A helping hand through the green tech ‘valley of death’

“Transition finance” — funding the decarbonisation of highly polluting industries — has become an increasingly prominent term over the past couple of years, and rightly so.

But as I’ve argued before, there is a risk that transition finance could focus too narrowly on providing capital to the big companies that happen to dominate those high-emitting industries today — and not enough on supporting the disruptive start-ups pursuing a radically greater pace of progress.

Those start-ups are facing real funding constraints — especially around the stage where they need to build their first full-scale plant. But as I outline below, investors and government institutions are starting to rise to the challenge.

transition finance

Running the clean tech funding gauntlet

On the sun-baked Mediterranean island of Sardinia, a trailblazing energy storage project from Italian start-up Energy Dome is passing through what entrepreneurs and investors commonly refer to as the “valley of death”.

The phrase has long been used to refer to the stage of a business’s development where it is making significant investments, but substantial revenue has not yet started to roll in. That’s a scary enough prospect for an asset-light software start-up. It has become a still more fearsome one for young companies developing technology to help decarbonise the world’s energy and industrial sectors.

But funding from the European Investment Bank and Breakthrough Energy Ventures — the clean tech investment vehicle set up by Microsoft co-founder Bill Gates — may help Energy Dome get through the valley alive.

The lifeline is a product of a partnership launched in 2021 between the EIB and Breakthrough Energy Catalyst, a unit of BEV focused specifically on funding capital projects by climate tech start-ups.

Energy Dome is one of a growing number of young companies developing grid-level energy storage, which will help ensure stable electricity supply as generation shifts towards intermittent solar and wind power. Its model works by pressurising carbon dioxide using electricity, and later allowing the gas to depressurise within its closed system, powering a turbine in the process.

By converting electricity to another form of energy and then back again, it functions much like a lithium-ion battery — but with superior efficiency and lower cost, says Claudio Spadacini, Energy Dome’s chief executive.

Stepping into the funding void

There’s are many venture capital firms willing to fork out a few million dollars to bet on an exciting concept, and this capital is generally sufficient to prove that concept at a small scale. But those venture firms are often unwilling to take the risk of funding a climate tech company’s first working plant — “first of a kind” in industry jargon — which will often cost several tens of millions of dollars or more to build.

At the same time, these investments are generally too small to be suitable for big infrastructure investment outfits, such as Canada’s Brookfield and Australia’s Macquarie, whose fund sizes can run into the tens of billions of dollars.

This is where initiatives like the EIB-BE Catalyst partnership come in. Energy Dome is one of two companies to have won funding through the partnership so far. Under a deal announced last December, it’s been promised a grant of up to €35mn from BE Catalyst, with a further €25mn in debt from the EIB.

The EIB loan will be repaid in full with a small interest after five years, with no principal or interest payments in the meantime. At that point, the EIB will also have the option to take an equity stake in Energy Dome at a low price that’s fixed at the outset.

This “venture debt” structure enables the EIB to earn a healthy return if the start-up succeeds, without “cash-strapping the company in the valley of death”, Alessandro Izzo, the EIB’s head of equity, growth capital and project finance, told me.

Now that it has got a path towards a full-scale working plant, Spadacini said, Energy Dome has been able to open early conversations with infrastructure funds interested in the potential to finance its future growth, which could provide capital on much more attractive terms than most other sources of funding.

“As a business, you dream of deploying technology with infrastructure capital, which is one of the cheapest forms of capital out there,” Spadacini said. “But infrastructure funds are reluctant to invest until a technology is fully demonstrated — not only technically but also in terms of project development.”

Filling the pipeline

Since it was set up in 2021, with committed capital of about $1bn, BE Catalyst has backed six climate tech start-ups, with a mix of grant and equity funding. It was a pretty modest tally, conceded Mario Fernandez, who leads the initiative.

“The reality is, we are hard pressed to find well-structured projects,” he told me.

Part of the problem, he said, is that many start-ups lack the financial and business skills needed to structure these early projects in a form that will attract big-ticket investors. To address this, BE Catalyst — as well as providing funding — works with businesses to help them structure their business plans and subsequent financing rounds in ways that will appeal to later-stage investment funds.

“The valley of death is not only financial,” said Eric Trusiewicz, chief executive of California-based Rondo Energy. “It’s also somewhere start-ups struggle to scale into becoming grown-ups.”

Rondo, a start-up (which we profiled last year) using thermal batteries to provide low-carbon industrial heat, last month became the second company to secure funding through the EIB-BE Catalyst partnership, with the former providing €35mn in venture debt, and the latter a €40mn grant. Rondo is using these funds to develop not one but three plants in Germany, Denmark, and a third as yet undisclosed European country.

Trusiewicz thinks the dearth of investors willing to back these sorts of capital outlays by start-ups is a reflection of a venture and growth funding ecosystem that is still heavily geared towards software and digital services companies.

“Climate tech is a pretty unique space in which the vast majority of things you’re doing are affecting the physical world, and attacking infrastructure problems that are measured in the multiple trillions of investment,” he said. “So it’s very different than the digital venture world where things have close to no variable cost, besides customer acquisition cost.”

BEV is not the only investment group to have turned its attention to this area of financing. Just Climate, launched by Al Gore’s Generation Investment Management in 2021, has raised $1.5bn to invest in “growth-stage, asset-heavy” companies that can help to decarbonise heavily emitting industries. Microsoft’s $1bn Climate Innovation Fund has helped fund plants by start-ups including low-carbon steel ventures Boston Metal and H2 Green Steel. Climate Investment, a $1.1bn fund backed by large oil and gas companies, has a mandate to fund climate tech companies from early stage to project development.

The US government has also been providing more support for this kind of funding under Joe Biden’s presidency, through the Loan Programs Office now led by veteran clean energy investor Jigar Shah, and the $25bn Office of Clean Energy Demonstrations.

The EU has its own big investment vehicles — notably the €95.5bn Horizon Europe fund and the Innovation Fund, which deploys revenues from the European emissions trading scheme — that the EIB is able to draw on for its financing alongside BE Catalyst.

EIB’s Izzo says the partnership is intended to act like an “icebreaker”, clearing a path for more private sector investors.

“We want to show that these deals are actually doable, and with a bit of more specialist, risk-taking appetite, things can happen. And that sends a signal to the private capital markets to actually go and invest in these asset classes.”

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