Outside of AI, few startups have attracted as much venture funding as climate tech, and like AI, companies in this space need big infusions of capital to reach a scale where they can make a difference, sometimes far beyond what a typical venture capitalist can provide.
A new deal with Rondo Energy, a manufacturer of thermal energy batteries, suggests a new avenue for philanthropic grants.
Climate tech startups like Rondo, especially those that manufacture hardware, face a special challenge as they move beyond the prototype and testing phase and start selling finished products to customers. Some call this the “commercial valley of death,” while others say it's a “first-time” problem.
It's very difficult to raise capital at that stage because investors don't have a blueprint for balancing risk and reward.
Venture capitalists are hesitant to invest at that stage because many of the technical risks have already been worked out and the returns aren't as high. Meanwhile, infrastructure investors, who would normally take on projects of that scale, are hesitant because first-time plants are considered too risky. The dilemma is so pervasive and urgent that it's become a constant topic of conversation among climate tech investors, almost an obsession. (Exantia, for example, produces “first-time”-themed merchandise.)
The folks at Bill Gates' Breakthrough Energy Ventures are no exception. In addition to its venture arm, the organization also runs Catalyst, a growth-stage platform that helps promising venture-backed companies get through the valley of death. This week, the company announced a deal that could serve as a template for others.
Catalyst announced on Wednesday that it, along with the European Investment Bank, will provide 75 million euros in project funding to install three of Rondo's thermal batteries, which can store scorching heat for up to 18 hours. One aim of the funding is to prove that the startup's product can replace fossil fuels in a range of industries. But it's the nature of the deal that could ultimately have a broader impact.
The European Investment Bank's portion of the funding is a loan, while Catalyst's portion is a grant. Now, grants are not uncommon in climate tech, but they are typically provided in the early stages, when the core science and technology are not yet proven. Catalyst hopes to use the grant to help Rondo address a later-stage concern: customer adoption.
“This is a commercial-scale application and deployment. It's untested. It's just not been done before,” Mario Fernandez, head of Breakthrough Energy Catalyst, told TechCrunch.
The three customers involved in the deal — a chemical plant, a cogeneration plant and a food and beverage plant — were willing to take on the risk of introducing new technology into their operations but weren't necessarily interested in paying for the privilege to do so, and infrastructure investors weren't willing to pay them up front, at least not yet.
“The infrastructure world is a world where there are a ton of boxes that have to be checked before you can make an investment,” Fernandez said. “Part of our mission is to make sure those boxes are checked in a way that gives you enough comfort to participate.”
Catalyst's hope here is that the three Rondo installations will prove to infrastructure investors that these projects are sound investments and that the risks surrounding them are well understood. Ideally, the new projects will not only unlock funding for future Rondo installations, but also provide a roadmap for other investors and startups working on similar technologies.
“Obviously, we don't have the capital to de-risk every technology pathway,” Fernandez said. “Our job is much more about how we move the entire ecosystem forward than it is about funding individual projects.”