The problems with the last wave of cleantech venture capital weren’t because of cleantech. And they weren’t because of venture capital.
That’s the conclusion that my colleagues and I came to some months back. It was based upon our prior eight years of experience investing via a broad range of approaches at a family office.
We looked back at our experiences, and what we consistently saw were companies that had gotten initial commercial traction with solutions that made a lot of sense economically and were increasingly proven -- and yet the resulting strong growth one would expect never came to fruition.
We kept seeing the same challenges again and again: long sales cycles, customer skepticism and the barriers involved in asking customers to switch from an opex model to an upfront capex spend.
And in an entrepreneurial context without a lot of capital choices, this typically ended up with the innovators having to raise too much of their growth capital via the venture capital model (thus significantly increasing their risk profiles), or simply being unable fuel their growth at all.
This has been especially true for smaller, distributed system architectures.
Driven by advancements in distributed computing, communications and automation -- and further enabled by efficiencies in manufacturing approaches and modularization -- the world is simply moving in a direction away from centralized hub-and-spoke models. The shift is toward more localized models of production and optimized consumption.
And yet, except for distributed solar, many innovators deploying these distributed solutions have had a hard time accessing the capital they need to scale rapidly, even with such sectoral tailwinds.
It’s hard to blame the consumers and markets for lower-than-expected growth and capital underperformance. Sustainable energy, water, food and waste reuse are in fact some of the fastest-growing markets in the world. At the larger scale, where traditional project finance already exists, the cost of capital has been driven down significantly as big investors hungrily seek out such investment opportunities.
The problem is that this capital doesn’t have any reason to extend outside of its comfort zone into the newer distributed solutions. Overall, these are some of the fastest-growing markets in the global economy, with strong fundamentals and trends -- and yet outside of large-scale infrastructure, the investment community has been staying away.
But you can’t really blame the non-infra investment community either. Until recently, that’s really been dominated by venture capital. Asking venture capital to carry all the load by itself ends up being a pretty bad idea.
The basic math and structure of venture capital wasn’t originally designed with significant capital amounts in mind; however, companies directly or indirectly deploying small- to medium-scale systems (which, it turns out, is a significant portion of the market) are probably going to require significant capital amounts.
Their venture investors know that the more capital they raise through that structure, the harder it is to raise more capital down the road, and the harder it also is to eventually exit at a reasonable valuation.
Under those circumstances, it’s hard to blame so many investors for not wanting to get involved in these efforts in the first place. Venture capital and large-scale infrastructure are both incredibly powerful and socially valuable tools for economic growth, but for lack of alternatives both types of investors were too often being asked to extend themselves well past their comfort zones.
Again, this comes down to the past lack of a robust capital ecosystem around these markets and innovations. At least, that’s what we saw, having been partnered with many entrepreneurs who really could have used capital for their growth that wasn’t venture capital or traditional infrastructure. Where alternative capital was available, too often it simply wasn’t well-coordinated with the other capital, leaving entrepreneurs with a confusing mix of capital options that were hard to integrate.
Here’s the great news, however: That robust, integrated capital ecosystem is now emerging.
There are more capital strategies and more diverse capital sources available now for these solutions than ever before. And this is not just our own approach at Spring Lane Capital -- there are other solutions for deployment capital, for innovation funding, and just generally for helping make customers feel comfortable making a buying decision more quickly.
It doesn’t get talked about much, because venture capital still sucks all the oxygen out of the (press)room. But a rich array of new approaches to investing in the sector are now available -- both institutional-backed or non-traditional -- for entrepreneurs who know where to look.
Eventually, we need these sustainability innovations to graduate to mainstream capital sources. This is the playbook that rooftop solar followed, where eventually the models were so well understood and accepted that significantly lower-cost capital flooded into the market and installations blossomed. We need to see a trillion dollars pour into the next wave of energy, water, food and waste solutions, and many of those solutions are ready for it.
I and my colleagues at Spring Lane Capital are eager to help pioneer the financing models that enable such mainstream capital to follow us into these solutions and drive significant deployment.
There are many of us out there now, working with new investment strategies, and starting to see the traction of real market change. And that is, for me, exciting to see.
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Rob Day is a partner with Spring Lane Capital, which offers integrated deployment capital for sustainable, distributed asset platforms. You can find all his previous GTM columns here.