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Hybrid project capital for climate entrepreneurs

Hybrid project capital fills a critical gap in the climate funding ecosystem as companies move from lab to full commercialization. With hybrid project capital, investors invest at the project level AND in your business at the same time. This model acts as a stepping stone between venture capital-funded deployment and more mature project financing, allowing you to build an asset, accelerate your growth, and unlock other capital that’s otherwise inaccessible.

Katie St. James is an Associate at Spring Lane Capital. We sat down with her to discuss why hybrid project capital matters to climate entrepreneurs, what sets this type of funding apart, and what these investors are looking for.

Why should entrepreneurs pursue hybrid project capital?

Hybrid project capital allows climate startups to bridge the ‘missing middle’ between VC and traditional project finance. Moving your technology to a commercial scale is incredibly capital-intensive, but the earliest stages of this process are still too risky for traditional project finance investors, who typically want to see a clear track record (2-3 years) of your company building projects on time and profitably.

Hybrid project capital enables you to unlock this larger investment by giving you the opportunity to demonstrate verifiable, project-level returns, while having the support of a new investor class than your early-stage VCs, who in turn bring new expertise, connections, and process to the table. Plus, since not all of the investment is dilutive corporate equity, hybrid project capital is a much lower cost compared to traditional venture.

Who is eligible for hybrid project capital?

Companies that are in a good position for hybrid project capital are on the brink of building, owning, and operating a large asset (think production facility, large operating equipment like a novel grid battery, etc). For most investors, this asset will need to be worth at least $10m, while others will have higher requirements. Because of the inherent complexity of underwriting these projects, securing financing for much smaller projects can be more challenging. Note, generally hybrid project capital is NOT a fit for your first field pilot; this is financing that comes after technological demonstration and is best leveraged for projects that can provide a strong standalone return.

Process and timing

You might be in conversations with project finance investors for years before you’re ready to actually start the process formally. Once the timing is right and you’re ready to kick things off, and you have all of the requirements handy (see below) you can expect it to take six to eight weeks to get to a term sheet.

The structure of hybrid project capital might be corporate equity and project equity, or corporate equity and project debt, or might even include corporate debt. Every player is unique and the models investors offer can be flexible depending on your specific situation. Before you start, get acquainted with all of the options that are out there, understand your preferences, but also go into the process with any given investor with an exploratory mindset. You never know what you might land on.

The diligence process

While VCs might make lots of little bets, hybrid project finance investors make a select number of big bets, and their diligence is more intensive as a result. In terms of your project, they’ll look at the project’s financial and operating model, your feedstock - your critical inputs - and your offtake - what you’re selling. What’s the market potential for this type of project? Are your relationships contracted? They’ll also look at what the development process looks like, and make sure your technology has been proven - as we mentioned before, hybrid project investors generally don’t like technology risk.

Although their core focus is on investing into the projects themselves, the scope of their diligence will cover your business too. They’ll look at your burn rate, and whether you have enough corporate capital to actually build these projects and get into your pipeline. They’ll also look at your history - if you have a previous project, its operational performance will help them understand the risk profile of your current one. The capability of your team is also hugely important, and they’ll be assessing whether you can work together productively and also grow successfully to meet the needs of an expanding pipeline.

How to secure hybrid project capital

1. Do you have the right team?
Project development represents a new phase in the lifecycle of your company. It requires a different skillset than technology commercialization. Note, this is not a nice to have, but rather a core requirement of being successful. As you approach this phase, you should plan to hire a dedicated development team. Depending on your project pipeline, important skillsets could include familiarity with permitting processes, experience working with EPCs and other contractors, construction project management, and asset management.

Raising project finance also requires specialized finance expertise. Project-level financial models are different from corporate financial models and are a key requirement to raising project finance. Such finance team members should ideally be full time, but could also be fractional in the early days as you’re ramping up. Your team should be able to build project proformas, speak to them in detail, and navigate the project financing process with ease. This will give great comfort to prospective investors.

Finally, hybrid project investors recognize that startups entering this phase of company-building face a learning curve. Good investors will leverage their own expertise to help startups navigate this transition and ultimately build a track record of professional project development that attracts more traditional capital. It’s important, therefore, for companies to demonstrate open-mindedness and willingness to learn and apply best practices.

2. Do you have a “bankable” project?
If you’re looking for hybrid project financing, the project needs to be attractive on a standalone basis. Given the greater risk profile of early projects, hybrid project investors will be looking for higher project returns than traditional infrastructure investors.

If you’re too early, and the project isn’t likely to be cash flow positive, or will have suboptimal returns (i.e. less than mid-teens IRR), it’s most likely a sign that you're not ready for project finance, and taking it to an investor at this stage won’t lead to a fruitful conversation.

3. Are you telling the right story?
You might be a venture-backed company that’s so far been told to move fast and break things, but this approach won’t cut it as you mature towards project finance. Because returns at the project level are relatively fixed, these investors have a substantially smaller appetite for risk. If venture capital is focused on the upside, project finance is all about the downside.

In hybrid project finance, investors are looking at both - though to different extents - so you’ll need to find a way of telling both these narratives in a nuanced way. Remember that even in the most rigorous financial spaces, everything hinges on storytelling.

How you talk about risk also extends to the documents you share with the investor. If you’d like to get ahead, spend some time with your team putting together an FAQ document that anticipates common questions and lays out all the evidence to address concerns. For some investors, it may also be helpful to organize your materials in a draft investment memo; this not only saves the other party time, but also demonstrates your sophistication.

4. Do you have the right partners?
Take some time to reflect on your current support infrastructure. Your generalist lawyers and accountants might fit the bill for now, but you’ll probably need to engage specialized experts for this next phase of your business. Project finance structures can be more complex than venture capital structures, with, for example, detailed contracts, new legal structures, and cash waterfalls. You want to feel confident that your support infrastructure can deftly navigate this new terrain.

5. Do you have the pipeline?
Hybrid project finance investors won’t only look at the one project in front of you; they’ll want to see that you have a robust pipeline of projects in front of you as well. To validate and defend your pipeline, you’ll generally need to show something on paper, whether that’s contracts, LOIs, and MOUs, or substantial details about your potential partnerships, which could include notes from meetings.

But there are other considerations that go into a pipeline beyond customer conversations, like site selection. You should be able to talk through what sites you’re evaluating for future projects, and what the timelines for construction and operations are likely to be. Finally, your pipeline should have as much consistency as possible from project to project. While a truly cookie-cutter set of projects is not always realistic, project investors will look for replicability in project design, financing and legal structures, and development and operational processes. This replicability ensures that the time and resources both parties invest in the upfront diligence process will pay off efficiently for both of you.