our [limited partners] to be an edge for us as investors, and on the back end they tend to be customers for our portfolio companies as well,” Katie McClain, partner at Energize Ventures, said in a recent interview. More specifically, while hardware costs have dropped quickly over the past decade, “the focus right now in the renewables space is how [to] reduce those soft costs.”
Examples of this include Aurora Solar, which raised a $50 million round in November. The company’s software design tool is used by rooftop solar developers including SunPower and Vivint Solar to turn location data into in-depth forecasts of solar generation capacity, shaving soft costs that make up the majority of per-watt installation costs for residential solar.
On the utility-scale solar front, Energize has worked with portfolio company DroneDeploy to fine-tune its approach to using drones for construction and agricultural inspections to solar farm surveys once done on foot, she said. “It’s much more efficient, it’s much faster, and it gets to that scale piece.” Another portfolio company specializing in visual data analysis, Matroid, uses computer vision technology "to run through all those images and spit out what’s useful for their customers and what isn’t.”
Daniel Goldman, managing director of Clean Energy Ventures, which raised $110 million in 2019 for its early-stage fund, described a similar approach to targeting startups seeking to fill gaps in existing technology infrastructure.
“Our goal is to fill this gap at the area of seed and Series A investing, companies that are beyond grant funding and coming out of universities that have pilots and demonstration projects, and maybe even early revenue,” he said. While the fund only invests in companies promising significant carbon reductions, it’s looking for those that can provide “capital-light” ways to get there, he said.
Portfolio company ConnectDER, for example, installs its devices at existing meter sockets to connect customer-sited solar systems and household energy data in ways that today’s utility smart meters don’t, bridging a gap between distributed energy and utility visibility and control. Another portfolio company, SunDensity, is developing glass coatings that could add 3 to 5 percentage points of light-to-electricity conversion efficiency to existing solar panels, he said.
The ConnectDER investment fits into a growing theme for 2021, which is “the transfer of power from utilities to distributed energy resource managers, to solar installers, to upstarts taking new technology to take control of energy use at a distributed level,” Goldman said. That trend applies equally to climate-change-wracked states like California, with its wildfires and fire-prevention grid outages, as it does to “broken” grids in developing nations, he noted.
Meet imperatives to expand clean energy access and social equity
The Biden-Harris administration has already taken major early steps in its clean energy and climate agenda, including a directive for federal agencies to procure clean energy and zero-emissions vehicles to reduce their climate impact. But it’s also made social equity a centerpiece of its efforts, from made-in-America pledges to boost jobs to commitments to focus investments in low-income and minority communities suffering the most health and economic damage from industrial pollution and global warming.
Over the past decade, Hawaii-based Elemental Excelerator has made “the nexus between climate action and social equity” central to its strategy of investing in public- and private-sector funds, CEO Dawn Lippert said in a recent interview. “Companies are catching up on equity and inclusion,” as well as the “inextricably intertwined” nature of climate-change mitigation and social justice, she said.
Elemental Excelerator’s latest investments range from community-based agriculture and garment industry initiatives to zero-emissions aircraft, indicating the expansive scope of its investment approach. Several of its latest cohort of portfolio companies are tapping widely available data sources to help link customers to clean energy options.
For example, according to Lippert, “We’ve installed tens of thousands of electric vehicle chargers,” but many EV charging providers “don’t have coordinated maintenance or uptime plans for them,” she said. Portfolio company ChargerHelp’s mobile app allows EV drivers to report out-of-service chargers and links users to local workforce development groups that are training charger repair technicians.
Elemental Excelerator also joined the recent $100 million investment in OhmConnect, which is seeking to enlist hundreds of thousands of homes in a virtual power plant to ease California’s grid stresses. In this case, it’s working with the San Francisco-based startup to expand access to “traditionally excluded communities,” where people pay a much higher proportion of total income on energy costs than most Californians, and subsequently have more to gain from programs that pay them to shift energy use during times of peak grid demand.
Clean Energy Ventures’ investment in SparkMeter last year takes on a similar challenge in emerging economies in sub-Saharan Africa and South Asia, Goldman said. The Washington, D.C.-based startup has branched out from providing its metering technology for off-grid microgrids to supplying them to distribution utilities searching for low-cost yet reliable systems to improve operations and reduce “nontechnical losses,” that is, energy theft or corrupt meter-reader activity.
“They can’t afford an SAP or a Siemens or a GE grid management system — it’s not in the cards,” he said.