Resources

Generate Capital Takes Road Less Traveled in Sustainable Infrastructure, a 2020 Wall Street Journal article.
Learn more about Generate Capital.

Guests

Host: Rebekah Emanuel, Head of Social Entrepreneurship, Harvard Innovation Labs
Guest: Scott Jacobs, CEO, Generate Capital

Transcript

Scott Jacobs:
There are a lot of these old technologies, as you said, that could be applied to existing problems with a different business model if someone were just willing to create that different business model and design a company to support that kind of model. That's the fly wheel we create when we get involved in anaerobic digesters, when we get involved in fuel cells, when we get involved in evaporative cooling technologies or battery storage or electric buses.

Rebekah Emanuel:
I'm Rebekah Emanuel, and this is Climate Rising, a podcast from Harvard Business School. We explore the business implications and opportunities of climate change. This season of Climate Rising, we focus on entrepreneurship tackling climate change. I'm the director of social entrepreneurship at Harvard Innovation Labs. I work with current and future entrepreneurs every day.

Anyone who runs a business knows that it's not just the great ideas that matter, it's also getting the right kind of financial support to bring ideas to fruition. Take today's guest, Scott Jacobs. He's the co-founder and CEO of the infrastructure investment and operating platform Generate Capital. Generate invests in and operates technologies. These are things like distributed clean energy generation, or energy efficiency, waste transformation. These technologies are all-important in the efforts to stop climate change, but they aren't necessarily new.

Generate's success doesn't rely on fancy tech, and it also doesn't rely on huge sums of money from venture capital. As we'll hear from Scott, Generate's key to success involves applying new business models and new financing models to tried and true, that's old technology and existing infrastructure. In many cases, Generate takes on both financing and operating roles for these technologies, much like a utility does, for example. His approach is making it more possible to bring to scale technologies that are critical for addressing climate change. I started by asking Scott about his background in venture capital and then consulting and how those led him to found Generate Capital.

Scott Jacobs:
Well, I started while at HBS working for a venture capital firm thinking that energy tech or clean tech would be the place that I would apply my time. And it was right at the beginning of the green tech, clean tech wave in Silicon Valley venture capital. You had folks like Vinod Khosla and folks like John Doerr talking about energy and clean tech or green tech as the greatest investment opportunity in the history of the world.

Rebekah Emanuel:
That's a good statement, quite large.

Scott Jacobs:
Right. And while it might be one of the best investment opportunities in the history of the world, it isn't necessarily with respect to venture capital. And so I looked at it on behalf of this other venture capital firm and realized that this other venture capital firm, which is one of the most successful ever, followed a very simple approach and a very clear formula to their successful investing in early stage ventures.

And it really is six factors. You give small amounts of money to small teams who in short periods of time create big revenue with big margin, and that gets you a big exit. So those were the six criteria. And it applies to the software world from which I came. It does not apply to the energy or resource systems that I was trying to change. In fact, it's not small teams, it's not small money, it's zero criteria. And so learning that led me to understand that the energy and resource systems are actually an infrastructure game, not an invention game. And the players are not the invention players like two guys, a garage, and a dog; it's totally different players in infrastructure, it's big capital providers, big corporate players, big governments that are all involved in infrastructure. And then you clearly see why I was drawn to McKinsey, where better than McKinsey to advise big capital, big corporate, and big government actors. And that's what I decided was the right place to try to have some impact.

Rebekah Emanuel:
So how did that work for you?

Scott Jacobs:
Well, it was really a wonderful opportunity that was daunting in many ways. Having been an entrepreneur, I don't think of McKinsey as the natural next step. Many advised me against it in fact, but the promise played out, the promise that I could apply my entrepreneurial and innovation background to affirm that had tremendous access and credibility with these decision-makers really allowed us at McKinsey to reframe the sustainability equation out of what has been an altruistic or policy compliance frame and into one of rational self-interest and economics. And because we have such a reputation at McKinsey for giving good advice around economics and rational self-interest, people would take us seriously when we talked about things like sustainability.

And we really did successfully build a practice around sustainability that dominated consulting world, but importantly, got a lot of those big capital providers to change the way they were thinking, that got a lot of those big corporate actors to change the way they were thinking, and a lot of those government actors to change the way they were thinking. We advised many heads of state around the world, we advised many CEOs, and we advised many of the largest investors in the world around sustainability over the five years I was there.

Rebekah Emanuel:
You advised all of these firms, all of these governments on this, why did you leave McKinsey?

