The fall of Silicon Valley Bank (SVB) shook the venture capital community to its core. The four-decade long reign of SVB projected an image of long-term stability. Of course, we know that nothing is infallible, and a series of bad decision-making and poorly managed loans brought SVB to its knees.
And yet venture capital firms have secured their centrality in the future of climate tech financing. Their access to funds and expertise in successfully scaling fledgling businesses are second to none. But they are a part of a larger problem, having actively contributed to SVB’s rapid collapse.
Franz Hochstrasser, CEO and co-founder of online investment platform Raise Green, told GreenBiz, "I was watching in awe at how rapidly the venture community mobilized to cripple the bank in a way that was, frankly, to me, an out of world perspective. Unnecessary." Established firms such as Founders Fund advised portfolio companies to transfer money out of SVB to more secure banks. Word spread and triggered a bank run on SVB, thus rapidly accelerating its fall.
The reason for this self-sabotage, according to Hochstrasser, boils down to groupthink. He’s not alone in this take, with many VCs condemning their associates for the crash in the first place.
Government intervention ultimately prevented an economic calamity akin to that of the 2008 recession, and one month onward, all seems back to normal. But should we allow that proverbial dust to settle? SVB, a stalwart of the climate tech funding world, overextended itself and in doing so, it exposed cracks in the wobbly, homogenous venture debt financing model dominating Silicon Valley, where only a precious few can secure investments through a VC firm.
To prevent a similar situation from repeating in the future and ensure a well-balanced marketplace, there needs to be a diverse portfolio of investing models, replete with traditional routes alongside new or less widely used models, according to Yin Lu, partner at early stage climate tech fund MCJ Collective. "The diversity of funding is an ecosystem that needs to be better understood and leveraged."
So let’s explore an alternative model: democratized venture financing, which grants access to previously restricted or excluded groups of people to invest capital in startups. Lu likened venture capital firms to that of an ivory tower, out of reach to the majority. Instead, Lu posited, the phrase "It takes a village" should be taken to heart to successfully run and scale a startup in the climate sector. In this view, expanding democratized venture financing would increase the size and scope of the "village" contributing to a startup’s funding. It would also increase access by different demographics to contribute to the climate startup ecosystem, according to proponents.
SVB, a stalwart of the climate tech funding world, overextended itself and in doing so, it exposed cracks in the wobbly, homogenous venture debt financing model dominating Silicon Valley.
For now, however, the top two demographics dominating venture capital are white and Asian men — comprising around 78 percent of venture capitalists. Pitchbook reported that only 2.2 percent of funding went to women-led startups in 2022, and only 2.6 percent went to Black and Latinx founders, regardless of gender breakdown.
Much of this is due to what is called behavioral bias in financing, which manifests in one group of people (in this case, men) unconsciously favoring enterprises run by other, similar looking people (again, men, in this example).
That makeup directly affects the demographics of founders receiving investments. Dimitry Gershenson, CEO and co-founder of revenue-based financing company Enduring Planet, told GreenBiz that venture debt is reserved for "folks who are backed by the most top tier VCs, who, back like 1 percent BIPOC founders and barely any women." A 2021 study, for instance, found that men tend to more harshly scrutinize pitch decks written by women and people of color.
This is why democratized financing in the form of crowdfunding — an investing model enabled by a digital platform that allows the public to contribute capital to startups — is an intriguing alternative for those who want to see more types of people engaged in the process of supporting startups.
Crowdfunding removes barriers imposed by the Securities and Exchange Commission's accreditation requirements for prospective investors, which include income minimums (often $200,000 to $300,000 within the last two years), the possession of certain professional certifications or credentials, and current employment within a private fund. It also eliminates the role of the venture capital firm altogether, instead allowing people of any income level, institutional affiliation or employment status to financially support a startup. And due to the behavioral bias described above, these diverse startup funders may also be more likely to back startup founders who look like themselves.
Across industries, crowdfunding services as varied as Kickstarter, GoFundMe and Patreon were collectively valued at $12.27 billion in 2019 and estimated to grow to $25.8 billion by 2026.
The diversity of funding is an ecosystem that needs to be better understood and leveraged.
Within climate financing specifically, Raise Green is one investment platform that champions a crowdfunding investment model.
"Raise Green is literally designed to pull people off of the sidelines by giving them a way that they can invest in climate projects and clean energy," said Hochstrasser, who worked on climate and energy for President Barack Obama’s administration for eight years. Raise Green accepts investments as low as $100 to provide marginalized groups traditionally excluded from venture capital financing with access to the investment world.
The people on the sidelines are an untapped resource, according to Hochstrasser, charged with the drive "to make our society more resilient to the impacts of climate change." Companies listed on Raise Green include electric vehicle startup Stak Mobility, emissions capture company Greener Process Systems and sustainable materials venture Applied Bioplastics.
An older example of a crowdfunding platform is Kiva, which launched in 2005 to facilitate micro-loans in the developing world. Approaching financing from the position of a nonprofit, Kiva’s process is somewhat different. Companies apply to Kiva for a loan and one of the organization's lending partners reviews the applications. Once the application is approved, the company’s total fundraising goal is made public. Kiva then facilitates crowdfunding by sharing the startup’s story to potential investors. Individuals can then contribute to help the startup raise funds.
For example, Olusheno is a Namibian enterprise aiming to provide solar-light installations to a community not connected to a local power grid. The company applied for a $100,000 loan and is given a set amount of time to crowdfund that capital.
However, both Raise Green and Kiva reside in a marketplace hindered by low public awareness and dominated by venture debt financing. "Exposure is the biggest barrier to adoption," Hochstrasser said about democratized venture capital. Lu raised a similar point, explaining that within the climate space, many startups don’t even consider crowdfunding as a viable financing option.
"People just need to be made aware of the other funding options out there relevant to their stage of growth and relevant to the type of technology they’re working on," concluded Lu.