Corporate VCs & climate change: Good citizens

In 2005, Idinvest Partners started investing in clean energy technologies and climate mitigation solutions alongside a group of likeminded venture capital firms. The alliance did not last.

“The marginal efficiencies we were getting in energy technologies were not comparable to those in areas like semiconductors. And then the hardware nature of those technologies didn’t allow most of the VCs to make their returns during their fund period,” says Julien Mialaret, who leads early and growth-stage investments in China and ASEAN for Idinvest, now part of Europe-based GP Eurazeo. “A lot of our peers dropped out, but we persisted.”

Idinvest’s persistence was anchored by three protocols: investing in areas it knew well, which meant more digital technology and less hardware; only backing entrepreneurs with the potential to go global, typically targeting the US or China as well as Europe; and working with corporates as partners.

The EUR50 million ($59 million) Electranova Fund was formed in 2012 with support from French power firm EDF and Germany’s Allianz as well as financial investors. A second fund of EUR137 million – known as Smart City Fund I – launched in 2016 with the same remit: Series A and B rounds for start-ups involved in new energy, mobility, property technology, advanced manufacturing, and deep technology. There are 15 corporate LPs drawn from Asia and Europe.

For Fund III - which is currently in the market with a target of EUR150 million - even municipal authorities are getting involved. “They want to build sustainable cities and they want to do it directly by investing in start-ups rather than waiting for SAP or Cisco to provide master plans,” says Mialaret.

Words and deeds

Idinvest is not alone in leveraging corporate appetite for exposure to technology that helps deliver sustainable outcomes. In China, Cathay Capital secured anchor LP commitments from auto supplier Valeo and energy giant Total for its car technology and smart energy funds, respectively. Meanwhile, Circulate Capital won support from the likes of PepsiCo, Procter & Gamble, Dow, Danone, Unilever, and Coca-Cola for a fund dedicated to stemming plastic waste pollution in South and Southeast Asia.

In many cases, corporate activity is in part driven by broader climate-related pledges. Total, for example, announced in May that it wanted to reach net-zero emissions by 2050. Even though COVID-19 prompted a collapse in oil prices, Xin Ma, a managing director for Asia at Total Carbon Neutrality Ventures – which backed the Cathay fund – reports that her budget is unchanged.

Coca-Cola’s world without waste (WWW) initiative includes goals to make all packaging 100% recyclable by 2025, use 50% recycled material in bottles and cans by 2030, and collect and recycle a bottle or can – regardless of where it comes from – for every one sold by 2030. “We know we cannot do this alone. To achieve our goals, we are working with a wide array of competitors and partners, including Circulate Capital,” says Matt Echols, general manager of WWW for Coca-Cola Asia Pacific.

According to Rob Kaplan, CEO of Circulate, participating in the fund not only gives these LPs access to recycling expertise they don’t have in-house, but it also represents a “supply chain resiliency investment” for them. He explains: “They get access to quality and quantify recycled material in these regions that wasn’t readily available to them before for use in new packaging.”

While the financial model for investing in a fund is well established, how corporates extract strategic benefits from their involvement – and what they offer to start-ups in return – is often highly bespoke and sensitively negotiated.

Establishing joint ventures between corporate LPs and start-ups is integral to Idinvest’s approach. For example, Forsee Power – one of its portfolio companies – makes batteries and battery management systems for electric buses. These are the most expensive components, and customers wanted to pay for them as an energy-storage-as-a-service rather than upfront. Forsee teamed up with EDF and Mitsubishi Corporation to form NEoT Capital, an energy transition financing business.

“We make the investment from the fund and the information remains within the investment team, but we will facilitate work between that start-up and the corporate, so they have things to do together. Over the course of time, when the entrepreneur reaches a certain level of comfort, he allows the corporate to participate in a later round directly,” says Mialaret. “It’s a good way for start-ups and corporates to engage in a sandbox.”

Red, red lines

For some start-ups, there is an awkwardness to working with corporates – especially when those would-be partners are also customers. First, they would prefer to keep the intellectual property and economics behind their technology confidential. Second, there might be a concern that bringing in one corporate as an investor would limit opportunities to work with others.

RWDC Industries, a Singapore and US-based company that is working on a biodegradable substitute for plastic, secured a $133 million Series B round earlier this year. Existing investor Vickers Venture Partners brought in two of its LPs: CPV/CAP Pensionskasse, the pension fund of Swiss retailer Coop, and International SA, a fund controlled by the parent company of Ikea. While the co-investors have corporate links, they are sufficiently far removed from the day-to-day to make RWDC comfortable.

“Some clients have expressed interest in participating in our growth because they see the strategic value in what we’re doing, but we made a conscious decision not to take them. We would never say never, but at this point we want to keep it simple and bring in influential investors who can open doors for us, but who are not necessarily clients,” says Zhaotan Xiao, RWDC’s Asia president.

RWDC would consider JVs at the operating asset level rather than the holding company level but on a highly selective basis. On one hand, Xiao warns that if a corporate invests time and energy in a JV, it might insist on owning some of the IP, so there must be red lines. On the other, not all companies want to back start-ups in the early development stages; they would rather put the time and energy into something closer to commercialization.

Corporate VC units allow a degree of early-stage experimentation, provided funding isn’t pulled from these programs at the first hint of commercial headwinds. While some of Idinvest’s LPs have captive VC teams and use the smart city fund to get access to new geographies, most do not. Mialaret notes that partnerships between corporate LPs and start-ups are labor-intensive and require a backstop: if agreed goals aren’t reached due to a lack of corporate buy-in, partnerships are terminated.

“We want to show corporates that there is a channel between them setting up corporate VC units – sometimes unsuccessfully – and putting in money as a passive LP,” he adds. “There is a middle ground where you can work with a GP but still get the corporate strategic benefit at probably a lower cost and in a peer group where you learn from the VC and from other corporates in the fund.”

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• Topics
• Cleantech
• Technology
• Greater China
• Southeast Asia
• South Asia
• Asia
• Eurazeo
• Circulate Capital
• ESG