How States Can Build a Cleantech Funding Pipeline

Research universities across the country regularly turn out science and technology that could be kernels for jobs-creating businesses. But many of those ideas have trouble finding bankers or venture investors willing to finance the slow, expensive development of a new company based on science.

Massachusetts has developed one response to the problem of funding hard technology development in the area of clean energy. The goal: fill the gaps left by institutional investors.

The agency, called the Massachusetts Clean Energy Center (MassCEC), was created in 2009 after the state passed a series of landmark laws that helped spark activity in renewable energy projects and clean technology companies. It’s been a priority for outgoing Gov. Deval Patrick, who announced another MassCEC grant program last week.

Although it’s too early to declare this approach a resounding success, the program’s money is helping fuel an active cleantech cluster in the region—something many states are also actively pursuing. For entrepreneurs, the program’s structure reflects the reality that state and federal funding remain crucial in energy and sustainability, where early-stage funding remains difficult to secure .

The MassCEC, which is funded by a charge on electric bills, has created a series of grants for researchers or startup companies that are designed to get technologies out of the lab and to demonstrate products in real-world commercial settings. The program isn’t entirely unique—California, New York, and Connecticut also provide financial incentives for cleantech companies.

But Massachusetts’ funding program is comprehensive, spanning from early-stage proof-of-concept grants to cost sharing with corporate customers for pilot projects. And the state also takes an equity stake in early-stage companies, which is not common.

Barton_Alicia_portrait-4

Barton

The funding programs have been formed in direct reaction to the exit of venture capitalists from cleantech and the challenge of relying on banks to fund innovation-based companies, MassCEC CEO Alicia Barton says. “We definitely have been riding that evolution along with the industry,” she says.

A classic financing gap—sometimes called the Valley of Death—is moving a company from a prototype product to its first commercial deployment. In hardware-based businesses, this can be expensive because there are manufacturing costs. And finding customers willing to take a risk with unproven technology is difficult, particularly among conservative electricity utilities.

Boston-based XL Hybrids, for example, landed a $150,000 state grant to test its hybrid-conversion kits for utility vans and trucks in cities with two corporate partners, which provided $230,000. Energy storage controls company Sparkplug Power received a $150,000 grant with a $223,00 match for testing a grid battery system with a utility in western Massachusetts. Similarly, one of liquid metal battery company Ambri’s first test sites is partially funded by the program.

Last week, the MassCEC announced a partnership with the Department of Energy’s ARPA-E agency to jointly fund pilot-scale commercial projects. ARPA-E funds companies or researchers to create a commercial prototype, but it struggles in finding follow-on funding from industry.

“My biggest worry, including when I was in business, is what I would call pilot-scale capital. It’s is the most difficult capital to get,” said ARPA-E director Cheryl Martin at a cleantech conference in Boston last week. “Because there are still risks even if you have prototypes.”

Early-stage
At the opposite end of the funding spectrum—early-stage financing—MassCEC is providing small grants to researchers or entrepreneurs working on clean-energy technologies (no fossil fuel companies are eligible.) It also provides money to incubators, including Greentown Labs in Somerville, MA.

With the departure of most venture capitalists from energy, these state grants are increasingly important. But seed investments are hard to get in any industry, notes Tibor Toth, the managing director of investments at the MassCEC. Angels and corporate investors are helping fill the gap.

“It’s not just in cleantech. You see in other tech and life sciences, some early-stage risk capital is being taken up by angels,” Toth says.

Are these programs working? MassCEC officials are quick to point out that the number of jobs in clean energy is growing faster than biopharma, although a significant portion of those jobs, such as solar installers and HVAC contractors, are not related to technology development. Officials can also point to a few companies, including MIT spin-off Solid Energy Systems, which received seed funding from the state and then attracted venture money.

On the other hand, these are relatively small sums of money—only tens of thousands of dollars in for the early-stage grants. Yet for entrepreneurs or scientists with promising technology, a state-funded program may be their best option to grow a business or build a proof of concept. The first demonstration projects for Ambri are in Massachusetts, New York, and Hawaii, states that are actively fostering innovation in the electric grid.

Other states have long had policies to promote the use of renewable energy. In fact, more than 20 states have a renewable portfolio standard, which mandates that utilities use a certain percentage of renewable energy. Those laws and net-metering regulations for residential solar, have helped drive rapid growth of solar and wind in states, such as Iowa, Colorado, Texas, and Minnesota.

The difference between those state policies and Massachusetts is the focus on accelerating clean-energy innovation, says Galen Nelson, the director of market development at the MassCEC. “We have colleges and universities spinning out companies all the time and a rich VC community that’s totally dialed into clean energy—that’s the recipe,” he says.

Other states that don’t have the same innovation ecosystem in place work with the local resources, Barton notes. Wisconsin, for example, has a number of large businesses based in the state, which are central to its planned Energy Innovation Center, she says.

At the national level, no significant energy legislation—cleantech- or fossil fuel- related—has passed since President Obama’s first term, and that is unlikely to change with a Republican-led Congress. That means many clean energy companies are focusing on growing their businesses in specific states.

In Massachusetts, meanwhile, a new Republican governor, Charlie Baker, will be taking over from cleantech advocate Patrick next year. In statements provided to The Boston Globe, Baker says that the state will continue to participate in a program to lower greenhouse gas emissions from utilities and “will also strongly encourage the clean energy innovation sector, which will have a positive benefit both for our economy and our environment.”

Whether that momentum continues remains to be seen. But for other regions in the country looking to encourage cleantech innovation, Massachusetts shows that developing alternatives to venture capitalist funding is likely part of the plan.

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One response to “How States Can Build a Cleantech Funding Pipeline”

  1. Les Fritzemeier says:

    Great and timely article Martin – thank you. I attended both the CleanTech Open and Forum 20/20 events in Boston last week. The enthusiasm in this sector has not ebbed, despite the VC pullback. Entrepreneurs being what they are, startups have found ever more inventive ways to bootstrap. I have participated in both the MACEC and NYSERDA programs and agree that they and incubators such as Greentown Labs are essential.

    Hardware development is especially difficult without financial support. Traditional equity financing and, frankly, even federal grant and contract monies have moved to the financial and information technology “cleantech” sectors. So, support from forward looking state governments, angel investors and, for some technologies, social impact funds will be the foundation of startup support until the VC tide turns, as it inevitably will.