One startup’s big idea to boost the green revolution: lots of small financing

December 5, 2014, 12:04 PM UTC

The British economist E.F. Schumacher in 1973 published Small Is Beautiful, a seminal, best-selling book that championed small-scale technologies that empower people. His ideas never caught on in a big way, but perhaps he was just ahead of his time. Today American is moving—albeit slowly—towards a more decentralized infrastructure.

Big, centralized utilities are no longer the only game in town. More than half a million U.S. homes and businesses have gone solar, according the to the Solar Energy Industry Association. A smaller number of homes and businesses are hooking up to micro-grids with back-up battery power to weather power-outages. And the movement isn’t just limited to energy. Many Americans are embracing food produced by local, sustainable farms rather than by giant agribusinesses. Some businesses, worried about droughts and pollution, are starting to generate their own clean water.

Yet, those who favor a Small is Beautiful world face a dilemma. A decentralized economy will not grow to scale without significant capital investment. Explains Scott Jacobs, the CEO and a co-founder of the company who previously helped found McKinsey’s clean tech practice and EFW, a resource-focused investment firm: “Big banks aren’t interested in putting in the heavy lifting it takes to vet hundreds and thousands of small projects. Or they simply don’t understand this new market.”

That’s where Jacobs’ new San Francisco start-up comes in. The company, called Generate Capital, will finance small- and medium-sized projects in energy, storage, clean water, combined heat and power, efficiency, and more. So far Generate Capital has raised money from big-time investors such as Jason Fish, co-founder of Alliance Partners, a Chevy Chase asset management firm, and Liesel Pritzker Simmons, an heiress of Chicago’s Pritzer family who runs the Blue Haven Initiative, an family investment firm.

Generate Capital was co-founded by Jigar Shah, who previously started SunEdison(SUNE), a financer of solar projects with a market cap today of $5.6 billion. SunEdison grew by providing “no money down” solutions to commercial solar projects. The company would buy the equipment, and customers would shell out monthly “lease” payments and therefore avoid putting up big chunks of cash for the solar panels up front. Says Shah: “You have to believe that the success of the solar industry is the ability to buy with no money down. So we’re going to apply that same finance model to all the other resource efficiency technologies.”

Shah thinks the company can get healthy returns from financing these sectors by making hundreds of investments as small as $1 million each. So far the company is underwriting projects in energy storage and solar hot water for businesses, municipalities, and utilities.

It does face some stiff challenges. Because Generate Capital will be chasing many small deals, the frictional costs could be high and the complexity great. Management will need to be super disciplined and keep costs down. One example, says Jason Fish, who is also chairman of the company’s board, is to not “create financing on a bespoke basis. The company will need to do standardized deal making.” Adds Shah: “We’re going to ask everyone to use the same loan document. I’ll probably lose a few deals because I won’t change the contract.”

It’s obviously way too early in the game to determine whether Generate Capital will succeed, but E.F Schumacher must be be smiling.