SPACs are the construct required to finance cleantech by VCs
In recent years more focus is being placed on emerging clean technologies, ranging from renewables and energy storage to nuclear power, as a result of climate change and growing global energy demand. While these technologies have enormous potential, they require a lot of innovation, and an abundance of capital is required for their funding.
The problem is that early-stage funding for clean tech has not been abundant, which resulted in suppressed development of new energy companies. Clean tech firms particularly lack the start-up advantages of agility and flexibility.
For products such as smartphone apps and SaaS solutions, 'Moving fast' works. However, the clean tech sector appears to require highly regulated, capital-intensive, mission-critical infrastructure.
That has hurt both returns and the well-intended impact. Venture-backed businesses have returned, on average, -15 percent of the internal rate of return (IRR) since 2000, according to Cambridge Associates. Compare that to healthcare venture-backed firms, which returned 24 percent in IRR during the same time span.
Unfortunately, clean tech lacks funding because it does not fit the treditional venture capital model. The ability to de-risk new ideas and focus on the most promising ones is essential to the venture capital model, enabling liquidity through M&A or initial public offering (IPO).
This arrangement allows venture capital dollars to be returned, plus appreciation that allows VC companies to collect new funds. The venture-backed business is also able to boost growth and maximize market impact through these capitalization events.
For instance, in healthcare, new technologies are de-risked by VCs. As a result, since 2012, the average annual ratio of dollars earned through an exit to VC-invested dollars is 1.8. For cleantech, this ratio is just 0.2, an 800-plus percent difference in the opposite direction. This has resulted in low returns and reduced cleantech companies' capitalization.
We need to address this problem collectively, considering the state of the world's climate and the lack of abundant energy in developing economies. Special purpose acquisition companies (SPACs) are greatly improving the venture capital structure of cleantech.
More than 110 SPACs completed transactions in the U.S. in 2020, capitalizing over $29 billion on these companies.
In 2020, SPACs, including Fisker, Lordstown Motors, QuantumScape, Hyliion, XL Fleet and others, capitalized almost $4 billion in cleantech firms. This helped push the ratio of dollars raised via an exit to VC-invested dollars from the previous 0.2 average to a much healthier 0.6, a 200 percent increase.
We would hopefully see even more progress in 2021.