Helping green technology overcome the “valley of death”

“Transition finance” – financing the decarbonization of highly polluting industries – has become a more prominent term in recent years, and rightly so.

But as I have argued before, transition finance runs the risk of being too focused on providing capital to large corporations that currently happen to dominate high-emitting industries, and not enough support for disruptive start-ups that pursue progress at a dramatically faster pace.

These startups face severe funding constraints, especially when it comes to building their first full-scale factories, but as outlined below, investors and government agencies are beginning to rise to the challenge.

Transition Finance

Overcoming the clean tech financing hurdles

On the sun-splashed Mediterranean island of Sardinia, a pioneering energy-storage project by Italian startup Energy Dome is passing through what entrepreneurs and investors commonly call the “Valley of Death.”

The phrase has long been used to describe the stage of development where companies are investing heavily but not yet seeing significant revenues. That’s a scary enough prospect for an asset-thin software startup, but it’s even scarier for startups developing technologies to help decarbonize the global energy and industrial sectors.

But with funding from the European Investment Bank and Breakthrough Energy Ventures, a clean-tech investment firm founded by Microsoft co-founder Bill Gates, the Energy Dome may be able to survive Silicon Valley.

The lifeline is the result of a partnership launched in 2021 between the EIB and Breakthrough Energy Catalyst, a division of BEV dedicated to financing capital projects by climate technology start-ups.

Energy Dome is one of several startups developing grid-level energy storage that could help ensure a steady supply of electricity as generation shifts to intermittent solar and wind. The company’s model works by using electricity to pressurize carbon dioxide, then decompress the gas in a closed system, powering a turbine in the process.

By converting electricity into other forms of energy and back again, they perform much the same function as lithium-ion batteries, but with greater efficiency and lower cost, says Energy Dome Chief Executive Claudio Spadaccini.

Stepping into the funding gap

There are plenty of venture capital firms willing to put millions of dollars into exciting concepts, and this funding is typically enough to prove the concept on a small scale, but these venture firms are often unwilling to take the risk of funding a climate tech company’s first operating plant — a “first” in industry jargon — which can cost tens of millions of dollars or more to build.

At the same time, such investments are generally too small to be suitable for large infrastructure investors such as Canada’s Brookfield and Australia’s Macquarie, whose funds can reach tens of billions of dollars.

That’s where initiatives like the EIB-BE Catalyst partnership come in. Energy Dome is one of two companies to have received funding through the partnership so far. Under an agreement announced last December, the company was promised up to €35 million in grants from BE Catalyst, plus a further €25 million in borrowing from the EIB.

The EIB’s loan will be repaid in full with a small amount of interest after five years, with no principal or interest payments due during that time, at which point the EIB will also have the option to acquire shares in Energy Dome at an initially fixed low price.

This “venture debt” structure allows the EIB to earn a healthy profit if the startup is successful, without “running out of cash and falling into the valley of death,” Alessandro Izzo, the EIB’s head of equity, growth capital and project finance, told me.

With a path to a full-scale operating plant in place, Spadaccini said Energy Dome can begin early discussions with infrastructure funds interested in potentially funding future growth, potentially on much more attractive terms than most other sources.

“As a company, you dream of deploying technology using infrastructure capital, which is one of the cheapest forms of capital,” Spadaccini says, “but infrastructure funds are reluctant to invest until the technology is fully proven, not just in terms of the technology but also in terms of project development.”

Pipeline filling

Since it was founded in 2021, BE Catalyst has committed roughly $1 billion in capital to back six climate tech startups through a combination of grants and equity investments, though Mario Fernandez, who heads the effort, acknowledged that’s a fairly modest figure.

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

Part of the problem, he said, is that many startups lack the financial and business skills needed to structure their early projects in a way that will attract larger investors. To address this, BE Catalyst not only provides funding, but also works with companies to help them structure their business plans in a way that will appeal to later-stage investment funds and subsequent funding rounds.

“The Valley of Death isn’t just an economic problem,” said Eric Tursiewicz, CEO of California-based Rondo Energy Inc. “It’s also a place where startups have a hard time growing and becoming adults.”

Last month, Rondo, a startup that uses thermal batteries to provide low-carbon industrial heat (which we profiled last year), became the second company to secure funding through the EIB-BE Catalyst partnership. The EIB is providing €35 million in venture debt, while BE is providing €40 million in grants. Rondo is using these funds to develop not one but three factories in Germany, Denmark, and a third European country that has yet to be disclosed.

Tursiewicz believes the lack of investors willing to back such capital expenditures by startups reflects the fact that the venture and growth capital ecosystem remains heavily biased towards software and digital services companies.

“Climate tech is a very unique field because it addresses infrastructure problems that mostly impact the physical world and require trillions of dollars of investment,” he said. “So it’s very different from the world of digital ventures, where there are very few variable costs beyond customer acquisition costs.”

BEV isn’t the only investment group looking at this funding space. Just Climate, launched in 2021 by Al Gore’s Generation Investment Management, has raised $1.5 billion to invest in “growth-stage, asset-heavy” companies that can help decarbonize emissions-heavy industries. Microsoft’s $1 billion Climate Innovation Fund has helped fund start-ups like low-carbon steel venture Boston Metal and H2 Green Steel factories. Climate Investment, a $1.1 billion fund backed by major oil and gas companies, has a mission to fund climate tech companies from early stage to project development.

The U.S. government, under President Joe Biden’s administration, is also stepping up this kind of funding through the Loan Programs Office, led by veteran clean energy investor Jigar Shah, and the $25 billion Clean Energy Demonstration Office.

The EU has its own large investment instruments, notably the €95.5 billion Horizon Europe Fund and the Innovation Fund, which uses revenues from the European Emissions Trading Scheme, and the EIB, together with BE Catalyst, can use these for lending.

The EIB’s Izzo said the partnership was intended to act as an “icebreaker” and pave the way for more private investors.

“We want to show that these deals are actually doable, and that with a little more professionalism and a willingness to take risk, things are achievable. And it sends a signal to the private capital markets that they will actually invest in these asset classes.”

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