Inside the climate-tech financing ladder: part I – the matchmakers

Climate-tech is a relatively nascent commercial adventure for investors and entrepreneurs alike. Even though it’s been a nearly a decade since politicians put pen to paper in Paris, most climate-tech startups have only been around for a few years.

Their financial foundations are seemingly set in early-stage venture capital. Now, they are quickly climbing up the financing ladder. With each step - the scale, form and source of finance evolves eventually moving closer to a scenario where institutional investors have a role to play.

A survey conducted by Net Zero Investor asked investors to nominate start-ups that are commercialising climate technologies and gathering investor confidence along the way. In this series, NZI documents who these start-ups are and how they are climbing up the financing ladder.

The first part of this series focuses on companies that are connecting consumers of renewable energy with its suppliers – making renewable energy a cost-effective match for both. The matchmakers, if you will.

The gridlock

At last count, government estimates suggest that over 50% of the UK’s electricity had renewable roots. It was only in the 1950s that the UK had seen such low levels of fossil fuel energy supply.

Connecting this burgeoning supply with its consumers, however, is a no easy feat. Within investor responses to our survey, the most common problem nominees were solving is the challenge of transforming the grid. These companies are commercialising technologies that will transform the infrastructure that connects consumers and producers of renewable energy.

On the supplier’s end of the grid, renewable energy brings with it a need to manage capacity and match it with demand. Granular Energy, which was nominated as part of our survey, is attempting to replace PPAs with its certificate management platform. Effectively establishing hourly clean energy markets.

“Our solution helps track and manage hourly matching to give hour by hour transparency into renewable energy provision”, says Eleonore Lazat, the company’s commercial director.

The bit in the middle needs rethinking too. Take for instance, the role of transformers. “The average transformer in the UK is 63 years old. It was built for a very different energy system to the one we have today”, says Jonathan Carrier, co-founder and CEO at Allye – one of the nominees.

“Resilience and continuity are key. We saw what happened at Heathrow”, Carrier told Net Zero Investor.

Allye, Carrier notes, is aiming to address the core challenge of grid constraints. Its storage solution – the Allye MAX – claims to reduce energy costs by up to 70%. Allye’s product proposition is a hybrid one with both hardware and software components.

On the consumer-end of the grid, the upfront costs of switching to renewables is a prominent challenge particularly for homeowners. GRYD Energy, another nominee, is attempting to bring it down to about £65 per month for a four-bed home. The solution, according to the company, is a UK-first subscription model for hardware.

“We fund, operate and maintain a home’s solar and battery hardware for the 25-year life of the system, saving developers up to £10k in hardware costs per home and enabling homeowners to reap the bill-saving benefits of solar from day one”, says Mohamed Gaafar, co-founder and chief executive of GRYD Energy.

“Solar is no longer just an environmental choice for home buyers; it’s a financial one”, he adds.

Invest to scale

The matchmakers are at different stages of their financing, but the next step looks similar in all cases. It is linked to a push for scale. Which shapes not only how much capital is needed but also who provides it and when.

Granular Energy has raised two VC-led rounds and is looking to expand into new markets in Italy, France, Germany, Greece, Ireland and the US. It currently has a 30-person team and a roster of 15 large utility scale clients.

“We will go back to market for a series A round to help us scale the team and extend our reach into new markets”, Lazat told Net Zero Investor.

GRYD Energy, which closed a £1m pre-seed round earlier this year, had a similar tale to tell. In the next three years, the company is aiming to develop larger pilots and service 30,000 new-build homes.

“As we expand, we’ll continue raising capital from venture and angel investors to grow GRYD’s team, technology and partnerships. We expect to see a natural evolution in our investor base towards more strategic investors from the property and energy sectors, including corporate venture capital funds, Build to Rent and institutional property investors, who we’ve had early engagement with”, said Gaafar.

For Allye, the demand and timing of strategic investment is something that needs deeper thought. “If you bring strategics on your cap table too early, it can act as a negative signal to the rest of the market and their competition that might not want to work with you.”, Carrier warned.

“The intent for us is to raise a seed round somewhere in the region of £4m”, said Carrier. At some point in the future, Carrier says, the company will also look to raise both equity and debt.

“That opens up your ability to get backing from other types of institutional investors”, he adds.

Rules of the game

Given the nature of their business, these companies rely on future renewable energy demand. Something that regulations can either incentivise or hinder. Regulatory headwinds, in other words, could result in turbulence on the demand-side.

For instance, Granular Energy’s demand outlook depends on suppliers choosing hourly matching. “The demand is entirely voluntary and comes from leading corporates who have ambitious carbon reduction targets. While the topic is being discussed in policy rooms and within the Greenhouse Gas Protocol, there is no hard requirement yet”, Lazat says.

Similarly, the demand for GRYD’s product is linked to the Future Homes Standard. “The government is expected to announce the Future Homes Standard within weeks, which will require new homes in England to produce 75–80% fewer carbon emissions. While details of these new regulations are yet to be confirmed, the direction of travel for Britain’s residential property sector is clear”, Gaafar adds.

“The geopolitical view around net zero and climate change impacts people’s perceived urgency around the energy transition”, noted Allye’s Carrier.

The founders pointed to several other risks from shifts in input prices and low-cost global competition to consumer confidence and margins.

For the matchmakers, their current financing rounds signal investor confidence in their proof of concept and product market fit. The next step on the ladder will be driven their ability to scale their operations profitably. A step which could see a different set of investors enter the conversation and pave the way for patient capital to follow suit.