Scott Jacobs:
Well, what became clear to me while I was at McKinsey is that the big government and the big corporates had actually gotten smart about this problem, but the capital markets had not. And in fact, when you look at any corporate CEO, they need money to pursue projects that reduce costs. They need money to pursue projects that create new revenue streams. And that money wasn't there for them from Wall Street, in part because the stigmatization of these topics had become so acute. And I went therefore to Goldman Sachs and Morgan Stanley and said to them, "You guys have a clean tech practice, why is it that you're not getting your clients, these big Fortune 500 companies, the money that they need to pursue these sustainability projects?" And the response was, "Well, our clients don't want to fund those things."

And I didn't take that at face value, I looked a little further, and I said, "Well, who are the clients? They're the people with the money, right?" What I learned was that their notion of their clients is a little different from what we think of as the origins of the capital. When we think about the origins of the capital or the fundamental asset holders it's pension funds, sovereign wealth funds, insurance companies, those types of very large, in fact in many cases, trillion-dollar asset holders. And they actually have long-term liabilities, all of them. And they're therefore looking at investment opportunities that create long-term cash flows as their most attractive investment opportunity.

But when you layer in a bunch of intermediaries like fund managers and like bankers, you have to look at their incentives. Those intermediaries earn money from fees, and fees come most easily when you give someone an opportunity to do something they've already done before. Change is really hard in the capital markets. And the intermediaries, having these short-term interests of fee generation really fundamentally misaligned the real capital, the long-term investors like pension funds, and the real economy, the people on Main Street who just want to save some money, right?

And so I said, "Well, that's an opportunity. Why don't we actually connect the real asset holders with the real economy, with a better system or a better mouse trap?" And that's why I decided to leave McKinsey. I needed to be an entrepreneur again to go solve this problem, but as an agent rather than as an advisor.

Rebekah Emanuel:
So how do you solve that?

Scott Jacobs:
Well, you start a company. And I heard from a lot of these investors, "Scott, where's the vehicle? How do we do what you say?" And what I was saying was that there are these tremendous opportunities in sustainable infrastructure that offer investors long-term attractive cash flows with reasonable risk profiles, genuinely 10-, 20-, 30-year cashflow streams that didn't require a ton of risk in order to access them. They are better risk-adjusted return opportunities in places like funding solar projects, funding waste management projects, funding electric vehicle roll-outs. They're better return opportunities than plundering the earth or the unsustainable infrastructure that we continue to fund. And I just needed to prove it.

Rebekah Emanuel:
Okay. So tell me, what were the key ingredients to making this happen? How do you bring that opportunity to investors to do this?

Scott Jacobs:
So I built a company with two partners that aligned all of the stakeholder interests from the get-go, understanding that in order to do infrastructure you have to align a whole bunch of different stakeholders. There's a community involved. There's a regulator involved. There are a bunch of finance people involved. There are a bunch of lawyers involved, accountants, technology people, engineers, project developers, and importantly, a customer who hopefully will pay for the infrastructure that you provide.

Well, to align all of those interests, you really have to think differently about the company. It can't be a traditional financial instrument like a fund because by definition, a fund has a finite life, and we're trying to serve customers with assets that live almost permanently. As importantly, we're trying to serve communities where many of the people in the communities taking advantage of these assets, benefiting from this infrastructure, aren't even born yet. You can't have a finite life on the vehicle, the investment vehicle, or the company if you're trying to build projects that really deserve to exist forever.

So we needed to build a balance sheet business that aligned all of these interests and recognized, first of all, that we're not just managing financial assets, in fact, we're managing physical assets. So not only do you need financial professionals, you need operational professionals. And no one had ever built that before. So we just decided to give it a go because that's what the market said was needed.

Rebekah Emanuel:
So walk me through an example, take me through whether it's a digester or the solar, EVs, and just tell me, how does this work? How to all those stakeholders get aligned, and what do you do? How's that different than what has happened before?

Scott Jacobs:
Sure thing. So we'll take an example from the State of New York, where we have built a number of biodigesters taking food waste from the City of New York and turning that into clean water, clean power, and fertilizer for local communities around the state, but-

Rebekah Emanuel:
Sounds like magic.

Scott Jacobs:
It does sound like magic. And again, it's an alignment exercise that is... It's simple but not easy, as my partner likes to say. It's about, first of all, having a project developer, someone who's on the ground in a local community, seeing some land that could be used in a different way than it's currently being used. It takes that project developer also identifying that the City of New York wants to get rid of its waste by not putting this organic waste into a landfill, which is filling up. It takes a project developer also recognizing that there are solutions to that problem for New York City and solutions to the local community for getting them electricity, water, and fertilizer.

