Who is the ideal investor for an early-stage NBS carbon project?
Many nature-based carbon project developers bootstrap the first $500-$1M in project costs to get through a feasibility study, or rely on grants and philanthropic funding to cover those early costs. That money can be hard to access and slow.
If we want to launch a lot more high-quality NBS projects, where could more very early capital come from?
Here’s the list I’ve been keeping of investor (or funder) attributes that would make a good match for very early-stage nature-based carbon projects:
- Fast and flexible: Due diligence expectations have to fit the level of project maturity. While making sure a project has some path to financial stability is important, putting an early-stage, lean team through a due diligence process more appropriate for a mature infrastructure developer can be so costly that it can kill a project. Early money has to move fast and be flexible.
- Comfortable with (high) risk: It’s a long road from pre-feasibility to a large-scale NBS project consistently issuing credits. Some projects ultimately won’t be a good fit for carbon finance. Investors who come in at the very early-stage have to understand this.
- Patient: Nature’s timelines don’t match investors’ typical timelines. NBS projects take years to develop and begin issuing credits in volume. The best early-stage investors will be patient.
- Friendly (or concessional): At current VCM prices, I believe few NBS carbon projects can provide market-rate returns; certainly not at the rate that an investor coming in early, and therefore taking on a lot of risk, might normally expect. Do we need investors who are willing to take below market-rate returns, and if so, who are they?
My read is that few impact investment funds are willing to take a hit on returns, and DFIs rarely satisfy criteria #1.
(One caveat here may be projects with revenue streams in addition to carbon – that’s a whole other discussion though.)
I’m curious if the above aligns with what others see in this space?
What other investor attributes would you add to the list? And, perhaps most important, what kind of investors fit that description?
I look at the list and wonder:
Does very early-stage capital to develop a NBS carbon project need to be philanthropic or “venture philanthropy”? At least until the market gets more comfortable with how NBS carbon projects work? Are there learnings from early days in renewable energy that can apply here?