The CREO Syndicate, a large investor group with scores of family office and foundation members, released a very useful report summary today with tons of interesting data about private investments into climate solutions. My team at Spring Lane Capital co-founded CREO when we were still at a family office some years back, and two of my partners still serve on the CREO board.
I had the opportunity to speak recently with Richard Benson-Armer of CREO about the report, which I would encourage every investor with interest in climate solutions to go check out. Because the data the authors gathered lead to some pretty interesting, and at times counter-intuitive, implications.
I’ll just highlight a few issues that struck me as particularly interesting in the report and in my conversation with Richard:
- Over a third of climate solutions are already “ready for prime time”, but could use more capital and effort around accelerated deployment
The report shows that over 60% of “critical clean technologies” are either at the demonstration stage or even further along, as defined by technology maturity levels (”TRL”). Everyone is aware of solar, wind, batteries, electric vehicles and a few other already-visible solutions. But this report shows that HUNDREDS of clean technologies are ready for more deployment capital, and have by implication moved beyond the need for early stage venture capital.
- To deploy an adequate amount of these climate solutions will require trillions of dollars
Deploying climate solutions most often requires putting “steel in the ground” (and concrete, etc etc). And that takes a lot of capital. There’s a reason why infrastructure funds tend to be much larger than venture capital funds.
And the capital needs aren’t concentrated in just one portion of the climate solutions landscape. The report identifies trillions of increased capital investment required across energy, transport, industrial solutions, agrifood and land, and the built environment.
- A huge funding gap exists at the “missing middle”
Many in our sector have described several different stages that they each define separately as a “valley of death” or “missing middle”. It’s frankly been confusingly all over the map.
This report, by delving into the actual numbers, specifically points to the stages of pre-commercial demonstration, first-of-a-kind projects, and early commercial deployments as a particular funding gap. It’s the gap between where venture capital funding runs out of steam, and where PE and infra investors feel comfortable taking the baton. And the gap is real — VC/growth tends to feel like n=0.5 is “proven”, while infra tends to want to race to be the first to deploy n=10 (to over-generalize). But who will fund deployments 1 through 9?
- In the US, the climate funding landscape is dominated by venture capital, not infrastructure
To those of us working on these opportunites in the U.S., this is not surprising. But as the report states, “Infrastructure funds dominate in Europe, while VC funds raise the highest amounts in Asia and North America.”
Perhaps not coincidentally, the report also identifies that many stages of investing have seen climate investment returns be consistent with the returns for other sectors… with the notable exception of growth stage investing.
To editorialize, I continue to see North American growth stage VCs continue to fund early project deployments through their own capital, rather than leveraging the availability of early stage infrastructure capital. This is in some part out of necessity — there isn’t much early stage infrastructure capital out there! But it also happens too often out of simple familiarity. “We know venture capital so we’re going to over-use venture capital rather than look for the alternatives”.
I find this also consistent with how often the climate solutions investment opportunity is defined in North America — by the press, by investors, and by analysts — as mostly a venture capital story. Yes, there’s a vital role for venture capital and growth equity! But perhaps it’s time to stop over-applying these structures into steel in the ground, which is a much better fit for infrastructure investment structures. That over-application of VC/growth financing structures into this capital-intensive stage of deployment perhaps contributes to the underwhelming returns in the growth stage that the report identifies. As I’ve written about extensively before, it’s time to utilize a more robust and diverse capital ecosystem.
The report has a lot of other insights and specifically useful data. Kudos to the CREO research team on such a valuable resource. Hopefully the lessons will start to be shared more broadly into the institutional investor universe and not just the family office and foundation communities that CREO has really specialized in to date.
Read the full article here