And so it really starts with that project developer finding the sites, securing the permits, building the value proposition for a lot of these stakeholders, and then coming to Generate and saying, "Hey, we think we have an opportunity here to solve a problem for the City of New York, to solve a problem for this community upstate and to solve a problem for the planet. How could we get the money to actually go forward with building such a project? And what-"

Rebekah Emanuel:
So you're telling me that before, when that person came forward, they weren't being successful finding money?

Scott Jacobs:
Correct. There are very few people out there who have ever invested in a biodigester, probably not very many more people than that who even know what it is. And as we said, change is hard, and what's easy to get financing for is something that people have already financed. Well, not many people have financed biodigesters, so there aren't many people to finance biodigesters. And there aren't very many people even spending the time to learn about biodigesters because it's too small a market opportunity for most of the traditional sources of capital. These projects tend to be five-, 10-, 15-, maybe $30 million total in size, and the traditional market for funding infrastructure projects, again, big pension funds or big investment funds that have a finite life, they tend to look for projects that are $300 million or bigger in order for them to even pay any attention.

Rebekah Emanuel:
$300 million or bigger. So that's because these investors have so much money to put to work, and they need to deploy quite a lot of it all at once. And it takes real time to evaluate a project, no matter how small or big it is, which can mean that evaluating small projects is less economical.

Scott Jacobs:
Well, a $30 million project is obviously one 10th that size, and it just won't be worth their time to look at a $30 million project opportunity. We had to build a business that was designed to go after these $30 million project opportunities, and so we did. But in addition, you have to, like I said, be ready to operate the assets so that the customers and the communities can benefit. It's not just about funding it.

Rebekah Emanuel:
Is that an unusual pairing?

Scott Jacobs:
Which?

Rebekah Emanuel:
Doing the financing and the operating?

Scott Jacobs:
Yes. We don't see really anyone who does that except utilities. So utilities are, in many cases, very reliable operators of infrastructure assets. At the end of the day, an investment firm tends to think about financial assets and an infrastructure operator tends to only operate. And what we've done is smushed the two things together, recognizing that the financial assets aren't worth anything if you don't operate them successfully, and there's nothing to operate if you're not building them with the money.

Rebekah Emanuel:
Did you think about two companies? Why do you want them together?

Scott Jacobs:
Well, in order to really deliver on the value proposition to the customer, you have to really have control over the operations. You could do it through a second company, but it's hard enough to start one company, might as well not try to do two. Certainly, there are ways you could try to make this happen by having multiple players involved, but again, we didn't see any operators out there that we could rely upon, so we had to build it ourselves. In the case of solar, there are reliable operators out there. And so our role in the solar ecosystem is a bit different from our role in the waste ecosystem.

Rebekah Emanuel:
So it sounds like you're developing new financing and business models and applying them to well-established technologies like biodigesters and solar.

Scott Jacobs:
That's exactly right. That's really the lesson of solar. And I have to credit my partner Jigar for teaching the world this lesson, Jigar started a company called SunEdison back in 2003. It was a solar project developer. So we were just talking about a waste project developer, this company that Jigar created was a solar project developer, and it became the biggest one in the world. But what was really ingenious about that model was the recognition that solar was old technology and that the business model was what was broken. It wasn't very compelling as a solar technology provider to walk into Staples and say to Staples, "Here's some cool infrastructure technology you can put on your roof. It'll save you money in the long run, but it will take you about 14 years before you see that payback. And by the way, you have to learn how to manage a power plant onsite."

That's not a compelling value proposition. The utilities value proposition of, "Hey, we'll give you the electricity as and when you want it, however it is that you need it, and you just pay us for it as you use it," that's a much more compelling value proposition. So no wonder solar didn't take off. But remember, solar was developed as a technology in the fifties. It has been proven in some of the most mission critical operations we ever undertake on earth, or not even on earth, in space. And so we had proven that solar technology worked, but the business model of selling 20 years’ worth of electricity with an upfront check and a requirement that the customer manage a power plant was just a failing value proposition.

So what Jigar said is, "How about solar as a service. We will pay all of the capital costs to put the solar on your roof, and we will operate that solar power plant on your roof so that all you get, Mr. Customer, is a 20% lower electricity bill every month, whether or not you care that the electrons are green or brown or purple." And so as a result, many more customers were willing to do solar because they could pay for it by the month and not have to take any of the operational risks that were being presented before if it were just a technology purchase. That model of taking a technology purchase and turning it into an infrastructure project is what we call infrastructure as a service, turning solar from a technology purchase into a service that unlocked a ton of market opportunity. And we said, "Gosh, there are a lot of these old technologies, as you said, that could be applied to existing problems with a different business model if someone were just willing to create that different business model and design a company to support that kind of model."

