Among entrepreneurs, there’s a dreaded place called the Valley of Death. That’s where startup companies go when they run out of funding before making money on their own, and it’s an especially common fate for clean-energy startups, like manufacturers of solar panels and wind turbines.
Those technologies are often pricier, riskier, and slower to produce revenue than, say, an app built on lines of code, which means they must find so-called patient capital from investors who are not expecting an immediate financial return.
But what if that early-stage, high-risk financing could instead come from philanthropists, who aren’t driven by profit? Later, traditional investors could step in and supply continued funding.
That’s the concept behind PRIME Coalition, a year-old Cambridge nonprofit that has pooled $1 million from wealthy donors, including Hollywood actors Will and Jada Pinkett Smith, as seed money for its first investment: an energy storage startup company.
“It doesn’t sound right at first to be supporting a venture that’s trying to be commercially viable with philanthropic dollars,” said Liesel Pritzker Simmons, a mega-millionaire heiress of the Hyatt Hotels fortune who cofounded a Cambridge investment firm, Blue Haven Initiative, that helps fund PRIME.
“But we think philanthropic dollars should be taking this kind of risk,” Pritzker said, “and should be used to support these kinds of companies.”
PRIME rethinks the traditional definition of charitable work and charitable giving. Its founder, 30-year-old MIT graduate Sarah Kearney, argues that companies whose products or services reduce greenhouse gases are doing a social good, just like soup kitchens and homeless shelters, so they should be able to receive philanthropic funding. In this case, the social benefits include conserving the environment and fighting climate change.
The group searches for early-stage alternative energy companies in the United States that struggle to attract money from venture capital firms, which typically don’t want to wait more than five to seven years to find out if their bets will pay off.
It then locates philanthropists or socially minded for-profit investors to fund them. Those could include charitable foundations, investment offices of wealthy families, and donor-advised funds.
“We want charitable investors to take any company we’re supporting to the next level to succeed in the commercial marketplace,” Kearney said.
PRIME’s organizational operating costs are funded by several foundations and nonprofits.
At a clean-energy investment summit at the White House Tuesday, PRIME will announce the first company it has invested in: Quidnet Energy, a Santa Rosa, Calif., firm that is developing a facility in West Texas designed to store solar and wind energy for use when the sun isn’t shining and the wind isn’t blowing.
To fund Quidnet’s pilot project, PRIME has pooled money from the Sorenson Impact Foundation in Salt Lake City, the Will & Jada Smith Family Foundation in Los Angeles, and two anonymous angel investors. Some of the donors will receive charitable tax breaks even though they are funding a for-profit enterprise.
Peter Rothstein, president of the New England Clean Energy Council, said philanthropic funding “can make a significant dent” in filling the need for early-stage capital for clean-tech companies.
“It addresses the early stage of innovation that requires capital to be patient and grease the skids,” he said, “so that other capital . . . can follow.”
PRIME offers funders several ways to provide financing.
They can make a for-profit investment aimed not just at making money but supporting a company doing environmentally conscious work; that approach comes with no charitable tax break.
They can make a charitable grant, including a “recoverable grant” that could return its principal plus interest to be re-invested in other charitable causes.
Or they can make a “program-related investment,” or PRI, in which donors receive a charitable tax break even though they are funding a for-profit enterprise.
The IRS describes typical examples of PRIs as no-interest or low-interest loans to needy students, or investments in businesses in deteriorated urban neighborhoods intended to spur employment. PRIs are also used, for example, by the Bill & Melinda Gates Foundation to make charitable investments in pharmaceutical companies helping develop vaccines for the poor.
But despite being allowed by the tax code since 1969, PRIs are used infrequently by smaller foundations and individual donors, and rarely in the clean-tech field, because they require complicated legal and financing expertise and do not fit the traditional model of charitable giving.
Yet Kearney says PRIs are uniquely well-designed to address the funding deficit plaguing clean-tech entrepreneurs.
“Not every company is a good fit for traditional venture capital at a very early stage,” Kearney said. “But philanthropists are in this unique position of not being constrained by anything except the tax code.”