Although the transport industry came to a standstill during lockdowns worldwide, global temperatures kept going up with each passing month in most of 2021. As a result, the earth became warmer than usual.
As climate change remains one of the hottest topics, Bill Gates — the author of How To Avoid A Climate Disaster — believes that funding green innovations is the only way to address the imminent crisis.
Greenhouse gas levels are now at new records, as warned by the World Meteorological Organisation (WMO), hours before the UN climate conference in November (COP26). Human beings are “way off track” when it comes to keeping the rise in mean global temperature to well below two degrees Celsius above pre-industrial levels.
Amidst all this, we also saw a rather positive “record” –- an all-time high in global VC funding in H1 2021, as Crunchbase numbers showed. Climate-tech investment is not immune to this mounting pace and the domain attracted a whopping US$30.8 billion in the first three quarters of 2021 — already more than the amount recorded in the previous full year, according to the PitchBook data.
Larry Fink, CEO of the world’s largest asset manager Blackrock, accentuated these business opportunities as he believed the next 1,000 unicorns would be involved in climate technology. “Asset owners are looking for investment opportunities that will come from this historic transition to net zero,” Fink said at the Middle East Green Initiative Summit in Riyadh, Saudi Arabia, in October.
Southeast Asia is also seeing the emergence of climate tech-focused funds, including Wavemaker Impact, Investible, and Circulate Capital.
The picture looks upbeat; yet, funding roadblocks are still there on these startups’ scaling-up paths.
A missing piece of debt financing
PropertyGuru co-founder Steve Melhuish, a founding member at Wavemaker Impact, told e27 that while the venture investment ecosystem for climate-tech startups from pre-seed to pre-Series A rounds is quite mature, debt financing is a missing piece. The reason lies in the capital-intensive hardware these climate-tech projects often employ, resulting in working capital challenges.
For instance, Ampd Energy, a Hongkok-based portfolio company of Wavemaker Impact. This startup produces advanced, compact and connected battery systems to replace diesel generators that power construction projects. Its target customers are large construction groups that lease or buy a full-stack system.
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“We can’t digitally solve climate… We need to make the products in advance, which costs money,” Ampd Energy CEO and co-founder Brandon Ng told e27. “That is where the financing requirements come in.”
Ng said the firm received a “double-digit million-dollar sum” in the latest round and looking to raise debt financing to support its expansion plan — although the path to get there stays obscure. “One of the gaps that still exist is not financing the company, but financing the solution in climate-tech,” added Ng. “Financing the actual deployment of the solutions [such as in energy storage, EV charging, or hydrogen] is still sort of very patchy.”
Bill Gates echoes this viewpoint as he looked at lab-proven green tech concepts that require “a massive effort” to commercialise — or turn into universal products that people can afford to buy. For instance, to prove that hydrogen production at scale works safely and reliably, innovators need to build physical plants and repeatedly solve engineering, supply chain, distribution, and pricing issues.
“Demonstration projects like this are hugely complicated, extremely risky, and extraordinarily expensive — and it’s tough to finance them,” he wrote in an opinion piece on Financial Times in October.
Unfortunately, banks and financial institutions are still hesitant with a “wait and see” approach, even in a burgeoning sector such as electronic vehicles (EV).
“There is a little bit of a boldness, or a risk-taking appetite that is required to enable this market and to accelerate adoption,” Kartik Gopal, a senior industry specialist in EV at International Finance Corporation, a member of the World Bank Group, said in the Climatic talk show.
Gopal realised that global financial institutions are keenly interested in this space. However, they still encounter a lot of challenges in terms of poor awareness about the technology, market, resale value, and the recycling process of these green tech products.
“There is a role to be played by global financial institutions in the space to create appropriate financial products, as well as startups to take on some of those risks,” added Gopal, pointing to special financial instruments such as the “first loss guarantee” mechanism to enable funding.
In the case of the “first loss guarantee” mechanism, a third-party organisation — often the government — underwrites a part of the loss if the startup defaults, leaving the residual risk much lower for traditional financial instruments to take a bite.
However, banks’ 3-6 month risk assessment process still remains the greatest barrier for green tech projects to receive a loan each time they need additional funding. This intense due diligence also imposes difficulties for other lenders, resulting in a highly centralised lending process with few alternatives.
Innovative finance with crypto and SPACs
A PwC report says innovative finance is responsible for driving a significant proportion of growth in climate-tech, especially with the emergence of SPACs (special purpose acquisition companies) in the last two years. This new fundraising approach, which raised US$28 billion in H2 2020 and H1 2021, accounts for a third of all climate-tech funding.
SPACs or blank-cheque companies are designed to merge with or acquire a promising startup — erasing a lot of expense, time, and regulatory hurdles of a traditional initial public offering (IPO) for the target company.