Rebekah Emanuel:
So your model of infrastructure as a service means that customers pay as they use something or on a regular scheduled basis just like they pay the utility for the electricity they use. That way, they avoid paying lots of money upfront, instead they pay bit by bit. This is termed infrastructure as a service. So what are some of the examples of customers who are adopting this model?

Scott Jacobs:
Well, we have almost 2,000 customers. So there's a long list of cities, communities, and companies. People like Walmart, Amazon, the City of New York, many school districts across the country, these are companies and organizations that don't have the budget or don't want to spend their scarce financial resources on something that is not core to them. They want it as a utility, and we give it to them as a utility.

Rebekah Emanuel:
So pick one of them, and tell me how it works.

Scott Jacobs:
Well, a good example is Walmart with an old technology that we decided wasn't so risky, and that's hydrogen fuel cells. We partnered with a company called Plug Power, publicly traded company that delivers these fuel cells. And they've been around for... In fact, they've been public for almost 20 years now, I believe. But they were struggling to get capital partners who were willing to turn their technology purchases into services. But Walmart said to Plug, "Hey, we want to get the benefit of your hydrogen powered fuel cells and pay for it as a service." And what Walmart needed was to retrofit the forklifts in their distribution centers, mission critical operation for them, I'm sure you can tell, from lead acid batteries to hydrogen powered fuel cells. And they didn't want to pay a big capital expense upfront, and they didn't want to take on the operational complexity and risk of operating this over time.

As you know, Walmart's in the retail business, they're not in the power plant business, and they're not in the transportation fleet business. So Plug Power came to us and said, "Hey, can we turn this technology purchase into a service with you, Generate?" And we said yes. And so we've rolled out distribution center after distribution center for a few years now, hundreds of millions of dollars’ worth of capital that delivers a long-term service agreement with Walmart, where Walmart saves money from day one and every day thereafter, Plug Power makes money on day one because we buy their technology from them, and that's exactly their revenue model. And then we make money every day that we effectively serve Walmart. So everybody wins, right?

Rebekah Emanuel:
So what makes this defensible? Why can't other people just do this?

Scott Jacobs:
Other people can do this. In fact, we'd encourage lots of people to do this. These are trillion dollar markets that we're trying to serve, and we certainly don't have trillions of dollars ourselves to serve the entire market. We'd love to see others do this. What we tend to see though, is financial people come to this from a financial angle and raise a fund, and they miss at least half of the equation that way. Or we see operating people approach it with the operating side and miss the need to have the big balance sheet and flexible capital to do what it takes to get these projects built. What I think we were able to do at the outset as three founders of Generate was recognized we each needed each other in order to bring the diversity of skills together, to be able to solve the problem for the customer.

Rebekah Emanuel:
I understand why Walmarts of the world want to pay as you go and want to sort of save money doing this. I've heard you talk about what you're doing as this bridge to bankability for the pension funds and the others in the world. Can you tell me what looks different for them than it used to?

Scott Jacobs:
Well, pension funds are getting very attractive investment returns that they weren't getting from infrastructure. So infrastructure tends to yield low single digit rates of returns or cashflows. Again, because risk and reward are typically linked, and so if you have a low risk asset like an infrastructure asset, you, by definition, should get a low return for that. What investors are getting from Generate is a high rate of return relative to the risk, much higher than traditional infrastructure. And they're getting access to all of these new markets that we are essentially facilitating the growth of. And over time, they'll be able to put more and more capital into these markets. But the bridge to bankability is more about the technologies that we are supporting.

So when we talk about the bridge to bankability, if you think about solar in 2003, it was not considered bankable. It wasn't trustworthy enough. It was too risky to the capital markets. And that's what I was saying Jigar really managed to succeed at confronting. By implementing projects with solar technology that delivered good cash flows to customers and to investors, it started to break down the stigma that solar wasn't a money making opportunity, or that solar was a risky technology. And as you started to see those early successes, you also saw the cost of technology go down. So the solar projects got cheaper and cheaper as you built more volume in the system. There were economies of scale in the manufacturing. There were learning by doing benefits by you get better as you do it. And there were economies of scale in the service. Well, that meant that the addressable market grew because as the projects got cheaper, more customers were interested in them.

And that's the flywheel that you got started by funding those first projects in solar at SunEdison. That's the fly wheel we create when we get involved in anaerobic digesters, when we get involved in fuel cells, when we get involved in evaporative cooling technologies or battery storage or electric buses. These are all areas where we were early at saying, "This isn't that risky. We can make this work. We can make real money from this by delivering for customers." And sure enough, as we did, the market grew, the technologies got cheaper, the projects got cheaper, the market grew further, and then the banks want to come in with cheaper money and bigger money because we proved it was safe. That's the bridge to bankability.

