Episode 172: Catalytic Capital, Additionality, and Climate Investing with Prime Impact Fund's, Amy Duffuor

Today's guest is Amy Duffuor, Principal at Prime Impact Fund. I've interviewed some of her colleagues early on in the My Climate Journey days, so it was exciting to hear how Prime Impact Fund has grown since 2018 and learn about Amy's role at the company. Plus we dive into additionality, catalytic v. concessionary capital, and the importance of climate-aligned impact investing.

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For people that haven't benefited from recording two episodes with two of your colleagues, what is Prime and what are the different legs of the stool that are underneath the Prime umbrella?

So, I work for Prime Impact Fund, which is an investment initiative of Prime Coalition, which is a 501[c][3] nonprofit, and Prime Coalition's mission is to partner with philanthropists to use catalytic capital to drive climate innovation. So you had Sarah [Kearney] on the show, so Prime Coalition was founded by Sarah, who saw that at the time, in 2013, 2014, there were very little venture dollars that were flowing into the climate space. And so, I mean, we can probably guess why that is, Cleantech 1.0 happened, people were a lot more reticent about making more investments and she thought, "Okay, instead of us focusing on why venture isn't stepping up to the plate, why don't we look at US family foundations and offices," which at that time, the asset class was about three or four times larger than the venture asset class, "... and partner with those individuals to really drive climate innovation."

And so she really made it her mission to partner with philanthropists to drive climate innovation, which happens in a number of different ways, and one of those ways is through catalytic investments. So Prime Impact Fund is an investment initiative of Prime Coalition, which sole focus is as an early-stage VC fund is to invest in technology companies with the potential for gigaton-scale climate impact. So that's kinda the relationship between the two organizations, although we all think of ourselves as one team.

What was it about the Prime model that spoke to you?

So when I first met Sarah and Matthew [Nordan], they talked a lot about how there could be a different way, in terms of how we can support climate tech companies, that they're often companies that are really beyond government grants but are too risky for mainstream VCs, and that we can use this special color of capital, catalytic capital. The ultimate vision was a blended type investment vehicle that could really bring together catalytic capital and more sort of conventional venture capital, that not only catalyzes and de-risks early-stage climate technologies, but helps them scale. I thought that was a really bold vision, particularly in the climate space because I hadn't seen that around as something long term that they were aspiring to and that was one of the key reasons, alongside the use of additionality, which I think is really unique in the model, that really sealed the deal for me.

Can you talk a little bit about that use of additionality and what that means and how it works?

Yeah, so additionality is interesting because it's actually, it's a bit of a shifting definition, but ultimately, the basic idea is that an investment wouldn't have come together, sort of but for our intervention, and this can manifest in a lot of ways. It could mean that, you know, a company is too early for mainstream funders, so we're not afraid of going into university labs. It could mean that there isn't a kind of a deep climate investor around the table that can help prioritize optimal climate impact, or the terms that are being offered aren't favorable to a founder or the timelines, mean that other investors can't participate. There are lots of different ways that additionality manifests, but ultimately, it means that we're not chasing hot deals. So if there is a round whereby it's 3X oversubscribed and you've got Andreessen Horowitz and Breakthrough Energy Ventures and USV around the table, you know, we're likely not to participate, just because it's not the best use of our catalytic capital, which we wanna, again, use to de-risk early-stage climate technologies for follow-on investors.

When Prime started, frankly, additionality was as simple as no one else is willing to fund this company, so we are so we can move forward. Literally in 2013 and 2014, when Prime first operated in deal-by-deal syndication mode, that was the case. Now, there's a ton of money pouring into climate, so additionality is shifting in the sense that it's less about a round not coming together for one explicit reason, but more about us focusing our efforts in more overlooked kinds of areas or verticals within the climate space. And now we've seen that sometimes our involvement in a company can actually spur other investors off the sidelines to participate, which we think is really great and an important field-building aspect to additionality and just Prime's approach to climate investing in general.

Now, given how broad climate investing is, I mean, it essentially touches every sector of every geography of our global economy, which verticals do you focus on, if you even think about it that way, how broad and, and across what areas?

So I think the first thing to note is that our North Star of investment criteria is gigaton-scale climate impact, so a company has to have the potential to reduce at least half a gigaton of greenhouse gas emissions by 2050. So when we think about verticals or sub-sectors, it's ones that can really achieve that, so when you think about transportation or buildings or agriculture, you know, there are lots of different areas, but then there are nuances within that. So in agriculture, for example, a lot of money has been flowing into agtech, but it's primarily down streamed towards the end consumer, think of all the alternative protein companies, think of Instacart. There's less money that's going more midstream and upstream closer to the producer, and so that can be an area where there's more white space for catalytic capital to play, you know, I guess no pun intended, a more catalytic role.

