Outside of artificial intelligence, few startups have attracted venture capital like climate technology. And like artificial intelligence, companies in the industry need large inflows of cash, sometimes far beyond what a typical venture capitalist can provide, to get to a size where they can make a mark.
A new deal involving Rondo Energy, which makes thermal energy batteries, suggests a new way forward: philanthropic grants.
Climate tech startups like Rondo, especially those that build hardware, face a particular challenge when trying to move beyond the initial or pilot phase and start selling finished products to customers. Some have called it the “commercial valley of death,” others say it’s a “first-of-its-kind” problem.
It is very difficult to raise capital at this stage because investors do not have a plan to help them balance risk and reward.
Venture capitalists are reluctant to commit at this stage because much of the technical risk has already been settled, meaning the returns won’t be as high. On the other hand, infrastructure investors, who would normally undertake projects of this scale, are not forthcoming because first-of-a-kind plants are considered too risky. The dilemma is so pervasive and pressing that it has become a constant topic of discussion among climate tech investors — almost to the point of obsession. (For the mind: Exantia did First-of-a-kind merchandise..)
The folks at Bill Gates’ Breakthrough Energy Ventures aren’t immune either. Apart from the venture arm, the organization also has a growth-stage platform, Catalyst, which helps promising venture-backed companies cross the valley of death. This week, he announced a deal that could serve as a model for others.
Together with the European Investment Bank, Catalyst announced on Wednesday that it will provide 75 million euros in project funding to install three of Rondo’s thermal batteries, which can store heat for up to 18 hours. One goal of the funding is to prove that the startup’s product can replace fossil fuels in a range of industries. But it is the nature of the transaction that may ultimately have a wider impact.
While part of the European Investment Bank’s funding is a loan, Catalyst’s part is a grant. Now, grants are not uncommon in climate technology, but they usually come earlier when the basic science or technology is not yet proven. Here, Catalyst hopes to use the grant to help Rondo tackle a later-stage problem: customer adoption.
“This is a commercial scale implementation and development. There are no tests here. It’s just unprecedented,” Mario Fernandez, head of Breakthrough Energy’s Catalyst, told TechCrunch.
The three clients involved in the deal, a chemical plant, a combined heat and power plant and a food and beverage plant, were willing to take the risk of adding a new technology to their operations, but were not necessarily interested in paying for the privilege of doing so. Infrastructure investors didn’t want to give them the money either — at least not yet.
“The infrastructure world is a world where there’s a very long list of check boxes that you have to check to make these investments,” Fernandez said. “Part of our mission is to see how these checkboxes are checked in a way that makes them comfortable enough to participate.”
Catalyst’s hope here is that Rondo’s three facilities will demonstrate to infrastructure investors that projects like these are sound investments and the risks surrounding them are adequately characterized. Ideally, the new projects will not just unlock funding for future Rondo installations, but provide a roadmap for other investors and startups working with similar technologies.
“Clearly, we don’t have the money to rule out every technology path,” Fernandez said. “Our work is much bigger than funding individual projects, but rather how we advance the entire ecosystem.”
