Why buy when you can lease? Over the years, makers of everything from sewing machines to SUVs have relied on this type of pay-as-you-go financing to spur sales. The entrepreneur who pioneered the no-money-down formula for rooftop solar systems now wants to help spread it to other cleantech industries.
SunEdison founder Jigar Shah believes the key to unlocking the $1 trillion a year he estimates is needed over the next decade to wean the world from fossil fuels will be millions of projects worth $1 million, rather than thousands of $1 billion ones. Shah’s latest startup, Generate Capital, is financing on-site battery storage systems from a company called Stem at about 70 locations of the hotel chain Extended Stay America. It also funded the deployment of fuel-cell-powered forklifts made by Plug Power, whose customers include Walmart, Lowe’s, and Ikea.
San Francisco-based Generate has built a portfolio of projects worth about $500 million over two years. “All of the solutions we need to combat climate change already exist in the hands of entrepreneurs,” says Shah, who started the business with two former McKinsey consultants, Matan Friedman and Scott Jacobs. “Our job is to deliver these new technologies to people who can use them.”
Generate lined up funding for a water treatment system at a plant Lagunitas Brewing is expanding in Azusa, Calif. Like all beer brewers, Lagunitas produces a lot of what’s called “high-strength waste,” which municipal water treatment plants often can’t handle. (A Lagunitas brewery in Petaluma had to truck its waste 50 miles to Oakland.) “We spent two years vetting treatment plants of every type, and nothing was scalable,” says CFO Leon Sharyon.
Then, in 2013, Lagunitas got a call from Cambrian Innovation, a Boston-based company that had developed a system in which bioengineered microbes consume most of the contaminants in wastewater, while belching out methane that can be harnessed for power generation. The whole process takes place in a tricked-out shipping container. (Beer drinkers take note: The treated water isn’t used for brewing.) A brewer—or vintner or dairy farmer—can get more containers as their operation grows. “We’re continuously upgrading and improving the equipment and can add more at any time,” says Cambrian Chief Executive Officer Matthew Silver.
Generate is paying Cambrian to install its equipment in Azusa, and will charge Lagunitas a monthly fee for the treated water and power it receives. Sharyon figures the brewer will save about $1 million a year in utility bills. “We’re getting wastewater treatment service without the risk of ownership,” he says.
Equipment leases on everything from solar rooftops to automobiles to software rose 1.3 percent in the U.S. in 2016, to more than $1 trillion, according to estimates from the Equipment Leasing & Finance Association. Generate is targeting a segment of the market traditional lenders have ignored, either because they lack the expertise in cleantech or because the small projects are not worth their while.
So how does Generate convince its own investors that certain projects are worth funding? “We get deep down into the components of the battery cell, pore over the warranty, test the effectiveness of software and the strength of the revenue streams,” says Friedman, Generate’s chief investment officer, describing the due diligence process on the Stem projects.
“Generate helps us close deals,” says John Carrington, CEO of Stem, which has been working with Generate since 2014. “They provide the capital that’s enabled us to greatly accelerate with customer demand.”
Generate’s three co-founders provide a check on each other to prevent what happened to SunEdison, which racked up $16 billion in debt and filed for bankruptcy this year, seven years after Shah left the company. Says Friedman: “Jigar finds the projects, Scott gets the funds, and I’m in the middle trying to figure out which ones work.”
CEO Jacobs says the biggest attraction for potential customers is that his firm removes some of the worry that comes with buying into new technology. “Now they know someone else is managing and taking the risk,” he says.
Early adopters such as Lagunitas also get bragging rights for running their business in a sustainable way. A popular measure of a brewer’s efficiency is the water ratio. The gold standard among craft brewers is about 4.5 gallons of water per gallon of beer. A “sloppy brewer” uses 6 or 7 gallons, Sharyon says. “With Cambrian, we’re down to 2.5 gallons. That’s significant savings when you’re talking about millions of gallons a year. It means a lot more in California.”
The bottom line: San Francisco’s Generate Capital has lined up about $500 million in financing for green infrastructure projects in two years.