The funding model Canada should borrow from the United States

By pooling money from grants, philanthropists as well as equity commitments, U.S.-based Azolla Ventures is able to catalyze the next generation of climate tech companies. Co-founder Amy Duffuor explains how this blended finance model helps hard-tech startups scale their solutions.

Some of the most promising climate solutions are at risk of never being implemented. Novel devices, materials, infrastructure and other physical solutions (known as hard tech) have the potential to play a major role in cutting global carbon emissions. But they require a lot of capital and time to develop — these solutions often don’t fit the typical timeframes of most funds. As a result, many ventures struggle to gain the investment they need to scale.

That is something investor Amy Duffuor, co-founder and general partner at Massachusetts-based Azolla Ventures, is actively working to address. “If we don’t solve climate change, nothing else matters,” she says. Duffuor takes a different approach to funding change. Inspired by models she saw when she was working in Southeast Asia, Duffuor derisks the investment and unlocks additional investment opportunities that would otherwise not be possible by pooling money from a number of sources, such as grants, mission-oriented family offices, philanthropists as well as typical equity commitments. This finance mix allows the U.S.$240-million blended fund to set 15-year terms with up to four years of extension — a time frame that helps catalyze the next generation of climate tech companies.

This innovative blended model doesn’t currently exist in Canada. But with a considerable capital gap for early-stage hard-tech companies in Canada, it could be worth considering as a way to help bridge that gap.

Here, Duffuor shares the benefits of this approach, and how it can help startups scale.

You’ve taken an unconventional career path. For your master’s degree, you specialized in migration studies, you’ve worked with entrepreneurs in Singapore and you’ve also worked as a management consultant as well as an investment banker. How have those experiences influenced the way that you make investment decisions?

Climate impacts everything: It impacts our health; it impacts who moves from place to place; it’s an intersectional problem and it’s going to require an intersectional solution. So that’s where my migration studies degree comes in. For instance, if you are in a house that has no air conditioning because you cannot afford it due to rising energy costs, how can you learn if you are at risk of heat stroke or heat exhaustion? It impacts what we eat and how we eat it. It’s not one thing. It is everything. I take a very human-centred approach to it and I’m drawn to solutions that have these intersectional impacts, whether that’s different climate verticals or whether it touches climate mitigation, adaptation and resilience.

Can you give an example of a venture from your portfolio that is taking an intersectional approach?

There’s a carbon capture company called Carbon Reform based in Philadelphia. What made Carbon Reform interesting to me is that they build modular carbon capture systems for commercial buildings; they retrofit into the HVAC system of a building. It’s not only capturing and sequestering carbon, it’s also scrubbing VOCs and particulates from the air. Improving indoor air quality can lead to better cognitive functions that could be important for schools and office buildings. It’s an example of a technology that has a health impact while also reducing greenhouse gases.

What inspired you to co-found Azolla Ventures in 2021?

I love being on the ground level where somebody’s thinking through their technology — the market entry and working through their unit economics. I was looking for a venture capital firm that was thinking about the climate crisis differently and approaching it differently. When I was in Singapore, there were a lot of more innovative financing structures, layering different types of capital from multiple sources. When I met my colleagues, I thought they were doing something really interesting that was purposefully envisioning a different way to support early-stage climate tech companies. I like to say to people that this is an experiment. There are some things that we had to learn along the way, but there’s some secret sauce that is working.

Catalytic capital can clearly put companies on a fast track by derisking investments. Can you describe your model and how it works?

Catalytic capital takes on disproportionate risk because it is structurally more patient and flexible capital. It is better matched to the risk and reward profile of early-stage hard-tech companies, which are often more capital intensive and require a longer investing horizon. It can be a tool to bridge capital gaps and drive impact that may not otherwise have been possible. Azolla brings together catalytic capital and more conventional venture capital. In our case, catalytic capital is primarily tax exempt in the U.S. So it can come in many different mechanisms and forms, such as traditional grants, recoverable grants and mission-related investments.

