Accelerators switch on to cleantech opportunities

Business accelerator and incubator programmes are increasingly helping to develop the next generation of clean energy companies.

These hothouses for businesses are typically for-profit organisations that support start-ups with office space, banking and legal help – as well as the occasional pep talk. They exist because entrepreneurs leading untested businesses remain extremely risky investments. Start-ups with profitable business ideas routinely fail because of a lack of coaching, as well as difficulties in raising funds. Only about 14 per cent of businesses survive their first year of life, according to the most recent US Labor Department statistics.

In recent times, accelerators or incubators have become crucial drivers of the venture capital fundraising ecosystem, with some of the biggest players backing some of the most well-known companies.

For example, Sam Altman – now chief executive of OpenAI, the company behind the AI-chatbot ChatGPT – once headed Y Combinator, which is one of the best-known accelerators in Silicon Valley. Founded in 2005, Y Combinator’s alumni businesses include accommodation booking company Airbnb and payment processing platform Stripe.

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More recently, though, as cleantech becomes a more attractive investment opportunity – partly thanks to government subsidies such as the US Investment Reduction Act – accelerators have been seeking opportunities in this burgeoning sector.

In my opinion, almost every great start-up going forward is going to have a venture capitalist from the studio model or another similarly hands-on approach somewhere on the capital [funding] table

—  Oliver Libby, H/L Ventures

Techstars – a Colorado-based accelerator that is one of the largest in the world by the number of businesses supported – has invested in Zipline, a drone logistics businesses. This California-based start-up says its fully electric aircraft can make deliveries with up to 97 per cent fewer carbon emissions than traditional services. In 2021, Zipline raised $250 million (€232 million) and more than doubled its valuation to $2.75 billion.

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This year, Y Combinator added Elyos Energy to its roster of companies. Elyos is a London-based start-up that helps big businesses to cut carbon emissions and their electricity bills at the same time. By connecting to smart thermostats, EVs, HVAC systems, solar and batteries in large commercial properties they are able to maximise consumption and automate participation in demand response energy markets avoiding peak electricity prices. And, last year, Y Combinator backed HyLight, an autonomous airships operator hired by energy utilities to spot methane leaks from the air.

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But there are drawbacks to the accelerator and incubator funding models, says Oliver Libby, co-founder of H/L Ventures, which includes H/L Studios and CityRock Venture Partners. He points out that accelerators and incubators only offer formal assistance for a few months – essentially acting as short-term booster rockets for a start-up but, inevitably, “They fall off at some point.”

By contrast, the studio model aims to support entrepreneurs for years rather than months. At H/L, the studio will make a common stock investment in about five start-ups at a time and stick with them. “You never kick the bird out of the nest,” Libby says.

He argues that this format benefits cleantech businesses, specifically, because they can be more costly to set up than other start-ups, such as crypto or software-as-a-service companies. With those businesses, once the code is written, customers can often be secured very quickly. However, cleantech businesses are typically making hardware, Libby notes. As a result, they need good relationships with utilities and a deep understanding of government regulations.

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‘’The studio model is going to become more common’', Libby predicts, in part because recent start-up implosions have burnt venture capitalists. The venture capital sector has been hit by a silent crash since money poured into the market in 2021.

The venture capital industry “accepts a hilariously high failure rate”, Libby suggests. “In my opinion, almost every great start-up going forward is going to have a venture capitalist from the studio model or another similarly hands-on approach somewhere on the capital [funding] table.”

The companies we support tend to be hardware-focused, climate-tech and energy transition start-ups, usually at the pre-seed through series A or B funding rounds

—  Julia Travaglini, Greentown

Amid the current boom in sustainable and impact investing, new accelerators and incubators are launching to back cleantech businesses exclusively. In June, Google launched a start-up accelerator focused on climate solutions, cleantech and green energy in the Middle East and Africa. Amazon launched its own clean energy accelerator in 2021.

Right now, the US Energy Department lists more than two dozen accelerators and incubators for cleantech opportunities. These include Greentown Labs, one of the largest cleantech incubators in the US by number of companies supported. This Massachusetts-based programme hosts more than 200 start-ups, including some in Houston, that are attacking climate change problems.

In August, Greentown named Kevin Knobloch, a former Obama administration official and president of the non-profit Union of Concerned Scientists, as its new chief executive. Among the start-ups Greentown has backed are electricity and manufacturing businesses that reduce carbon emissions. In June, Greentown partnered with the Massachusetts Clean Energy Center to foster offshore wind start-ups.

“The companies we support tend to be hardware-focused, climate-tech and energy transition start-ups, usually at the pre-seed through series A or B funding rounds,” says Julia Travaglini, a senior vice-president at Greentown.

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One of Greentown’s main goals is to help start-ups vault over the two “valleys of death” that Travaglini says start-ups will often encounter. The first valley comes after they receive their initial outside funding – typically from angel investors, grants or even prize money. And the second valley they come up against is having to prove a product can exist in a hostile marketplace.

“We work to arm our start-ups with what they need in the lab, so they can safely and swiftly get to work once they join us,” Travaglini says. These armaments include 3D printers on-site, as well as lawyers and a network of corporate partners, which “can be a linchpin in a start-up’s success”.

“While we first want to make sure our start-ups thrive while at Greentown,” she says, “we’re also focused on finding opportunities for our start-ups to get their technologies out into the world.” – Copyright The Financial Times Limited 2023