Abstract
Venture capital (VC) is a critical source of finance for renewable energy ventures. Importantly, VC investments are made in rounds. In higher rounds: (1) the availability of capital drops—we find that less than 50% of renewable energy ventures receive “follow-on” financing—and (2) the rate at which VC firms co-invest increases—we find that 75% of “follow-on” investments are “syndicated”, co-investments. We argue that the way in which VC firms co-invest—in terms of how and to whom they are connected—is critical to understanding which projects are financed. Using data on 760 firm-deal observations, we examine how the VC firm’s direct ties (ego network) create trust (which we measure using the clustering coefficient) and improve access (structural holes) to important investment information. We consider too how the “small-world” nature of the global VC industry network (small-world quotient) improves “information reachability”. Finally, we consider the way in which these features interact with each other—specifically, when they can be substitutes and when they are complements—in explaining which projects do and do not receive follow-on financing through syndication. We conclude by reflecting on the implications of our findings for VC syndication and sustainable entrepreneurship in the renewable energy industry.
Highlights
Venture capital (VC)—a form of private equity financing that is provided by VC firms to start-ups, early-stage, and/or emerging companies [1,2,3]—is financing the energy transition [4,5]
We argue that because so much follow-on financing is syndicated, VC firms are embedded in a syndication circle [6] or network [25]
We explore the topic using a sample of 760 VC investments—that is, 760 firm-deal dyads—made by 333 VC firms, in the Chinese renewable energy industry in the period
Summary
Venture capital (VC)—a form of private equity financing that is provided by VC firms to start-ups, early-stage, and/or emerging companies [1,2,3]—is financing the energy transition [4,5]. It can be suggested that to have and to understand the energy transition, one must first understand the VC industry. Two features of VC investments in renewable energy projects are noteworthy. VC firms invest in rounds, meaning that the investment decision is not once-off. It is a series of decisions, taken over a period of 5–7 years. Financing after the initial round is known as “follow-on financing”. The number of projects that receive follow-on financing tends to decline sharply across rounds. For example, less than 50% of the ventures that receive first-round financing receive follow-on financing, and only 25% secure follow-on financing in or after the fourth round
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