A few weeks ago, I had the pleasure speak with Amy Francetic, founder and managing director of a Chicago-based clean energy investing venture capital firm called Energize Ventures, and the co-founder of the Clean Energy Trust, a Midwestern-focused non-profit clean energy accelerator.
This conversation left me with three take-aways and a newfound sense that the best elements of the capitalist system – inventiveness, the boldness to take on big problems, and almost infinite adaptability – would allow human civilization to continue to survive and thrive in the face of what looks to be rapidly worsening climactic conditions.
The Debate is Over
While pundits on cable news programs and fossil fuel industry-sponsored think tanks dish out disinformation regarding the current scientific understanding about climate change, it is clear that most companies and institutional investors are no longer fooled.
Ms. Francetic said that among the people with whom she speaks – pension fund managers, insurance company executives, and corporate managers – there is a common agreement that the climate has reached a tipping point and that we need to work on strategies to adapt to and mitigate the effects of climactic change.
She acknowledges that there does still seem to be a slight generational gap, with younger people generally more receptive to investment theses related to climate change investing, but this gap too is narrowing. She also says that the Clean Energy boom and bust cycle in the mid-aughts scared some investors away from the Clean Tech space but says that even that effect is starting to wear off.
In general, Ms. Francetic’s impression is that politics and industry PR efforts aside, there exists a broad acceptance in the corporate world that climate change is ongoing and that finding solutions to mitigate those effects offers some wonderful business opportunities.
Not Everything is a Moonshot
While most people’s impressions of venture capital (VC) investors is someone who rolls the dice on a brilliant entrepreneur with a big picture idea like storing data on near earth orbit satellites, Ms. Francetic points out that not everything in climate change investing is one of these “moonshots.”
When the first wind farm was built to harness wind power, there was a lot of uncertainty about how the technology would work. Engineers needed to figure out how to integrate the power generated by “distributed” sources onto a grid that was designed for centralized generation at a coal- or natural gas-fired plant. It might seem simple now, but the initial technical challenges were daunting.
Now the basics of wind farming are well understood. The last few years have seen the rapid expansion of Internet of Things (IoT) technology and it is hard to find a piece of industrial equipment – including a wind turbine – that is not equipped with many IoT sensors.
The ability to track and collect data related to the operation of the wind farm now offers a threat and an opportunity. The threat to a wind farm operator is that they are buried under petabytes of data and can’t make sense of it all. The opportunity is that if the operator can find a software tool that helps manage all that data, it can create efficiencies that boost profits.
Ms. Francetic particularly appreciates these types of incremental efficiency investments and sees great potential here.
One of the most important things an institutional investment manager can do is to “de-risk” investments so that investors can participate in a venture’s upside potential without taking on too much downside exposure. Focusing on increasing the efficiency of an extant technology goes a long way to de-risk an investment portfolio.
By focusing on efficiency, you are investing in a technology that is known to work, so you reduce technology risk. Also, you are investing in a technology sold to a client you know is generating steady revenues and can pay their bills, so you reduce counterparty risk. In a world where unforeseen hiccups can ruin even a good idea, being able to remove a few risks from one’s list of things that might go wrong represents a great advantage.
Interestingly, Ms. Francetic does not shy away from moonshots in every aspect of her career. She explained that a lot of the companies funded by the Clean Energy Trust are, in fact, at much earlier development stages. These are scientists that have good ideas and need a little capital to find out if the ideas have commercial legs or not. Working with these early stage entrepreneurs is rewarding, and the success stories from the Clean Energy Trust may end up becoming firms that she will eventually want to place in the Energize portfolio as well.
Diversify Your Catalysts
Many people think that climate change investments all hinge on a single investment catalyst. For instance, they might imagine that until there is a universal carbon tax applied to emissions, this business or that business will never be economically viable.
Ms. Francetic points out that there are plenty of businesses that, by being able to serve a wide range of customers, are not tied to a single investment catalyst and thus will not be brought down by some regulatory set-back or industry-specific slow-down.
For instance, one of Energize’s investees in Nozomi Networks, a company that monitors and protects critical network resources for industrial control applications. Nozomi’s software is just as important to a wind farm or a utility operator as it is to an oil refinery or natural gas pipeline manager.
Finding investees like this, that serve the needs of a wide customer base, not only helps to further de-risk an investment portfolio, but also boosts the portfolio’s upside potential by allocating capital to highly scalable businesses.
The Time is Now
As our conversation was winding down, I asked Ms. Francetic what one piece of information she would like to get across to people about climate change investing. She smiled when she replied, “The time is now.”
She knows, as I do, that we are perched on the edge of an enormous paradigm shift. The only way to build and maintain intergenerational wealth in this century will be by investing in the new paradigm. Intelligent investors take note.