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Historically, most entrepreneurs looking for financing don’t have the luxury of choice. In fact, few startup founders get to the funding stage and many struggle to get the attention of potential investors to consider their business plans — But the past 18 months have been anything but normal. Tech startups – especially clean technology-focused startups – are seeing a funding boom like never before, with a record $501 billion invested into the clean energy industry in 2020 alone, according to BloombergNEF.
As consumers become more environmentally conscious – thereby “going green” – governments and corporations have been pressured to dial up their commitments to reach net-zero, increasing the demand for new technologies and solutions that help decarbonize the global economy. As clean technology startups show skyrocketing returns and valuations, the venture capital and financial community has responded with increased interest in the space, and a massive influx in funding.
Tech entrepreneurs bringing new climate tech solutions to market, such as electric transportation, clean energy, circular supply chains and sustainable buildings, are now finding themselves in an enviable position: After years of funding famine following the 2011 collapse of clean tech investment, a veritable feast of financing options has emerged. For promising startups, the challenge now is less about finding financing but rather selecting it, understanding which kind of financing to choose, and who to partner with.
No tech company is the same, neither is their financing journey
It’s clear by the numbers that we are riding the wave of the second climate tech wave. More than $60 billion in global venture capital funding went to climate tech companies between 2013 and 2019 according to PWC, and BloombergNEF reports another $17 billion was added last year. And Bloomberg estimates that 76 climate funds were established in 2020, bringing the number of funds focusing on climate tech to nearly 400.
As head of SE Ventures – Schneider Electric’s venture capital arm – I work with hundreds of climate tech entrepreneurs and startups. I’ve seen how funding works as both an entrepreneur and an investor. I know first-hand how important choosing the right funding option and investment partner can be.
Startups can have many suitors, from established venture capital firms to SPAC’s and corporate investors, and it’s crucial that founders weigh their options carefully in order to determine which offers the best chance for success.
SPACs and PIPES: Goodbye fundraising, hello quarterly reports
An increasingly popular financing option is merging with a special-purpose acquisition company, known as a SPAC. These so-called blank-check companies are made up of nothing but cash with the sole purpose of going public and then merging with a promising growing company. SPACs are an attractive way to quickly raise a lot of capital and often involve outside investors injecting money through private investments in this new public equity, or PIPE.
For startups with a mature technology that will bring in reliable revenue, a SPAC can provide the cash needed to scale toward profitability, without the need for more fundraising.
But, once a startup merges with a SPAC to become public, it is expected to deliver results on a quarterly basis — and public markets can be brutal. Investors deplore unpredictability, and without reliable growth the share price can plummet, leaving the management team in danger of being replaced.
ESG Funds: Measuring impact beyond the balance sheet
ESG investing or investing in companies based on environmental, social, and governance criteria, is surging in popularity. Investors are increasingly backing companies working to reduce carbon emissions, develop technologies that accelerate the renewable energy transition, and slow climate change. A commitment to sustainability is now a popular risk mitigation strategy.
Many ESG funds motivated by doing good (socially) and doing well (financially) focus on the long-term. They will often weather growing pains as long as the company shows progress. Many private equity firms use ESG as a differentiator for attracting investors and employees, and are willing to overlook traditional ROI factors in the short-term.
ESG funds are typically hands-off, but their sweet spot is late-stage companies. Earlier-stage companies may find it difficult to catch their attention. Some ESG funds may not be able to provide the technology support or partnerships that can make or break a startup in a notoriously difficult industry to penetrate.
Corporate venture capital: Access to customers, but beware the bureaucracy
Many large corporations have created internal venture capital funds that invest in startups to spur innovation, spot new technology, co-innovate and generate returns. These funds are siloed from the rest of the corporate structure to varying degrees.
Corporate VCs (CVCs) offer something that others can’t —customers. Beyond connecting a startup to their own clients, CVCs can sometimes be the company’s first big customer, building legitimacy in an industry wary of newcomers.
But choose wisely: Some CVCs can hamper a startup’s agility with endless meetings and bureaucracy, and funding decisions are notoriously slow. Look for a CVC with a single point of contact to help navigate the company, procure resources and avoid time-wasting projects. Choose a company with a culture and strategy that align with yours, as these relationships can last a decade or longer.
Venture capital: Instant reputational boost
VC investment enables young companies to secure seed and early round funding needed to build a business. Until recently, traditional VCs that wouldn’t touch anything related to renewable energy are now adding new investors that specialize in the industry to scout for companies that have breakthrough potential.
If a top VC with a successful track record offers you funding, take the money. Top VCs have solid performance histories and reputations for picking winners. They provide mentorship that can be invaluable to an entrepreneur’s success and legitimacy.
However, when it comes to VCs, it’s important to be mindful of timing. Joining a fund toward the end of a typical 10-year cycle could add pressure from investors who want their money out sooner. They may push you to make decisions before you’re ready. Each round of funding brings in more capital, but that comes at a cost to equity.
Evaluate your options and plan for success
Investing in clean energy is frenetic, but renewed interest in the industry is here to stay. We’re in the midst of the first energy revolution in a century. The industry has gone from famine to feast, and climate tech founders need to choose the path that’s best for their company.
Short-term thinking, underdeveloped technology and unrealistic expectations led to the collapse of the cleantech bubble a decade ago. More money and faster results are not always the best bet. Take time to prioritize your key success factors, balancing the benefits of capital, market access and strategic fit. If you choose investors who have the knowledge and guidance you need, a shared strategic vision, and a bit of patience, you could be one of the lucky few who build the winning companies of this climate tech boom.
Diarte is a high-tech entrepreneur, angel investor, and global business leader with extensive experience running large companies. He is responsible for corporate ventures and external innovation at Schneider Electric, as well as the company’s open innovation and incubation programs and investments in startup and growth companies.
