Climate change poses an “existential threat” to human civilization, a new study says, and many tech leaders believe innovation could be key to preventing its most dire effects. But despite the high stakes, venture capital dollars flow overwhelmingly to companies developing online games, virtual reality and other consumer products instead of breakthrough batteries or cheaper solar panels.
Last year, less than $7 billion dollars of private investments went to U.S. companies in clean technology — and that was a jump compared to previous years going back nearly a decade. By comparison, IT companies in 2018 raked in more than 14 times the amount raised by businesses innovating in renewable power, electric transportation and other clean products, according to an analysis by PitchBook.
In the Northwest, most of the clean energy businesses that have been financially successful — including LevelTen Energy, which on Monday announced a $20.5 million Series B funding round, and last month’s acquisition of EnergySavvy by Tendril — are software-based. But some business and political leaders believe that could change.
In recent months and years, a series of policies, funding programs and startup initiatives have emerged from Washington state with the goal of unleashing game-changing investment and discovery in clean energy:
- This spring, Washington lawmakers passed and Gov. Jay Inslee signed a law requiring utility companies to stop using coal power by 2025, reach carbon neutrality by 2030 (which can include carbon offsets) and emit zero carbon by 2045. Climate experts are calling the policy “groundbreaking.”
- The state capital budget over the next two years includes $25 million to pay for the research, development and deployment of clean energy and grid improvements.
- The University of Washington’s Clean Energy Institute (CEI) is partnering with 37 companies and 280 researchers at its Washington Clean Energy Testbeds, a cutting-edge facility for energy research and development launched in 2017.
- This month, the Cascadia CleanTech Accelerator is expected to announce its fourth cohort of clean tech startups.
“We’ve got a gold mine,” said Rep. Gael Tarleton, a Seattle Democrat and the lead sponsor of the state House bill that created the clean energy goals. “And the best part is that it’s a gold mine ready to help, rather than hurt, the environment. … We’re on the verge of something really profound. I’ve only been down this kind of a path a few times in my career where everything changes, and we’re at it. It’s the cusp.”
Yet even with regulations and institutions pulling in the right direction, the clean energy sector in general is notoriously tough to crack, and Washington state might not be the place to do it. One reason for the disparity in investments between software deals and energy hardware is simple: it’s more difficult to make money from capital-intensive companies producing solar cells and solid state batteries than from scrappy startups producing lines of code.
“Compared to other tech sectors, clean tech is hard to get funding for,” said Rachelle Ames, manager of the Cascadia CleanTech Accelerator. “These are very hardware intensive, where it’s not going to be a quick turnaround for getting your return on investment. You have to be willing to play a longer game with them. The ability to get to that point can be very difficult.”
Beyond the question of funding, investor Chris DeVore points to the small pool of talent and expertise in clean energy locally. Thanks to Washington’s cheap, plentiful hydropower from dams, there has been little incentive over the decades to build out the sector, and the new legislation might not be enough to reverse that.
“Innovation doesn’t come from good intentions,” said DeVore, managing partner of Founders’ Co-op and managing director of Techstars Seattle. “It comes from a deep, broad sector of high-performing people.”
Building a shortcut to profitability
Dan Schwartz had a riddle to solve.
It was 2012 and Inslee had just been elected. A long-time climate hawk, the governor (and current presidential candidate) wanted to support clean energy development in Washington state. So the University of Washington asked Schwartz, a professor of chemical engineering, to come up with ideas for the university’s role. Schwartz zeroed in on the economic hurdles facing the sector, eager to understand the profile of a successful Northwest clean energy company.
Sifting through financial data, he realized that few of the startups went public, that the end game was more often acquisitions by larger businesses that could then churn out their hardware at scale. But the exits weren’t generating really huge dollars. Earlier this decade, clean energy businesses in the state were going for $30-60 million, according to his research. That meant investors were limited to putting in just a few million dollars if they wanted a good return.
Schwartz proposed that the strategy for creating more successful startups was building a faster, cheaper path to their products — and the UW could provide that shortcut.
In early 2017, the UW’s Clean Energy Institute (CEI) opened the Washington Clean Energy Testbeds. From the outside, the facility is a nondescript, dated-looking box that used to house sheet metal fabrication and motor pool vehicles. Inside, there’s $6 million of shiny, new equipment for printing solar cells on film using electronic ink; building batteries and analyzing their performance on the molecular level; and running sophisticated tests on simulated energy grids.
“A company can come here with nothing but an idea, get federal dollars on a grant, and go from an idea to a researched and tested prototype and then start bringing in resources,” said Schwartz, director of the CEI.
The CEI also has Entrepreneur-in-Residence Ramkumar Krishnan, chief technology officer at NantEnergy, and Investor-in-Residence Jeff Canin, from the Seattle-based, energy-focused angel investing group E8. These experts can help researchers shape their ideas into a business and advise them in securing government grants and other funding.
By partnering with the testbeds, the startups “have credibility because they have access to this resource, this tool, this expertise,” said Devin MacKenzie, UW professor and technical director of the Washington Clean Energy Testbeds, which are part of the CEI.
And there are plans for an even bigger facility, called the Center for Advanced Materials and Clean Energy Technologies, or CAMCET, to be built west of the UW’s main campus. CAMCET will be a space for UW scientists and partners from industry, government and nonprofit organizations to collaborate. Construction could begin in fall 2020.
In the meantime, MacKenzie hopes to grow the number of companies using the testbeds to about 100. Because while he’s more optimistic about building the state’s clean energy sector than others might be, MacKenzie agrees that reaching a critical mass of expertise will draw in more investors and create a stable talent pool that can keep churning out clean energy technology.
“It’s about that ecosystem,” he said. When it comes to the testbed participants, “we want to get to about triple where we are.”
