By now, most of us know the story of how Silicon Valley’s love affair with “cleantech” didn’t turn out so well. As of the end of 2014, most VCs no longer do energy tech investing (beyond software-based deals), and only a small handful of groups are trying to tackle energy investing and entrepreneurship in new ways (like M37 or Hawaii’s Energy Excelerator).
But I’ve just learned about one of the more interesting new energy investing projects out there, from entrepreneurial investors Scott Jacobs, co-founder of EFW Partners and McKinsey’s cleantech practice, and Jigar Shah, the former founding CEO of SunEdison. Called Generate Capital, the team is providing capital for energy, water and food infrastructure assets using the solar-as-a-service model of financing that Shah pioneered at SunEdison.
Here’s how it works: Generate Capital will put up funds — between $2 million to $20 million — to get a resource infrastructure project installed. For example, a city might want to upgrade to LED lights, a university might want to heat its water with solar or a sports complex might want to install a new, energy-efficient heat pump. Generate Capital owns the asset (the heat pump, for example), and as the infrastructure delivers reliable revenue over the years (the city pays its monthly lighting bill) and potentially saves the customer money (a smaller energy bill), Generate Capital makes a return off of the cash flow.
This type of financing — “infrastructure as a service” — has its roots in the solar-as-a-service funding model, which has been a huge breakthrough for the solar panel industry. Solar developers like SolarCity raise funds to pay for the installation of the solar system and then charge customers for the energy. Most of the growth in the business of putting solar panels on residential rooftops is being done with these types of financing deals.
Generate Capital isn’t interested in the solar PV market, which is already maturing, filled with competitors and offering lower rates of return these days. It’s instead focused on the variety of under-installed, but already proven, clean and efficient energy, water and food technologies. It’s got to be a commodity tech, or getting close to a commodity tech, already. So no next-gen biofuel plants for these guys.
The thesis behind this strategy is that a lot of the needed technology for new energy infrastructure is already available, but these industries just need new types of financing. These are projects that would be deemed way too small for traditional banks to look at, let alone back.
While Generate Capital might sound like a fund, it’s not. It’s a balance sheet business and it closed a Series A round in September from several family offices, like Ceniarth led by Greg Neichin (formerly of the Cleantech Group), investor Jason Fish, and others. With the Series A, plus debt that it will raise, Generate Capital plans to finance deploying hundreds of millions of dollars in hard resource infrastructure assets. The company’s investors get monthly dividends from the cash flow, and down the road Generate could exit by going public or getting acquired.
The company plans to also have a “developer in residence” program, which provides a way for the small companies working with tech like LEDs, battery farms or heat pumps to work with Generate. Shah told me he wants to bring the same kind of organization and standardization that has been created in the solar PV industry to these various resource infrastructure deals. Before Generate, Shah was a managing partner of Clean Feet Investors, which was doing similar infrastructure funding work.
Another core thesis behind Generate Capital is that the world will increasingly be resource-constrained and will need a build-out of more efficient and cleaner infrastructure around energy, food and water. There will be 10 billion people on the planet by 2050 and three billion new middle class consumers over the next 15 years, and they’ll be using more and more of these resources.
One of Generate Capital’s advantages could be that hardly anyone else is doing this, so it could potentially tap into a vast unmet need. The partners have been doing these deals and maintained these core theses for years, so they strongly believe in what they’re doing.
It’s still early days for Generate. The founders have been incubating the company for about a year, have a few pilot deals done and are closing on some of their first asset deals now. Generate will have to ramp up its pipeline of projects to start making returns.
Updated at 10:33AM, PST December 4th, to clarify that Greg Neichin isn’t a personal investor in Generate, but he’s the Director of single family office Ceniarth, which invested in Generate.