Rebekah Emanuel:
If we sort of think about what you're doing in the world, I hear you talking about people's incentives really clear-eyed and then thinking about what that makes them want to do. It sounds like energy companies, utility companies, other folks aren't willing to take risk because they need to optimize for reliability. What does that mean about the adoption of new technology for them?

Scott Jacobs:
That's a great question and a great insight. It is absolutely true that utilities are actually disincentivized from taking risk by the nature of their regulation and their return profile. They are forced to do the safest thing for their customers. And again, change is hard, so they do what they know is safe because they've done it before. Big scale assets, monolithic assets, dirty assets, that's what they know to be safe, and so they'll just keep doing more of that absent some big force change. What's interesting though, is that the customers want more affordable resources, and they want more reliable resource systems. Customers can't rely on PG&E anymore to deliver electricity in a reliable fashion, so whatever they were doing that made them feel safe obviously didn't deliver. And what ends up happening is you create an opportunity for someone to come in and solve a customer's problem more effectively. And that's really what we've done. We solve the customer's problems more effectively than these utilities because we are willing to integrate solutions that are smaller scale or less well-proven than a coal plant.

Rebekah Emanuel:
Excellent. So for people early-, mid-career, looking out at this, folks looking at this resource revolution, as I think you've talked about it, what roles are pivotal? What skills do you recommend people develop?

Scott Jacobs:
Well, there are a lot of different roles that people need to be aware of in order to build projects effectively. And it is a lot harder than building an app or a software product. You don't just need a person and a computer. So you have to think about the engineering complexity, you have to think about the financial complexity, you have to think about the customer, you have to think about the community, you have to think about the regulator. All of that is to say, in order to address complexity, you need the best people. So there are lots of roles, but in all of those roles, it's really important to think about the best possible people for each of those roles and what motivates the best possible people to come work with you on a problem that's complicated and hard. And for us, I think that's where being a values driven company in a mission driven exercise that generates real and better financial outcomes is a unique combination that creates a tremendous attraction for the best people to this business.

Rebekah Emanuel:
Excellent. So a common profile that I think many folks grow up with of an entrepreneur is the Elon Musk of the world, a brand new moonshot tech. You're sort of championing an entrepreneur using old tech and new applications. Tell me what... If people sometimes aspire to be the next Elon Musk, what's someone aspiring to be this next entrepreneur going to need or look like?

Scott Jacobs:
Well, I think it's really about building stuff. If you thought about real estate because you liked building buildings, or if you thought about engineering because you liked the idea of building bridges or roads, you can get excited about some of this sustainable infrastructure stuff we're talking about. There's no doubt that Elan Musk serves as a tremendous role model for a moonshot technology, but I'll remind you that even that quote-unquote moonshot technology you're talking about, at least if you're talking about Tesla and not Space X, is 120-year-old technology. The first cars were electric. So he didn't actually invent anything new with Tesla, he just importantly made the best car in the world. And what was so transformative was that the best car in the world was the greenest car in the world. In other words, it involved no sacrifices for the consumer. Not only no sacrifices, but everybody wants one, right?

And so I think as you think about being an entrepreneur, you have to be really clear about what sacrifice you're asking anyone to make. And if you're asking people to make sacrifices, it's not going to be as big of an opportunity as if you're giving them something better than what they've got. And in our case, whether it's old technology, new technology, doesn't matter. What matters is what we're offering the customer something better than what they've got. And that's entrepreneurship.

Rebekah Emanuel:
Thank you, Scott.

Scott Jacobs:
Thank you.

Rebekah Emanuel:
That's it for this episode of Climate Rising. Next time, we'll take a look at innovation in the transportation sector and the new battery swapping business model that is revolutionizing affordable urban transit in India.

Thanks for joining us. I'm your host, Rebekah Emanuel. This is Climate Rising, a produced by the Business and Environment Initiative at Harvard Business School. This episode was made possible by the collaboration between this episode's associate producer, Roxanne Tully, HBS class 2021, producer Mary Dooe, and our team from the HBS Business and Environment Initiative, faculty chair Mike Toffel, and Jennifer Nash, Lynn Schenk, and Elise Clarkson. Thanks for joining us.

You can subscribe on Apple Podcasts or wherever you listen. And please, leave us a review, we appreciate the feedback. You can also find show notes and links to resources discuss on this episode on the climate rising homepage, climaterising.hbs.edu.