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The reverse is, the average size of traditional SPACs in 2020 was approximately US$350 million, meaning that acquisition targets have to achieve a valuation range between US$1 billion and US$3 billion. This leaves a gap in the climate-tech funding picture that needs more innovative solutions to address.
Julian Kwan, CEO of InvestaX, a Singapore-headquartered and licensed platform for Digital Securities Offerings (DSOs), told e27 that the firm is about to launch the first digital SPAC targeting environmental, social and governance (ESG) companies early next year. Climate-tech startups fall under the ESG domain.
InvestaX utilises smart contracts and blockchain technologies to offer a faster, lower cost, more flexible alternatives to traditional SPACs. The whole process will then be distributed globally, not just domestically. Sponsors will accept cash or cryptocurrencies as an investment, attracting a greater host of investors and product offerings.
The first wave of InvestaX’s digital SPACs targets US$10-50 million, ensuring a larger pool of potential acquisition targets and less competition for sponsors. “We think we can help the industry by doing smaller investment vehicles,” said Kwan. “It’s much more in line with the capital that is required in the ESG startup world today.”
Other than InvestaX, blockchain startups such as Grayblock Power are also trying to serve the untapped funding market of under-US$50-million deals in green energy space through decentralised finance (DeFi) approach.
As stated by Grayblock, given the resources poured into the risk assessment, banks do not want to lend to energy projects under US$50 million because earnings from interest on a US$10 million loan are not worth their time. The startup addresses this gap by creating an Avalanche-powered launchpad for renewable energy projects, which employ Grayblock Power Network (GPN) as the governance token for listings.
In this financing method, any people, institutions, or energy developers that hold a predetermined number of GPN — known as Network Partners — can submit energy projects to launch on the network. Following a Decentralised Autonomous Organisation (DAO) mechanism, they can also vote to support listings of other projects.
Due diligence reports will be generated and offered to Network Partners through third-party service providers such PwC and registered legal lenders that obligate the project developer to pay back the loan and put up collateral. If successful, DeFi lenders receive their proportional project tokens and immediately stake them in that specific Project Pool to earn yield.
Starting with US$1 million for each possible fundraise, Grayblock anticipates raising tens of millions of US dollars for each project after several first launches on the network.
These crypto-enabled financing alternatives offer a more flexible system to hold shares in a startup as investors can trade those in the market, which is impossible in private equity investment.
“We encourage a much broader investor base,” added Kwan. “It’s not excluding any investors; it’s more inclusive.”
Attracting more funding for climate-tech
Even though the capital has constantly been climbing to new heights with the support of more funding alternatives, green-tech projects can still face investment shortages for many reasons.
PwC’s “State of Climate Tech 2021” reported that 14 cents of every VC dollar now goes to climate tech, but the needle is pointing way too much at mobility and transportation companies such as EV producers.
Other areas — including solar power, wind power, food-waste technology, green hydrogen production, and alternative foods/low greenhouse gas proteins — garnered only 25 per cent of the total investments, despite representing over 80 per cent of the emissions reduction potential by 2050. “We believe there’s a huge opportunity to rethink and work on solving problems in those areas,” said Melhuish.
The climate-tech venture arm of Wavemaker Partners, in turn, pays close attention to high-growth opportunities in land use and carbon sinks, agriculture and food, industrial processes, and energy.
However, investors’ concerns boil down to the scalability and profitability of these projects due to their inherent challenge in shifting the entrenched mindset of customers.
“Very often, when we go to a new market, we’re not trying to sell our product. We’re just trying to educate people. This is how we could do it,” added Ng of Ampd.
Some also believe that the return projection of these startups might be much less than investing in other areas, which discourages investors from participating. Climate-tech startups, therefore, need to figure out ways to make themselves more attractive to both investors and clients, including proving their profit-making or cost-reducing abilities of their solutions, Melhuish advised. “Having a climate impact is the outcome; we don’t talk about it as the first point.”
He also looks at the scalability from a different perspective, reflecting how Wavemaker invests: it is more important to apply existing technologies to address current issues, rather than focusing only on new science and technology that might take a decade to start making a big impact.
Wavemaker Impact claims that it has already identified over 50 opportunity areas with the potential to reach US$100 million in annual recurring revenue and abate 100 million metric tons of carbon at scale — what it calls “100×100 companies”.
Compared to other booming industries such as fintech or e-commerce, climate-tech companies often secure higher entry barriers that define their success in a largely underserved market of the world. The aim is to find certain types of investors that understand sustainability to support their growth.
“In the future, all businesses that want to survive are going to be sustainable,” Melhuish said. “Southeast Asia has a US$2.7- trillion opportunity for climate-tech solutions. If you’re going to address this, then you’re going to build successful, valuable companies.”
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