Day 21: Funding

Today you will learn from expert guest Chris Wedding about funding, why it's an obstacle to solving climate change, and how we mitigate or eliminate the obstacle of the funding for climate change solutions.

Summary

Guest: Chris Wedding

Dr. Chris Wedding is an award-winning professor at two of the best universities in the United States: Duke University and the University of North Carolina at Chapel Hill. Over the last 20 years, he has taught more than 6,000 students from age 6 to 60. In addition, he is the Founder and Managing Director of IronOak Energy Capital, a renewable energy investment banking and advisory firm; Founder of Entrepreneurs for Impact, executive mastermind peer group coaching for climate change and energy entrepreneurs; Senior Adviser at Cherokee, an environmental private equity and angel investment firm; Faculty Member at the Institute for Defense and Business; and one of the world’s earliest LEED Accredited Professionals in the multi-billion-dollar green building industry. Dr. Wedding brings an international perspective to his work with experience in 20 countries and proficiency in 3 languages. He also writes a regular newsletter on cleantech finance trends.

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Explain succinctly what funding is from first principles.

Avenues for funding:

• Government grants
• Venture capital: 25 percent or so of all venture capital dollars go into climate tech companies, which  is not really a sector. It's really many, many sectors under one umbrella.  But the latest data shows that venture capital investments are down 80 percent since the last. That said there is a lot of capita, tens or hundreds of billions of dollars of capital raised in private equity funds and venture capital funds.  But those investors are hesitant to invest because they don't want to invest in a company at say a 20 million valuation when the kind of macroeconomic pressures may force that to be a 10 or 15 million valuation at it for a seed stage company in six months.
• Revenue: You make money and reinvest profits into growth. That's fine. That's called organic growth, but it's slow, right? It's very slow. And we're kind of in a hurry here right to tackle climate change.
• Debt financing: so loans,  and that's great, except that many banks don't understand the risk profile  of various climate solutions getting into the market.
• Revenue based financing or royalty:  we're not going to give you debt. We're not going to give you equity. It's something in between where we get a portion of your revenue, not your profits. Your portion of your revenues. So if you make a lot of revenue, guess what? We make more money as investors. If you don't,  we make less. Now they usually have caveats, which would say like, Hey, at a minimum over the term of our commitment, maybe it's three years or five years, we need to get a 1.5x or 2x multiple on our money. But you could also argue, well, cool, if you get downside protection, we're going to cap your upside. So they may say, well, great, if we crush it, we're going to cap your upside at, I'm making it numbers, 3x or 4x, or who knows, as an equity multiple.

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Why does funding impede us from creating solutions or overcoming climate change?

Most projections suggest that we need to be investing 3 to 9 trillion per year. Bloomberg estimated in 2023 that maybe it was 5 trillion dollars in the energy transition. So that's a great start, but it's still short of what is needed across again across almost every sector.

There's 2 big buckets here that need investment:

• Deployment: infrastructure, real assets, project finance. So think solar projects, wind projects, battery storage projects and green building projects.
• Innovation: where venture capital landscape exists. Many of those companies cannot grow quickly without someone else like venture capital investing because their revenue is going to be five years off from when the company is founded.  And so there's no other, I mean, government grants can be helpful.

How might we mitigate or eliminate the obstacle of funding for climate change solutions?

Government policy will make some difference to create much more confidence for investors to invest.

Governments have decided like this matters, right? Clean air matters. Clean water matters, like not burning up and the atmosphere matters. Therefore, we will stimulate brand new industries. And when any new industry starts, guess what? It's not economic, right?  

Any new industry that the government decided was important in the early days oil or nuclear or natural gas, you name it, there wasn't continues to be government support to make those things  more attractive to investors and entrepreneurs.

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Additional Resources

• Intergovernmental Panel on Climate Change
• Entrepreneurs for Impact
• Climate Tech VC
• Pivotal 180

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Top Skills To Learn

Our guest recommends learning the following skills:

• Bring whatever skills you already have: the good news that almost any discipline you learn can be applied to climate solutions. If your jam  is branding and marketing, awesome. If these companies don't have that, they're not going to sell anything, right? Therefore, no climate solution.  If you love operations, if you just love spreadsheets and  like schedules and timetables and budgets, great. These companies need someone to run the trains efficiently.
• Being self-directed
• Networking: finding other folks that care about what you care about, a similar mission, and usually if done properly, you're helping each other out.

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Activity

Activity: Funding Source Research

Description: Choose a specific climate solution (e.g., renewable energy, reforestation) and research various funding sources that support its implementation (e.g., government grants, private investments, crowdfunding). Reflect on the role of different funding mechanisms in driving change.

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Skill Lesson Mastered

Demonstrate mastery of the knowledge and skills presented in this lesson by applying it to the above activity. If, and only if, you have a full understanding and have mastered the knowledge and skills presented in this lesson, select the next lesson in the navigation.