Financing the commercialization of new tech in the energy space
Written By: Stratton Report
October 12, 2016
An interview with Jigar Shah of Generate Capital
Stratton Report has long been interested in Generate Capital and its infrastructure-as-a-service™ business model. Back in January 2016 we reported here that the company had financed $150 million of sustainable infrastructure during its first full year in business. We also noted in July that the firm served as the primary source of project financing for Stem’s energy storage-as-a-service business model. We were fortunate enough to speak with Jigar Shah, the president and co-founder of Generate Capital and the founder of SunEdison, about the firm and its goals.
Stratton Report: What is the biggest obstacle today in the large scale adoption of the innovative technologies like energy storage?
JIGAR SHAH: The biggest obstacle in the adoption of innovative technologies in the energy space is financing. These new technologies need infrastructure and infrastructure is either paid for in cash, by players like utility companies, or it needs to be financed. And there are a lot of people who are experts in these energy technologies but know very little about how to get that new infrastructure financed. That’s where Generate can help.
SR: Can you explain Generate Capital’s infrastructure-as-a-service™ model?
JS: Often, customers of innovative technologies really want the services that those innovative technologies provide, whether it’s lower cost lighting or more reliable HVAC, or backup power from energy storage. Customers want a solution, not gear. They don’t really want to own the assets themselves and they only want to pay for what they use as they use it. With our model, we own the infrastructure and then we sell the services—lighting, HVAC, energy storage, whatever–to the customers under a long-term contract. I popularized the pay-as-you-go business back in 2003 at SunEdison. The model was pretty successful there, and we were able to get large banks interested in funding our contracts.
SR: Why did you start Generate Capital in 2014?
JS: My co-founders, Scott Jacobs and Matan Friedman, and I began discussions and proof-of-concept work many years ago. But, in 2014 the market spoke. We realized that while there were a lot of banks that had gotten comfortable funding solar, there weren’t many interested in funding energy storage projects, fuel cells, anaerobic digesters, cogeneration, energy efficiency or the other types of technologies required to build a truly renewable economy. We knew that there were a lot of entrepreneurs that could use the financial approaches that we had developed in the solar industry, and so we created Generate’s novel model to step in and play a very useful role.
SR: So you were helping people through “the valley of death” as they call it up in San Jose?
JS: No. In Silicon Valley, the “valley of death” refers to scaling up the pilot facility to industrial/commercial volumes. We don’t do this. All the technologies we deploy have been proven (at the scale and within the use cases in which we deploy them).
SR: Typically start-ups look to venture capital for funding. How would you compare what you do to VC?
JS: Venture capital is very expensive money, because investors take risks in the early stages of a company’s lifecycle, and they need to earn a multiple of their invested capital to compensate for that risk. Many VC investors talk about getting a “10x” on their investment, and that is indeed what they aim to achieve in any individual company. Importantly, VCs are investing in the companies themselves. On the other hand, Generate Capital invests in hard assets, sometimes developed by companies that VCs back. However, the technologies that we deploy are proven technologies, and therefore, we look more like a bank than a venture capitalist. Furthermore, our money goes into these hard assets that have current cash flows, making these assets much lower-risk than a VC investment. Our money isn’t as cheap as bank debt for something like a Fortune 500 company, but it’s much cheaper than what VCs expect to return with their investments.
SR: So can you tell us a bit about the projects that you guys have been financing in the last few years?
JS: Generate invests across a range of sectors, from energy efficiency to renewable water, food, energy, etc. We found that there are a lot of hard-to-finance areas: battery storage, anaerobic digesters, fuel cells. In fact, even certain areas in the solar space are tough. The commercial and industrial solar space broadly actually lacks financing, once you get outside of the Walmarts and the Targets of the world.
SR: I’ve read that your target for deal size is between two million and 20 million. Is that still the case today?
JS: We rarely do a two million dollar deal unless we feel the company will eventually grow sufficiently to deploy five or ten million. But we have several deals right now on our plates that are currently sitting at $2 million, and then there are a lot of deals that are closer to $20 million, even up to $100 million. We close the larger deals (instead of banks) because the technologies involved just don’t have the respect of the banking sector yet.
SR: How can you be profitable, given the fixed upfront costs, due-diligence, etc., doing a $2 million deal?
JS: Transparency, Standardization, and Automation. We’ve broken our process down to a science and use a unique structure and underwriting process that allows us to do deals that are too small for traditional capital sources. It’s also important to remember that small deals can usually be closed in conversations with one decision-maker vs. the lengthy process of the larger deals.
SR: How difficult is it to raise money for Generate Capital?
JS: It’s hard to raise money in this space. People often say, “if the banking sector doesn’t want to fund these deals then maybe they shouldn’t be funded.” So a lot of funding in this space is coming from experts in the areas of resources who know this opportunity exists and from foundations, endowments and family offices who have allocations to infrastructure, renewable energy, or impact investing. We’ve been more successful than most with our own capital-raising because of our unique approach and our team’s track record making money for investors over a long period of time.
SR: Are investors getting more comfortable with the kinds of deals you do?
JS: It’s not that they’re getting comfortable with this kind of transaction as much as they’re getting comfortable with our platform and our ability to do the underwriting such that their money is safe. I mean, the longer that we’re in business and the longer our track record gets, the more they will be comfortable with our model and ability. Like all partnerships, it comes down to earning and maintaining trust. We’ve really focused on building not just a model but a unique team that investors want to work with over the long-term.
SR: How do you vet the deals you do?
JS: Project finance is a very simple formula. Basically you need three things. First you need a technology that everyone believes actually works, and one where there’s enough data to prove that it works. Second, you need a customer with decent credit that wants to use that technology and is willing to sign a long-term contract to do so. And third, you need to find an operator that can actually maintain the technology so it will perform throughout the life of the contract. So those are the three things we look at. Surprisingly, perhaps, even that basic level of understanding is generally not pervasive amongst the innovative technology folks.
SR: Do you think you’ve made a difference?
JS: Yes. For example, there are a number of people who’ve recognized that financing commercial solar is a problem, particularly when doing a project for a small customer because the cost of evaluating people’s credit and doing all that work is fairly laborious. Not a lot of folks want to do that. As a consequence, during the last few years the developers in the marketplace have not spent as much time or effort as they could have trying to serve the commercial solar market because there wasn’t financing available for it. And so once you have a financing partner, like us, willing to finance that space, then suddenly folks start reallocating resources to it. So we’ve helped to break up a bad pattern that was holding back a whole sector.