Fundraising for Climate Scale-ups

Since TFN officially launched in Oct ’22 we have had the opportunity to take on 6 quite distinctive mandates across the energy transition: Solar PV cell manufacturing by MCPV, hydrogen refuelling stations in Spain via Resilient Hydrogen, green bio-graphite for battery anodes from CarbonScape, H2-powered aviation with Fokker Next Generation, independent renewable power solutions by Enernet Global and a Voluntary Carbon Market (VCM) solution for the shipping sector together with FPG AIM.

Furthermore, we have spoken with nearly 100 transition focused investors and at least 1-2 climate scale-ups every week. What did we learn?

The climate financing gap is real. Funding of early-stage climate deals is down 40% YoY in H1 ’23 and the deals that are getting done are often cash injections from existing investors into scale-ups running light on cash. But underneath that cyclical dip runs a more structural headwind; none of the traditional investment disciplines have a good answer for how to do capital intense, early-stage financing rounds if the Net Zero transition is anything but linear. Here is what we are seeing: 

•      Venture Capital firms need to adapt from an infinitely scalable software financing approach to providing early-stage financing for capital intense growth plays with a different risk-reward profile. That said, their instincts on team and technology are second to none and valuable in a syndicate. As funding levels dropped off a cliff in H1 ’23 we saw corporate VCs and strategics selectively stepping in, leveraging their cashflow to pick up smart deals.

•      Private equity investors will need to embrace a greenfield investment case as fundamentally similar to a divisional turnaround but lacking the comfort of a historic P&L. Their ability to manage portfolio companies & grow management teams will be key to nurture scale-ups through their growth spurts.

•      Infrastructure specialists need to start embracing uncertainty and putting a price on it. To move the dial, climate tech needs scaling solutions and de-risking is key; this is where infrastructure specialists excel.

•      The Public sector will backstop the transition. Broad-based subsidies like the Inflation Reduction Act (IRA) in the US will ignite some real boom & bust cycles but the alternative is Europe’s patchwork of national support and lumbering pan-European efforts. Neither is perfect and where the private sector is hesitant, the provision of debt is gaining prominence in the pursuit of scale. On that front, TFN is working with the National Growth Fund in the Netherlands for the first of its kind EUR 100mn loan to launch a greenfield solar PV manufacturing business.

•      Long-term efficient capital. When we founded TFN a year ago we saw a clear catalytic role for this segment consisting of family offices, SWFs and impact investors with more flexible investment mandates. Except for a couple of bright exceptions, we don’t yet see them playing this critical role. Fund managers often have lower risk tolerance levels than what their investment mandates prescribe; focusing in on what they know well (geographies and industries) might be an enabler.

 It is fair to ask whether this hesitance across the different investor groups is simply because the risk-reward is not (yet) there. On a narrow timeframe that view is defendable, but there are two reasons this approach risks getting caught out in the longer term.

 Firstly, the public sector is underwriting a put on the transition and in time will create broader incentives just as it did for Wind and Solar. The US IRA is a case in point that such a pivot need not be gradual. The second reason is that some benefits don’t make it into the ex-ante version of an IRR model: A deep understanding of how the energy transition is evolving is crucial to inform corporate and investment strategies, attracting the next generation of talent that care about the transition requires playing an active part in it, and there is value in building deeper ties with LPs & stakeholders wrestling to bring impact/climate into their risk-reward mandates.

Climate scale ups need to run before they can walk. We define a “climate scale up” as the capital intensive twin of a start-up. The fact that there are “hard-assets” involved typically implies that debt funding is key to accelerate growth and achieve economies of scale. To attract meaningful leverage at such an early stage, preparation is everything – from detailed operational planning, external vetting of plans and technology and locking in feedstock / offtakes where possible to putting together a team with the credibility to land the plan. Often scale-ups don’t have all this in-house and that is where TFN slots in.

 We see five approaches that scale ups can leverage to beat the odds:

1.     Synching the Operational roadmap with the Financial roadmap. It neither makes sense to get financing for what cannot realistically be done, nor to target a plan that cannot be financed. Start with a vision, bring it down to a strategy but ultimately it comes down to the tactics of what can be financed when and by whom.

2.     Syndication. This turns out to be a multidimensional chess game: maximising public sector support while retaining private side agility in your cap table; exploring OpCo debt structures to attract venture / infra debt whilst preserving HoldCo simplicity and, above all, knowing when to tap which equity pool.

3.     Simple is good - eliminate the interdependencies. Take a deep look at the assumptions in the business plan before reaching out to the market. What are the key interdependencies and what can be done to isolate these? Key man risks, feedstock dependencies, lead times for equipment orders and EPC challenges often play an outsized role in financing discussions. Pre-empting these points can be the difference between a first mover head-start and a costly delay.

4.     Venture building = team building. Paradoxically, capital intense businesses mean that more is at risk at an early growth stage. Therefore, the best investors in this emerging space double down on team quality. Scale-ups often counter by adding more “grey” hair to the team or via an advisory board but such experience can also act as a brake on ingenuity. TFN offers solutions such as an outsourced corporate development / strategy function and fractional CFO that buys founders time to grow their teams without rushing it. 

5.     Staging gates for value creation. Breaking down the roadmap, operational or financial, into staging gates facilitates internal focus and illuminates the value creation steps for investors. An additional benefit of transparent staging gates is that these can be used as building blocks for international expansion or even in M&A discussions.

Over the past year, we have sharpened our conviction of how TFN can help scale-ups and their investors to accelerate along the climate transition. We cut across the boundaries of classic consultancy advice and corporate finance; the two need to be seamlessly blended to solve for the five levers above. We think establishing the right financial roadmap implies scale which in turn is what will accelerate the transition. It makes a lot of sense that not all scale-ups retain that expertise in-house and that is where TFN can help.

Ultimately the climate and energy transition will have to happen and represents a once in a generation opportunity. History has been favourable to those pushing the boundaries of what is possible and that is what TFN is doubling down on.

Does that resonate? If so please get in touch and follow us on LinkedIn, we are in continuous dialogue with scale-ups & investors on how to drive the transition forward. Interested to help us take TFN forward into year 2 and beyond? We are looking to grow our core team as well as expand our network of special advisors, so please reach out via email.