New fund boosts climatetech startups run by people of color and women

Back in 2017, the Los Angeles Cleantech Incubator won a federal grant to study an issue at the heart of its mission: How important is cost-effective debt financing for aspiring cleantech entrepreneurs who are women or people of color?

The answer? ​“This is critical,” said LACI CEO Matt Petersen.

Armed with these findings, LACI won about $150,000 in grants to test a solution to this problem: a debt fund launched in 2021, offering low-interest, no-collateral loans of $20,000 to $40,000 each. None of its first 15 borrowers have defaulted on their loans, and many have paid back their principal, plus interest, which has been deposited into a revolving fund for the next round of worthy borrowers.

That track record has given LACI the confidence to scale up its Cleantech Debt Fund and take it nationwide.

On Wednesday, LACI announced an expansion of the fund to $6 million available for loans of up to $250,000 each for about 100 early-stage startups over the next five years. It has also been joined by three other incubators — Greentown Labs in Boston and Houston, Evergreen Climate Innovations in Chicago, and New Energy Nexus in New York City and Oakland, California.

“Giving cleantech startup founders access to this kind of affordable debt financing that’s not dependent on personal collateral and credit score is breaking barriers for all kinds of founders, but particularly Black and brown founders and women founders,” Petersen said in an interview.

That perspective is backed up by reams of data. Black and Latino founders received less than 3 percent of the tens of billions of dollars in venture capital finance doled out in 2020, despite making up about one-third of the U.S. population, according to Crunchbase. Female startup founders have also garnered tiny shares of overall VC investment, according to Pitchbook. And a massive body of research has cataloged the challenges minority- and women-owned businesses face when it comes to accessing capital and credit.

These are the kinds of barriers that incubators like LACI are trying to surmount by offering accessible debt financing, Petersen said.

“There’s no one else that’s entered this part of the capital stack for cleantech startups,” he said, let alone for startups with founders who are less likely to have a network of wealthy supporters or collateral for a bank loan.

Interest on the loans is expected to run about 8 or 9 percent, which is ​“certainly cheaper than credit card debt or traditional bank loans,” Petersen said. And unlike commercial bank loans, the Cleantech Debt Fund won’t require a certain credit score or personal collateral.

Sobrato Philanthropies and Homecoming Capital are providing the anchor investment for the fund, and the Wells Fargo Foundation is supplying about $500,000 to cover loan loss reserves and operating costs, he said. LACI and its incubator partners are providing due diligence for startups seeking loans, and Mission Driven Finance will do the underwriting and service the loans.

The right kind of capital for scaling up 

Having access to low-cost debt was certainly important for Josh Aviv, CEO and co-founder of SparkCharge, a Somerville, Massachusetts–based startup. The portfolio company of LACI and Greentown Labs has created ​“the world’s first mobile, on-demand EV-charging network,” Aviv said, with purpose-built ​“Roadie” fast-charging battery units that customers can order for delivery to their needed charging site via the startup’s Currently app.

SparkCharge secured $40,000 in loans from LACI’s pilot debt fund in 2021 to purchase equipment and hire staff in support of its launch in Los Angeles. ​“The loan did a really good job of allowing us to launch in a city relatively quickly,” Aviv said, especially at a time when the startup was still operating largely on grants and a $3.3 million seed round raised in 2020.

Since then, SparkCharge has raised a $23 million Series A round and inked partnerships with Hertz, Uber and Kia. It plans to be serving 20 cities by the end of 2022.

“Venture capital money is some of the hardest and most expensive money to acquire,” Aviv said, which makes it less than ideal as a source of funding for startups that need to move quickly to tap into emerging opportunities. It’s also dilutive, meaning that it reduces a founder’s controlling stake in the company and hands more over to equity investors.

That’s why almost all businesses prefer to use debt to invest in equipment and employees and to expand into new markets and lines of business. But startups have largely been locked out of traditional commercial lending.

Climatetech startups focused on ​“hard tech” rather than software face a particular challenge on this front, said Ramsay Huntley, climate strategy and innovation lead at Wells Fargo. ​“There are often costs associated with that that are not compatible with the venture capital model,” he said. ​“They need to manufacture something; they need to do an early-stage pilot of a product.”

There are lenders that specialize in supporting clean energy and efficiency businesses and investing in disadvantaged communities, ranging from state and local green banks to community development financial institutions. But these entities aren’t well equipped to analyze and assess the risks involved in lending to startups pursuing novel technologies or business models, he said.

Putting capital back into communities 

One important aspect of the new debt fund is its structure as a revolving fund, with initial loans being paid back into a pool of capital to be made available for further lending, Huntley said. Beyond building the pool of funds available for lending well beyond the initial capital infusion, that’s also a way for LACI and its fellow incubators to build a track record that could provide other lenders more confidence to try something similar, he said.

“Companies take out a loan and pay back that loan in a timely manner,” Huntley said. ​“That’s how you prove your risk profile to an otherwise risk-averse funder.” 

Lending money to startups founded by nontraditional entrepreneurs can also boost investment in underserved communities, he said. Many of the startups backed by the LACI debt fund’s four incubator members are focused on bringing clean technology products and services to communities that have been overlooked by ​“the classic Sand Hill Road VC model,” he said, referring to the home of some of Silicon Valley’s top venture capital firms.

That’s the case for Envoy, a startup that took out a loan under LACI’s pilot debt program to roll out its first EV ride-share offering for residents of a Los Angeles housing complex. That pilot has served as a model for a bill introduced in Congress this year that would create a federal grant program to support EV car-sharing programs for public housing projects across the country.

SparkChange also has the potential to make EVs more accessible to residents of underserved communities. Aviv noted that the company’s Roadie charging units can be delivered anywhere in the cities it serves, and with a combined monthly membership fee and per-kilowatt-hour charging costs that can be competitive with grid-connected charging in many cases.

That could allow SparkCharge to serve as an EV-charging supplier in ​“certain areas of cities that just don’t have access to EV charging,” he said. ​“Typically, they’re lower-income communities where the mainstream companies aren’t interested” in installing equipment.

EV-charging investments tend to target wealthier areas where more people own EVs. ​“But [with] portable charging that’s brought to you, you don’t need that physical infrastructure, and you can democratize charging,” he said. ​“Without that, certain demographics get left out of the green economy.”