The blended model creates an interesting dynamic whereby you can meet investors where they’re at; they can use different pockets of money to invest in climate tech startups. This also allowed us to have a larger fund size. That’s important because even the most successful climate tech companies are going to encounter roadblocks. We want to make sure that we can support them.

How has Azolla Venture’s blended approach helped derisk a venture that had a promising solution?

In 2021 at Prime Impact Funds [which is a U.S.$50-million catalytic capital fund where Amy Duffuor is also a managing director], we led a seed-round investment into a carbon oxygen battery company called Noon Energy. They’re focusing on long duration energy storage, storing energy north of 100 hours. At the time, it was very challenging to convince other investors to see the value in long duration energy storage. Everyone was like why do we need to store energy for more than six to seven hours? But of course, a year or so later, California came out with their proclamation. And when they went out to raise their Series A in 2023, they raised U.S.$28 million.

How do you assess whether a company is a good fit?

All initial investments need to meet three criteria. To begin with, every company that we invest in needs to have the potential to achieve at least a half a gigaton of greenhouse emissions reductions by 2050. Also, every single financing round is subject to what we call our additionality mandate, which means that our presence is necessary for that company to achieve optimal climate impact. There could be a capital gap, we could be the only deep, climate-focused investor or maybe someone is going to put down punitive terms that will harm impact. But if it’s an oversubscribed round, we likely won’t participate — it’s just not the best use of our catalytic capital.

Plus, companies need to be able to attract downstream commercial capital from other VCs or strategics. It does no good for us to invest in a technology if there’s no one to help continue the financing to help a company scale. It’s quite a unique and involved process.

How do you find ventures that are in that sweet spot where they have a promising technology but are struggling to secure funding?

We’ve got amazing partners, like MaRS. Being part of your community and being linked in with a lot of fellowship programs like Chain Reactions Innovations, Breakthrough Energy Fellows, The Activate Fellowship and Deep Science Ventures in the U.K. really helps. We’re not afraid of going into university labs to spin out technologies. We try to make our network very broad. We go to a lot of events, and we get referrals and work to ensure that the VCs in our network are as diverse as possible — because if you have one type of VC archetype then those are going to be the types of companies that you see.

The fund invests in early-stage startups that have the potential to reduce a gigaton of emissions by 2050 but they may not be at a stage where they are reducing emissions yet. How do you ensure that the limited partners who typically have no obligation to provide resources beyond the capital invested are receiving the expected return?

We don’t talk about returns because we don’t want that to be the focus. It’s really supposed to be focused on impact. That’s where we direct the energy of our limited partners as well. Our LPs are not looking at how many GHG emissions reductions have happened because it’s just too early for these companies. Our LPs have given us the money and they trust us. We keep them abreast of where companies are from their impact metrics and targets.

So let’s use a battery company as an example. There are going to be certain developmental milestones that they need to hit which then should translate into deployment milestones. How many batteries are they going to be selling? How many megawatt hours? What are the various market applications? These predetermined milestones should translate into greenhouse gas emissions reduction. To meet our LPs’ goals, we think it’s important to create a culture from ground zero and embed that impact ethos in the ventures. This is why we tend to take board seats — we’re usually board directors or board observers. We like to take pretty active governance roles by design.

It’s been a tumultuous couple of months. What’s your prognosis for climate tech in the coming years?

There will absolutely be headwinds, but I think high-quality companies that have strong business fundamentals will have a better time weathering them. We try to take a balanced view when we’re looking for companies. But when there are challenges that means there are opportunities. It’s going to be a really interesting time. We’re not exactly sure where things are going but during times of challenge creativity really rises to the top.

Are you a climate tech investor interested in getting connected to the MaRS Climate team? Reach out to Leah Perry, senior manager in cleantech at MaRS, to learn more.

Photo courtesy of Azolla Ventures