What do Bill Gates, Steve Case, Nancy Pfund, Pierre Omidyar, and Will Smith all have in common? All Hollywood action stars? Ummmm…. yes, and, they are all cleantech investors.
News flash: There’s a wave of philanthropic investing in cleantech that’s breaking open, right now. I’ll explain what it’s all about and how impact investors and philanthropies can get involved now, when the opportunity and impact is the greatest.
Below is Dawn Lippert, Executive Director of Energy Excelerator, a non-profit cleantech incubator, at the White House in June. Vice President Joe Biden was also there, announcing that the administration’s $2 billion “Clean Energy Investment Initiative” was doubling to over $4 billion, because of interest from foundations and long-term investors.
It was a flurry of activity. The Federal Treasury announced that it may be streamlining the tax rules related to mission-related investments and program-related investments. A new center at the Department of Energy called the “Clean Energy Impact Investment Center” was forming. My organization, Energy Excelerator, was announcing a new fund for our portfolio companies and more.
But amidst all this buzz, the news that made headlines was that Will + Jada Smith’s Foundation was investing in a little known startup called Quidnet Energy — a new venture that’s trying to use natural cavities in the earth to store energy. Men In Black Caves? Independent Investor day? Fresh Prince of Clean Air? But seriously… how and why did this all happen?
Let’s take a step back here. What is cleantech, exactly?
You may be familiar with prominent industries such as solar, wind, electric cars, battery storage, etc. But cleantech is much more than that. Cleantech enables children in Tanzania to read at night. Cleantech helps women in Nicaragua access clean water for their families. Cleantech is creating micro-entrepreneurs in Thailand through mobile phone charging stations. At Energy Excelerator for example, we take a broad view and invest in everything from water efficiency to regenerative agriculture to off-grid energy access. Cleantech is big and broad.
Foundations have historically played an instrumental role in supporting basic science and technology, but that dropped dramatically as the appetite of venture capital shifted to internet technologies promising quicker returns. Some call this the Snapchat phenomenon — a seductive siren’s song of shiny things that sucked VC money away from science and left a big funding gap in its wake. Between the two World Wars, foundations invested over $100M in science, but that work has become increasingly dislocated from what VCs are investing in in the commercial marketplace. Companies like Twitter, Instagram, and Snapchat now account for 25% of all VC dollars. Fortunately, we are just now starting to see foundation grantmakers and other philanthropic investors claiming their place in the advancement of society through for-profit investments that wouldn’t otherwise be done by traditional venture capital firms.
One example: Venrock — a prominent VC firm and the portmanteau of Venture and Rockefeller — started originally as a family fund in the war years, and invested almost exclusively in science and engineering-driven enterprises like aviation, rocketry, analytical instruments and nuclear power. Cut to today, and it boasts investment in pure science like Dollar Shave Club, technology breakthroughs like Twitter tracking tools and space-age futurism like internet ads.
Effectively, long-term issues like climate change require long-term commitments. Maybe Silicon Valley VCs wants to do it but — squirrel! — have you heard about the new photo app? Hence, the Snapchat effect.
3 Reasons Why Impact Investors Are Perfectly Positioned To Swoop
We are right now witnessing a long-last reuniting of impact capital and beneficial technologies. While Will + Jada Smith grabbed the headlines that day, there’s a lot more where that came from. The Gates Foundation made similar news earlier in the year when Genocea, a vaccine company they funded and owned 6% of went public. Overall, $600 billion sits in U.S. private foundations. $47 billion went out as grants in 2011. A mere 0.1% went to energy innovation.
This time next year, this will be a different conversation because foundations, money managers and impact investors are about to get involved in a big way. Here’s why they are perfectly positioned to do this:
1. Impact: We have the hard science about the health effects of fossil fuels, from asthma to cancer rates, and we know that these problems disproportionately affect the poor and those least able to protect themselves. Internationally, the developing countries that contributed the least to the problems surrounding climate change are those who are bearing the brunt of climate impacts. This fight for justice around climate is real and cleantech can drive impact across a huge spectrum of issues. If you care about women’s empowerment, cleantech is a part of that. If you care about access to education, cleantech plays a part in that. Human rights, clean air, water and food: cleantech can help.
2. Timing: This is the time, and not just because the decisions we make over the next ten years will effect the next 100, but because the field of investment is open. It’s been said that we’re half-way into a 100 year transformation of our entire energy system. Founding a cleantech startup now is kind of like founding a software startup 15 years ago, and VC’s are missing the boat. This is your green field, for now.
3. Returns. Energy Excelerator companies have gone on to raise over $207M of private capital since 2013. With new, scalable, cost-effective technologies coming out of the cleantech sector every day, we have the chance to change the trajectory of the planet and the human race… while making fantastic returns.
For all these reasons and more, it is the impact community’s turn at bat.
Foundations often use a tool called a program-related investment (PRI). With a PRI, a foundation directs grant funds (part of the mandatory 5% per year to maintain tax status) to a for-profit company that does “program-related” work. The US tax code requires a PRI to meet a two-part test: The investment must “significantly further” the charitable goals of a foundation, and it must be such that the foundation would not have made it “except for [its] relationship” to those goals.
On the 95% side of the equation, with solid returns for cleantech investment, foundations are now looking to divest from interests that don’t align with their missions, and invest in ones that do. Using an Aligned Intermediary is an emergent way to operationalize this.
Taking the Plunge
This can be done effectively two ways:
1. You can create your own deal flow, source companies, perform due diligence and track results over time. For larger organizations that can build this internal capacity, this is, perhaps, a good way to go.
2. You can invest through an existing vehicle that is already doing the sourcing and vetting. That is how Will and Jada Smith ended up funding that little-known cleantech start up — they relied on the scientific savvy and sector experience of the folks at PRIME to delve into the cleantech space. At Energy Excelerator, we currently have 32 companies in our portfolio that have raised $207 million in follow-on funding, and we add sixteen new companies every year. You can see the results here on our new Impact Report.
This is the year to get into cleantech. Organizations like Energy Excelerator and PRIME are here to help. The climate imperative is as present as ever. The returns and upside on investment are getting bigger. This is going to be a big year.