Diverse-owned start-ups fight climate change with ‘bootstrap innovation’

Martha Montoya’s technology start-up is fighting climate change by improving inefficiencies in agriculture logistics, a lofty goal that could mean big savings for the industry’s largest investors. But the people Montoya’s really trying to help are those who are most often overlooked.

“This is about the farmers,” she says. “Anytime the supply chain breaks down, everybody gets paid – the distributor, the trucking company, everybody – except for the farmer.”

Three years ago, after working 27 years in sustainable agriculture, Montoya, a Colombian immigrant whose family once farmed coffee beans near Bogota, launched her company called Agtools to “democratise data about the market,” she says.

“From little farmers to major buyers,” Agtools, based near Los Angeles, is building a platform that provides information ranging from real-time open-market prices for produce to logistics updates for distribution.

“There’s a whole ecosystem around our tools,” Montoya says.

While Agtools has raised $1.8 million in seed funding, including $500,000 from a group of Latin American businesswomen, Montoya feels overlooked by Silicon Valley investors as she has sought access to the wider venture community.

“When we as minorities approach the investment world or the Silicon Valley world, they look at us and say, ‘Well, you haven’t proven yourself,’” Montoya says. “I’m sorry to say… but who cares? I don’t give a squat.”

As a female founder of a diverse-owned tech company, Montoya is part of the start-up market that venture has left underfunded. From 2015-20, Black and Latin American founders received 2.6 percent of total venture funding, according to a report on diversity from Crunchbase.

But the realities of climate change and its impact on marginalised communities, in particular, may force that trend to change.

Diverse-owned start-ups focused on climate-tech solutions are emerging on the frontline for creating new ways to invest capital into neighbourhoods that are most in need of weather-resilient investments.

In many cases, the founders of these start-ups are from the communities they are trying to improve, and many, such as Montoya, are discovering that their biggest obstacle to fighting climate change may be breaking venture’s cycle of unequal opportunity.

“At the end of the day, fighting climate change is about saving money and making money,” Montoya says. “When we become entrepreneurs, we always work the extra mile. This is an asset that very few have in this world.”

Hit with harder punches

Recent extreme weather events have confirmed what research has suggested for years: poorer communities across the US are bearing the brunt of climate change. A federal report on the National Climate Assessment in 2018 found that climate change is “exacerbating existing challenges to prosperity” in communities lacking economic mobility.

In some cases, residents of these communities are unexpectedly realizing how climate change is impacting where they live. In Jackson, Mississippi, where nearly a third of people live below the poverty line, an historic blizzard in February drove temperatures so low that water infrastructure became inoperable for weeks.“People who are already vulnerable, including lower income and other marginalised communities, have lower capacity to prepare for and cope with extreme weather and climate-related events,” the report stated.

Elsewhere, the effects of climate change are taking longer to settle in, but they are still proving detrimental. A growing phenomenon known as the “urban heat island effect” has caused sprawling neighborhoods in eastern Los Angeles to bake in scorching temperatures due to a lack of trees, parks and green spaces. California’s uncontrolled wildfires last year compounded this problem when dense smoke further choked the region.

“Due to climate change, mother nature’s throwing harder punches,” according to Matthew Kahn, an urban economist focused on climate-related issues at the National Bureau of Economic Research. “On average, the poor and minorities are disproportionately going to be hit with these punches.”

Kahn says this may sound like more bad news for the US’s marginalized communities, but “challenge and opportunity are two sides of the same coin.” As the technology used to fight climate change becomes cheaper, an opportunity is being created for entrepreneurs to “fill the gap” in underinvested communities.

“There may very well be positive percent, discounted-value projects in marginalized neighborhoods that have not yet been funded because, for some reason, venture capital can’t be accessed,” Kahn says.

‘Bootstrap innovation’

Donnel Baird launched Brooklyn-based BlocPower with this exact opportunity in mind.

Growing up in the Brooklyn neighborhood of Bedford-Stuyvesant in the 1980s, Baird says his parents, who immigrated from Guinea, heated his family’s apartment using the gas-powered kitchen stove because the building’s boiler was broken. His father had to make sure to leave a window open at night to release carbon monoxide buildup, Baird says.

