Who would have thought that venture capital just needed a little help from its friends in philanthropy to get its mojo back.
For much of the past decade, the lion’s share of venture funding has gone toward relatively conservative investments. Think: fast-followers, rehashes of existing business models updated with some new tech or buzzword and a preference for software above all else. The common thread was low capital expenditures, small headcount and shorter timeline to profitability.
All that might make for good returns, but when it comes to taking big swings on challenging problems like climate change, the transitional venture model can come up short. Not always, of course — there are plenty of firms focused on the sector that have come up with ways of both delivering returns while also queuing up firms that have the potential to eliminate massive amounts of carbon pollution.
But for every company that gets funded, there are dozens of others with viable concepts that are short on funding because they’re still too early-stage.
That’s where Azolla Ventures hopes to step in. On Thursday, the climate tech-focused firm is announcing a $239 million blended fund — meaning it’s not just drawing on traditional investors. Rather, the fund pairs investors with philanthropic partners who are hoping to maximize the impact of their dollars.
The result is a fund that will be focused on investing in early-stage companies — mostly pre-seed and seed with some Series A — that would otherwise be overlooked by other VCs.
“In some ways, you would look at what we’re doing and think, ‘This is an interesting early-stage, maybe very early-stage private investor.’ On the other hand, we’re so different it’s like we’re from outer space,” Azolla co-founder and general partner Matthew Nordan told TechCrunch+.
The key differentiator is that Azolla requires its investments to prove that they’ll not only be commercially viable and have a substantial impact on the climate, but that they’ll also be an additional investment, one that other investors would pass up.
Azolla works closely with Prime Coalition, which birthed the firm. Prime Coalition helps determine the impact of the investment: Whether it will reduce at least a metric gigaton of carbon pollution by 2050 or whether it’ll have any unintended social consequences or inadvertently harm biodiversity, for example. Prime Coalition also helps grade the additionality of the investment both through in-house assessments and through an advisory committee composed of volunteers from traditional VC firms. Those advisers let Prime know whether the proposed investments before them spark their interest but are somehow beyond their remit.
“That helps us identify the reasons that give us conviction that the company is both needy and deserving of catalytic support,” said Sarah Kearney, executive director of Prime Coalition.
Both Prime Coalition and Azolla use that word a lot: catalytic. The thinking is that by leveraging philanthropic funds, they can coax more traditional investors into making riskier or longer bets than they would otherwise. Some of that philanthropic support comes in the form of grants with no expectation of return, others are so-called recoverable grants that return the original funding if the portfolio hits certain benchmarks. Both philanthropists and traditional investors can also subscribe directly to the fund.
As of June 1, Azolla Ventures has attracted 133 investors across two pools of capital that span small and large private foundations, donor advised funds, corporate giving programs, family offices, philanthropic individuals trusts and other mission-aligned investors. In Prime Coalition’s Prime Impact Fund, a $50 million fund it launched in 2018, philanthropists could support the fund for as little as $10,000, far lower than traditional VC minimums.
Azolla differs from traditional venture funds in a number of other ways. The fund has a 15-year term with up to four years of extensions, far longer than the norm but also not unusual for the climate tech sector. General partners are paid differently, too. Their carried interest doesn’t just depend on how the fund performs, but also how well they follow through on fulfilling the climate impact part of their jobs.
“Because we invest in such a crazy early stage, we often call what we’re looking for proto-companies,” Nordan said. The thinking is that the firm can step in to replace smaller non-dilutive grants with larger checks that help cut the R&D phase in half. Those checks are likely to be around $2 million, Nordan added, though companies with larger capital requirements might receive up to $5 million.
“We’re very interested in categories where mainstream thought is that maybe all the innovation is out, but maybe it’s not,” Nordan said. “Our mandate requires us to stay on the bleeding edge. The minute something gets well understood and has the eye of mainstream angel and venture investors, it’s moved outside of our mandate.”
For years, clean tech then climate tech sat so far outside of investors’ comfort zones that it was treated as more of a specialized niche, a curiosity really. And that may still be the case, but as the niche has struggled through downturns and ultimately captured the attention of more mainstream investors, it’s also had to grapple with the unique challenges the sector faces.
The problems climate tech is addressing are enormous, larger than many other sectors combined. So is the market. But the timelines can be grueling and long, far exceeding traditional investors’ patience. As a result, climate tech firms have had to rewrite the rules of engagement. Breakthrough Energy Ventures, for example, uses a timeline that’s twice as long as the usual VC fund. And now Azolla is pushing the boundaries in another way, placing philanthropists hungry for impact alongside aligned investors who are hungry for returns.
If it works out, the two are likely to make each others’ positions stronger. Philanthropists help absorb some of the downside, providing extra firepower that makes riskier bets worth taking. And the investors bring a different lens to each opportunity, using their knowledge of market forces to help determine which have the most potential for sustained and large-scale impact.
Observers of the social enterprise world may not be surprised by Azolla’s unique structure — philanthropists and impact investors have been moving in this direction for a while now. But the scale of Azolla’s new fund and the way it is structured to prioritize impact additionally appear to put a new twist on things. Is it enough to make a dent? We’ll have to wait and see, but how the firm’s initial investments perform in the coming years should provide a helpful preview of whether it’ll deliver on its promises.
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