Other overlooked areas, too, you know, when we think about places we wanna focus on, I mean, energy storage, long-duration energy storage is a place that we've recently made an investment. I think it's funny, we invested in a direct air carbon capture company called Verdox. This is about two years ago. We actually see so many DAC companies that are coming to us now, so when I talk about additionality being shifting, maybe in a year or two years, there's gonna be a lot of conventional venture money that's pouring into those companies, which I totally wouldn't have thought. And that may not be the most appropriate place for us to play in terms of catalytic capital. Actually, you know, another good example is electric aviation. So when we were in deal-by-deal syndication mode, we backed a company called Weight Electric. Now we see a ton of money that's been pouring into electric aviation companies, whether it's ZeroAvia or Universal Hydrogen. So when we think about a kind of additionality in overlooked areas, that really shifts over time.

You talked about how there's kind of a sweet spot, where if it's too much access to capital, then not a fit for Prime. And if it's too un-fundable, then not a fit for Prime. I guess my question is, what are some reasons why a company would not have access to capital in this frothy market that you think are a good fit for Prime? And then what are some reasons why a company would not have access to capital in this frothy market that you think would either be a flag or would make them less in your sweet spot?

I think that there's a lot of capital that's flowing in this space. What we found is that companies whereby there is more capital that's required to achieve those additional proof points, I mean, one of the areas that we play within Prime is primarily in hardware-based companies in the climate space. I mean, they require more capital oftentimes and they have a longer investing horizon, so kind of in the s- the spirit of that, people that are focusing on, you know, different blue tech solutions, the ocean is very unknown when you're trying to do any sorts of pilots, or there's a lot of concern now around the ecological impacts and, frankly, impacts of coastal communities. That may mean people are really shying away in those pre-seed, seed, and Series A rounds, which are the rounds that we typically tend to participate in.

So things like ocean sequestration or ocean farming, or wave energy, I think all areas that people have tried shy away from, or even decarbonizing Maritime shipping. So I think those are places that Prime could play a really helpful role, so while there's money coming into the space, you know, a lot of that capital is either coming in at a point in time, even if it's early stage, where certain things have been de-risked, or you know, could have more of a software bent.

So you know, there's a lot of money that's now pouring into some of these carbon marketplaces. You know, think, you know, Puro.earth or, or Nori, and so we don't necessarily believe that they're bad investment at all. We just... we wanna make sure that we're trying to fill a capital gap, and think the last thing I'll say on that is us trying to fill a capital gap with catalytic capital and kind of focusing on these areas doesn't mean actually that conventional venture investors or strategics don't invest alongside of us. I think sometimes that's a nuance that gets lost because we've only invested solo once. We think it's hazardous to your health, building syndicates are really important, and oftentimes, those syndicates have people that have very complementary skillsets and may have other conventional venture investors. And so it's really kind of a nuanced space, Jason, that's also evolving too. If you do another one of these in two years with someone from Prime [laughs] and you ask about a kind of additionality in overlooked areas, the answer may be different because it's always shifting.

What is the difference between the definition of concessionary and the definition of catalytic?

I would say that we are not concessionary at all, I think because the key thing when you think about concessionary, I think that's both in terms of risk, but then also in terms of return. And I would say that, if anything, we... concessionary and risk, we take a disproportionate amount of risk. I wouldn't necessarily say in our mindset that it h- links to return, understanding that the North Star is the gigaton-scale climate impact piece. And the reason we take issue with it is that we use a special color of capital doesn't mean that companies can't advance to become very large-scale, self-sustaining enterprises or do it relatively quickly.

I mean a good example of this is out of Prime Impact Fund, our first investment company called Lilac Solutions, it's a lithium extraction startup, lithium is very critical for the exponential growth in the electric vehicle market. We invested, you know, late in 2018. Earlier last year, so February 2020, they had raised a $20 million Series A round that was co-led by Breakthrough Energy Ventures and The Engine, MIT's tough tech fund, about 16 months after our investment, and they're going on to do amazing, amazing things, understanding the critical gap that they're playing within the lithium supply chain.

So yeah, I guess I'd just say that just because we use that, this type of capital, again, it's not concessionary necessarily on any sort of return perspective, but it's really on risk. We're taking more risks, it's high risk, potentially high reward ventures. That's part of the thesis that really underpins what Prime is trying to do.

Hypothetically if a situation arose where climate impact and commercial success were at odds and not directly aligned at that fork in the road, what would you do?

So thankfully, we have not gotten to that fork in the road, but that's also because Prime Impact Fund started making investments in late 2018. It's still pretty early on in the fund's life. I can imagine some of these more challenging decisions will happen later on, but you know, if there is a very lucrative commercial sort of opportunity and it is going to be harmful from a climate impact perspective, we're always going to choose to focus on the large-scale climate impact. I think that that's the clear case, but there's obviously a lot of grays and you know, grays and ebbs and flows in between and that will obviously happen on a case-by-case basis, but we are unapologetically impact first. That is the mission, that is the reason these philanthropists, high-net-worth individuals, family offices, and foundations have interested us with this special color of capital, and we're gonna stay true to that.

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