“Very early on as a kid, I was exposed to the intersection between public health and poor heating and cooling energy equipment,” he says. Now, through BlocPower, Baird is helping “turn buildings into Teslas” in underinvested urban communities throughout the US, including the neighborhood where he grew up.

His start-up in February closed a $63 million Series A fundraising round, including $8 million in equity and $55 million in debt, to build a tech and financial platform that works with utility companies, local governments and landlords to retrofit apartments and houses with lighting upgrades, solar panels, smart thermostats, and efficient electric heating and air conditioning systems.

Despite the hefty funding, Baird says BlocPower still received some degree of skepticism from investors as other start-ups may when a business model is focused on customers from lower income communities: “A lot of investors said, ‘We agree with you morally, but just don’t think there’s enough money in the market.’”

In response, Baird has doubled down on the notion that BlocPower, which has now completed over 1,100 projects throughout the US, has been able to access underpenetrated markets.

“This is a massive opportunity to create jobs in communities that have historically been disenfranchised while fixing up their buildings to be modern, healthy and clean,” Baird says. “We’re looking for places where we’re not going to have competitors because the problems and challenges are so hard that it’s a deterrent to other folks.”

New York-based H/L Ventures is one of the investors to have bought into Baird’s vision, along with others including Goldman Sachs, the American Family Insurance Institute, Kapor Capital and CityRock Venture Partners.

Oliver Libby, a managing partner at H/L Ventures, says BlocPower’s financing agreements with entities other than the end users in lower income communities is “making it possible to deploy energy efficiency solutions very rapidly and at scale.”

Libby blames an “active engagement gap” as a reason why the venture community has left diverse-owned start-ups fighting climate change underfunded. He says many investors are not considering opportunities that exist far outside the world of Silicon Valley or Wall Street.

He adds that an understated key to BlocPower’s success has been having an entrepreneur in Baird, along with his team across the country, leading the way and who are representative of the communities receiving investments.

“It’s extremely important to have founders who represent the communities they’re trying to help,” Libby explains. “You have to have lived it and seen it to be able to fix it.”

Carla Walker-Miller, founder of Detroit-based Walker-Miller Energy Services, which also focuses on energy efficiency upgrades, agrees that diverse-owned start-ups focused on bringing climate change solutions to underinvested communities must position themselves as “gap finders” in the market. To build such a business requires “bootstrapping and innovation,” she says.

“One of the most important things we can do for marginalized and income-constrained communities is to help them understand the role that power and energy costs play in their economic realities and their health,” Walker-Miller says. “We have to give them the context that climate change is going to make everything more expensive and less reliable.”

Investors also must understand the need for “patient capital” for these investments to become successful opportunities, she adds. “A lot of the capital that’s being provided to address climate change issues is not patient.”

Pitfalls of ‘pattern matching’

Complexity is another obstacle that has kept venture capital from funding climate tech targeting lower income communities, according to Aaron Jacobson, a partner at New Enterprise Associates.

Start-ups providing services to end users who require another entity in the revenue stream to generate cashflow are always “more challenging businesses to get off the ground,” Jacobson says. NEA has previously backed climate-tech start-ups including Outrider, which is increasing efficiencies at manufacturing hubs using autonomous vehicles, and fuel cell technology developer Bloom Energy.

“What’s most important in the business model is who pays and ultimately what the value proposition is,” he says. “It’s always a simpler business model if you can just go to a customer and get them to pay you directly.”

Jacobson adds that there is increasing “creativity” around how to simplify and scale climate-tech financing solutions. “There are more and more business models where the user who’s getting the value may not be the one actually paying for it,” he says.

One example is the development of microgrids combined with energy storage, which is attracting utility companies as a way to add value to the existing grid by taking away part of the power demand.

Reginald Parker, who has founded Atlanta-based Optimal Tech Corp, is doing just that.

Optimal, which Parker says is preparing for its Series A fundraise, brings “environmental and energy justice from a community-based approach.” The start-up launched as a solar platform that has expanded to “facility management-as-a-service” and is bringing energy monitoring and control to “connected services at home,” Parker says.

“We act as a facility manager giving buildings and homes the information that’s useful to help manage upkeep,” he explains. “When hardware at home or in commercial buildings requires repairs or upgrades, our system will connect with vendors to send over their services.”

