Is Venture Capital Or Project Finance The Key To Solving Climate Change?

Project Finance or VC for solving climate change
Diving into the difference between Venture Capital & Project Finance in Climate Tech. (Image: Swarnav S Pujari)

I was bored Sunday morning, so I posted a question on LinkedInĀ with a question that Iā€™ve been thinking about for a while now.

As I talk to many startups on a weekly basis, usually regarding fundraising strategy, I have noticed one of two scenarios:
  • Early stage startups (pre-seed/seed) are struggling to fundraise.
  • Later stage startups are looking to do an equity raise and use the funds where project finance would typically be used.
This led to my question of the role of venture capital vs project finance.
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Meanwhile, the answer to this question is not black and white, the post ignited some interesting discussion.

The Problem:

There is a gap between lab-scale prototypes (government/seed funded) and fully commercialized plants/processes with predictable performance and economics (project finance).
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At the earliest stages, government favors funding academic work, whereas corporates are wary of risk. Companies need resourcesĀ to de-risk and pilot technologies. Later-stage startups seek venture and/or project finance to build the first commercial systems.

To Answer the Original Question:

Project finance is needed in the short-term to deploy and scale technologies currently in the market that can have a great impact. Project financingĀ today is best used for proven technologies like wind, solar, and geothermal energy. The tricky piece of project finance is modeling risk, which is why it is harder for new technologies to receive project finance, even when the capital costs of these smaller MVP units are significantly less than that of a full-sized asset.
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Venture capital is needed in the long-term to build and accelerate new ideasĀ to create impact. However, it is difficult to put the cost burden entirely on investors with high-risk appetites.

The solution to this short-term vs long-term tradeoff is a cooperation between public and private agencies. Among those, Corporate VC is playing an important part. New partnerships and investment vehicles are combining capital with other resources. Additionally, we may even see more challenges, similar to Elon Muskā€™s $100M carbon capture challenge.

The conversation got more interesting ā€“ pulling in other pieces of the puzzle.

Even though project finance is more of a priority, in terms of timing, the decision relies upon what is applicable when and under what market circumstances. Additionally, to be able to scale and deploy technologies, there needs to be a strong market. Strong markets mean more options to fund and finance businesses/projects.

The takeaway is that there will be a variety of investment vehicles and partnerships to continue to drive innovation forward to fight climate change. Among that, we will likely see new models to assess risk, as well as more creative and new finance structures.

My Thoughts:

Meanwhile the initial question was intentionally written to ask which financing options are better, I agree that it will take a combination of venture capital and project finance to help scale and deploy technologies to fight climate change. We need to prioritize which technologies receive funding.
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The path forward will include finding a new way to assess and underwrite technology risk to help earlier stage technologies deploy, and creating new vehicles/structures for funding.

About The Author

Daniel Kriozere

Daniel Kriozere

Co-Founder at The Impact

Daniel currently works at Lawrence Livermore National Laboratory. His original assignment was to maintain and update facility safety documentation for all facilities on-site, and perform risk analysis. Over time, his role has expanded to leading continuous improvement efforts through product management.

Concurrently, Daniel volunteers with Techstars, helping organize startup weekends, and with the American Institute of Chemical Engineers, organizing events on the local and national levels of the organization. He also volunteers with One World, and previously with Powerhouse Ventures, to source and screen startups for potential investment.

Daniel holds a BS in Chemical Engineering from UC Davis, and recently completed coursework in energy innovation from Stanford. His passion is at the intersection of sustainability, innovation, and business.

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