Funding is the top hurdle facing renewable energy startups. A clean energy bubble hit the economy in 2008. That’s about the same time as the better-known housing bubble. Too much money chased too many unworkable ideas. Unfortunately, financing renewable energy hasn’t bounced back as much as housing has.
For example, Acquion Energy, which made grid-scale batteries for renewable energy, seemed to be doing all the right things.
It got funding from multiple sources. It tried to avoid relying on rare materials and used repurposed equipment. And it tried to operate in niche markets with little competition.
But it had to declare bankruptcy in 2017 after a fundraising campaign failed. It wasn’t alone, even among other battery startups. It had arrived at the middle and late stages of growth that so many startups have experienced as the “valley of death.”
Venture capital money did build several strong cleantech companies between 2008 and 2011. These include Tesla. But while cleantech firms received 17% of venture capital funds in 2011, the share fell to 8% in 2016.
According to Bill Gurley of the venture capital firm Benchmark “the vast majority of entrepreneurs should NOT take venture capital.”
What is the problem with venture capital for renewable energy? And what options can startups turn to?
Every business was once a startup. It takes money to set up a manufacturing process and sales network. If the idea is based on new technology, it takes money to prove the concept and scale it up for commercial production.
Startups, however, don’t have money. Venture capitalists exist to provide it. They risk their own money to help build a business. They hope to see the business grow until it is large enough and well enough known to stand on its own. And they expect a good return on their investment.
From a venture capitalist’s point of view, the ideal business will grow very large very quickly. Most industries become dominated by a few major players. Economies of scale allow them to use capital efficiently. And too often, that means using raw materials wastefully.
Renewable energy companies can’t yet grow rapidly into a dominant position. Startups often rely on emerging and relatively untested technology. Sustainable use of resources may require companies to stay small and local.
Startups in energy storage, home energy management, and EV-charging infrastructure can still attract venture capital.
Early-stage solar, wind, and biotech companies no longer get venture capital money. Electricity is still a regulated monopoly. It has little growth potential. A new company that produces kilowatt-hours of such a regulated commodity can’t grow or change the industry quickly enough to satisfy most venture capitalists. That’s because they don’t find financing renewable energy profitable enough.
Besides venture capital, new businesses can apply for government grants. President Trump has worked to dismantle federal funding for renewable energy startups.
That’s not necessarily a bad thing, however. The federal government has a long history of subsidizing companies whose only source of funding turns out to be government grants.
Eight years ago a solar company called Solyndra failed spectacularly after the grant money dried up. “No more Solyndras” became a common political slogan. Politicians using it often opposed the government’s role in financing renewable energy.
Others, I hope, recognized a specific problem with Solyndra. Its product was marginally superior to its competitors’ but much more expensive. And so it couldn’t attract enough other investment to continue to operate once it used up its grant money.
The government doesn’t need a return on investment, as venture capitalists do. So it too often gives grants to companies with unworkable business plans.
Startups need a variety of funding sources. If they can get a government grant as part of the mix, there’s nothing wrong with applying. But it’s foolish to rely too much on government grants.
In 2014, fourteen utility companies pooled their resources to form Energy Impact Partners. It does not deal with startups. It works with companies with proven technology and business models. That is, it sees not quite established companies through that “valley of death.”
Royal Dutch Shell and Duke Energy, among other large corporations, also have financing arms. They invest money and need a return on it, but the return doesn’t necessarily have to mean getting money back.
A successful corporate investment may result in new technology the company can use. It could help create an important supplier, or maybe even a future subsidiary.
Non-energy corporations have become more committed to environmental issues Therefore financing renewable energy becomes a way to reach their goals. In 2019, the volume of corporate renewable energy projects grew by 40% over 2018. It more than tripled that of 2017.
Four of the largest tech companies have contracted to buy massive amounts of clean energy: Google (2.7 GW), Facebook (1.1 GW), Amazon (0.9 GW), and Microsoft (0.8 GW). How quickly will the rest of the world start to do the same?
Speaking of Microsoft, Bill Gates has teamed up with 27 other billionaires to form Breakthrough Energy Coalition. They fund projects that traditional venture capitalists won’t touch, projects that seem too slow or too risky.
Incubators and accelerators
Given the uncertainty of venture capital or government grants, many startups turn to business incubators.
Business incubators may be sponsored by private industry, municipal governments, or universities. They provide early-stage funding and connect startups with other investors.
They house numerous new businesses under one roof and charge less than the market rate for office space. Those businesses also share secretarial staff, utilities, and some production equipment. Such cooperation reduces everyone’s operational costs and overhead.
What’s more, business incubators provide expert help in developing business models and marketing plans.
Typically, a startup stays with the incubator for two years. After that, it can join a business accelerator to see it through its adolescence.
Some incubators and accelerators specialize in financing renewable energy and other cleantech sectors. For example, Wells Fargo’s incubator focuses in part on energy consumption in commercial buildings. Shell’s focuses on advanced grid technology.
Renewable energy startups need money. They’re starting to have more places to look for it.
The big four in tech are buying into the renewable boom / Haley Zaremba, Oil Price. February 2, 2020
Where can cleantech startups find funding in 2019? / Eric Wesoff, Greentech Media. January 24, 2019
Why bad things happen to clean-energy startups / James Temple, MIT Technology Review. June 19, 2017
Thin film solar installation. Public domain from Wikimedia Commons
Business angel. Image by Tumisu from Pixabay
Money down the drain. Source unknown
Slow money logo. Source unknown
Home energy storage. Photo by Christine Bennett. US Department of Energy