Parker agrees that business models targeting lower income communities can add complexities to financing solutions, but he says the venture community’s use of “pattern matching” to find the next big investment opportunity has created a cycle of thinking that excludes many diverse-owned start-ups that show potential for growth.

Pattern matching is a form of analysis investors use that looks at previous successes to inform future decision-making. Due to the funding gap for diverse-owned founders, it’s also a thought process that can prematurely eliminate the next generation of entrepreneurs.

“We’re not under-represented, we’re underestimated,” Parker says. “[Investors’] pattern matching capability is limited to understanding the sheer capability that exists inside their myopia.”

Brittany Davis, general partner at Backstage Capital, a Los Angeles-based investor that focuses on funding diverse-owned start-ups, says that pattern matching has been “particularly damaging” for diverse start-ups and for business models targeting lower-income communities. The lack of current success stories with these backgrounds “doesn’t compute” for investors making future projections.

“It’s something that’s hard to really point at, but I think it’s happening,” Davis says.

She adds that much of the funding that’s already backed climate-tech solutions has looked at the market from “the top down,” meaning customers who can and will pay the most have been targeted first.

“There’s still millions of people who need better solutions,” Davis says. “What many diverse-owned start-ups in this space are doing is focusing on the bottom-up part of the market, which is significant in size. That’s where money can be made.”

‘Right pitch to the right people’

Beyond venture capital firms, institutional investors, which typically manage multi-billion-dollar portfolios, are recognizing the need to fund climate change solutions “in a more organic way,” according to Liqian Ma, head of sustainable and impact investing research at Cambridge Associates, a Boston-based investment firm for institutional investors.

A few years ago, Ma says, institutional investors approached climate change and diverse investing opportunities as strategies “squarely within the impact bucket,” but both issues have recently received increased priority from investors.

Climate-tech, a technology sector that includes both physical assets and computer software seeking to improve the efficiency and pollution of various parts of the economy, is an area of growing interest among venture investors. While capital invested in climate-tech opportunities represented only 6 percent of all venture funding in 2018, according to a report from financial services firm PwC, annual investments grew from $418 million in 2018 to $16.3 billion in 2019.

“Our view is that these will be critical pieces and components for growth for a lot of our institutional portfolios,” Ma says.

“There’s a lot of innovation and development that needs to happen. Climate-tech includes massive industries.”

Mario Garcia, a co-founder of Substance Power & Mobility, a Los Angeles-based start-up that has raised $40,000 in initial funding so far and is developing batteries for specialized electric vehicles used at manufacturing plants, says his company is planning to approach the venture community with two strategies in mind.

He and his team have identified potential investors and separated them into two categories based on the type of incentive which is likely motivating them. One list of investors will receive a pitch from Substance that covers all of the profit and revenue generation that the start-up believes it will create. The other set of investors will receive a pitch “driven by social impact” about how Substance can help fight climate change.

“We’re sending the right pitch to the right people,” Garcia says. “We have a story for both of them.”

An extra push

To underscore the market opportunity that investing in lower income communities present, Montoya says investors should look at “the base of the pyramid” where there is strength in numbers.

“Those customers may not pay $100 for a product or service, but a lot of people may pay $50,” Montoya offers as an example. “You help marginalized communities with smaller dollars, but with large volumes. I’m not sure investors are understanding that.”

As she continues seeking growth capital for Agtools, Montoya says she still can’t help but feel frustrated when another agriculture-focused start-up, led by a non-diverse team, raises millions of dollars without even having a product in market.

Then when she thinks about when she has put her opportunity in front of investors and been overlooked, she responds: “I just have to ignore them. I’m going to spend too much energy trying to convince some of these guys.”

Montoya adds that there’s an additional benefit beyond the financial argument about what diverse-owned start-ups bring to the fight against climate change. She says that, because these companies work hard to secure funding, they tend to “go the extra mile” in building their businesses.

“The entrepreneurial spirit is so beautiful in our communities, and that spills into the work that we do,” Montoya says. “We just have a little bit of an extra push to do more.”

This article first appeared in affiliate title Venture Capital Journal.