7 New Types of Investors Fueling Clean Energy's VC Renaissance

Venture capital is surging back into the energy sector it abandoned seven years ago, and the money's not all coming from billionaires, oil companies or corporate funds. There's a need breed of venture investor in town, according to one of them, in fact, seven new breeds.
Traditional venture capital never was a good fit for energy technologies, according to Matthew Nordan, the managing director of the Prime Impact Fund, because energy technologies take longer, cost more, face more risk and return less than, say, a new pill.
"It's more time, more money, more risk, sort of less gross margin to go around," Nordan said in a recent appearance at Carnegie Mellon University's Scott Institute for Energy Innovation. "When somebody sells a drug at the end of the value chain, sells a pharmaceutical to you, we've got like a 99.5-percent gross margin on that pill. When GE or Siemens sells a turbine, they might have like a 25-, 30-percent gross margin on that turbine. There's kind of less profit to go around."
Even though overall investment in clean energy dropped 8 percent in 2018, venture capital and private equity investment surged 127 percent to $9.2 billion, according to Bloomberg New Energy Finance, attaining its highest level since 2010.
2019 could be prettier.
"What's beautiful about 2019 is that there is a new tribe of investors who are coming at this space on its own terms," Nordan said, "and who in many cases have either some secondary motivation to their capital that creates a return that's not purely financial, or they have a creative model that allows them to make some end runs around the challenges of doing traditional venture investing in this field."
According to Nordan, the members of that tribe include:
1 Asset-Light Investors
"Energize Ventures in the Midwest (is) solely going after asset-light companies that don't have to spend a lot of money to build big manufacturing facilities
and stuff like that. They can do it on other people's balance sheets. Very good idea." For example, software companies can be an asset-light investment.
2 Strategic Investors
"We have a series of strategic funds, the most notable of which are Clear Sky and Energy Impact Partners, whose limited partners—the people who give
them the money they get to invest—are all utilities or energy companies or other folks who have a strategic motivation to deploy capital in addition to their financial one."
3 Creative Partnerships
"We have some really cool new models. Abe Yokell and Josh Posamentier of Congruent Ventures on the West Coast have come up with a model where they partner with later-stage funds, who can help them get investment returns at an early stage without getting washed out if they can't invest more and more money in the same companies later on."
4 Foreign Investors
"The orange man and the White House is not really helping us on this front," Nordan said , "but there are a bunch of interesting cross-border investors from places in the world where electricity and other resources are a lot more expensive, who have figured out how to channel money into Western startups. 1955 in San Francisco is a good example of that."
More after the jump:
5 Place-Based Investors
"We have place-based investors like Clean Energy Trust that is all about seed stage investing in the Midwest." Clean Energy Trust last month held Co-Invest Clean Tech, its annual showcase for midwestern clean tech startups.
6 Patient Investors
"We have patient investors who don't have the constraints of normal investment funds, like True North Venture Partners, a Walton family money vehicle, that is actually structured as a holding company which can buy companies and hold them forever if they want to. You know a lot like Warren Buffett might do."
7 Philanthropic Investors
In 2014, Nordan and MIT researcher Sarah Kearney launched Prime Coalition, and then its Prime Impact Fund, to take advantage of the $600 billion held by family foundations that have a social or environmental mandate but had not yet ventured into the energy sector.
“Our three underwriting criteria are the three things you see here," Nordan said, "gigaton-scale transformative climate impact, potentially unlikely to raise capital without us, attractive to follow-on investors if these companies can be de-risked on our dollars.” Prime has only one criterion for success, he added: "We have one overriding principle at Prime Impact, right. There's one thing that defines success to us one and one only, and it is vastly reduced greenhouse gas emissions. That is success."
These seven types of investors are not just a financial boon to new energy startups, he said. Because they better fit the sector's characteristics, they can keep startups going when their founders might otherwise flee to more secure jobs. They “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.”