‘Innovation will be key’
At the most fundamental level, Curtis Kirkeby has one thing to do: keep the lights on. Kirkeby is a fellow electrical engineer for technology strategy at Spokane-based Avista Utilities, whose mission — shared by all utilities in Washington state — is to keep the juice flowing reliably to all of their customers at a reasonable price.
But the new law signed this spring tweaks those objectives, explicitly adding clean power targets to their mandate, a change that in one fell swoop super charges the need for clean power deployment.
Currently, hydropower is king in Washington state, producing 5.4 million megawatt hours — seven times more power than coal, natural gas, nuclear power and clean energy (solar and wind) combined, according to the U.S. Energy Information Administration. Since the state isn’t building massive new dams, that leaves solar and wind as the biggest players for achieving zero carbon emissions.
And that has Kirkeby thinking about a certain 12-day stretch each year when the wind stops blowing in Spokane and energy usage peaks just as people get home from work and the sun sets.
That rules out wind and solar for real-time energy generation, and the batteries and other options for capturing and storing power for later use are currently too expensive and too short in duration to meet this need, Kirkeby said. Improvements to the grid, which moves the energy from power source to users, will also play a role in meeting demand, and so will energy conservation.
“The challenge is pretty big. We’ve got time, but innovation will be key,” Kirkeby said. “With today’s technology and approaches, we really can’t get there.”
But the gap between technology innovation and deployment by a utility is another chasm for startups to leap.
When it comes to utilities, “historically they’re very difficult to work with because they are very slow moving. It’s by design — it’s not a criticism of them,” said Eric Berman, co-chair of E8. “They’re not about innovation and risk taking. They’re about slow and steady.”
The UW’s CEI and the CleanTech Accelerator are helping entrepreneurs focus their innovations so that they integrate with utilities’ long-term investments in existing systems. The CEI is also trying to build partnerships with energy companies such as GE Energy and Siemens. These businesses provide an essential link, buying a startup’s technology, demonstrating its reliability, scaling it and selling to utilities.
And some of the utilities themselves are directly investing dollars into research and development, Kirkeby said. “We are actively trying to help the community be successful.”
What role for Washington state?
While local tech news is dominated by the success of companies outside the energy sector, there have been multiple acquisitions and lucrative VC deals in the Northwest in recent years — though most were in energy software. Some notable acquisitions since 2016 include:
- Seattle’s EnergySavvy, a software company that helps utilities engage with their customers, by Boulder, Colo.-based Tendril last month
- Seattle’s BuildPulse, a software company in energy management, by Surrey, B.C.-based CopperTree Analytics in November 2018
- Demand Energy Networks, a software company providing management of energy storage, located near Spokane, by Italy’s Enel in January 2017
- Seattle’s 1Energy Systems, a platform for managing the electrical grid, by South Korea’s Doosan in July 2016
- EnerG2, a UW-spinoff and manufacturer of carbon materials for energy storage, by Germany’s BASF in June 2016
- Seattle’s Powerit Solutions, a software company enabling electrical grid management, by Philadelphia’s Customized Energy Solutions (CES) in January 2016
LevelTen Energy, a Seattle company started in 2016, announced on Monday that it has landed a $20.5 million funding round led by Prelude Ventures. That brings the startup’s total funding to $27.3 million. LevelTen, which helps corporations more easily purchase renewable energy, reports that customers have bought more than $1 billion of green power through its platform.
Other significant fundraising rounds in clean energy include:
- Seattle’s solar energy startup OneEnergy Renewables raised $1.8 million in February 2017, following a $5 million round in October 2014 (LevelTen CEO Bryce Smith previously ran OneEnergy)
- Drift, a Seattle-based energy marketplace platform, has raised more than $10 million, most recently raising $7 million in October 2017
- Redmond’s Helion Energy, which is working on fusion reactor technology, raised $10.6 million in July 2015
- Optimum Energy, a software company helping businesses save on heating and cooling costs for their buildings, has raised at least $45 million, with a $10.2 million round in August 2015
Microsoft co-founder Bill Gates is ponying up some of his vast wealth in support of clean energy, including his role as founder of Bellevue-based TerraPower, a startup working on next-generation nuclear fission reactors. Earlier this year Gates reportedly lobbied members of Congress with the promise that he would invest $1 billion of his money, plus raise an additional $1 billion from others, if he could get federal support for a pilot of TerraPower’s technology.
Gates also helped create the Breakthrough Energy initiative, including a coalition of wealthy investors that have created a VC fund for supporting ambitious clean energy solutions.
Investors and entrepreneurs have different takes on what’s holding back clean energy enterprises in the Northwest.
EnergySavvy co-founder and former CEO Aaron Goldfeder said new legislation and efforts by the UW and CleanTech Alliance are all positive steps, but they’re only a start. He calls out three pieces that are missing in Washington’s clean energy sector: bold leadership pushing innovative clean energy and conservation programs, policies that push utilities and other big customers to buy from Northwest companies and a lack of VC dollars.
Even if companies can cut their R&D costs, there is still a lack of capital, Goldfeder said. E8 is great for angel investing and Breakthrough Energy targets large-scale initiatives. But few VCs are writing the $5 million to $15 million checks.
“Fostering customer adoption, capital and the right leadership are keystone issues,” Goldfeder said. “Without those in place, the industry doesn’t standup correctly.”
DeVore suggested that given the area’s limited scope of energy expertise that the region should concentrate on what it’s already good at: digitization and network technology. Both come into play for efficiently managing the electrical grid and energy use, which are important tools for reducing carbon emissions.
DeVore’s firm, Founder’s Co-op, and E8 were among the investors in LevelTen’s funding round.
If the Northwest focuses on digitization and network technology in clean energy, DeVore said, “we can bring something really powerful to the global conversation.”