Investors see new market potential with infrastructure bill

Fifth Wall, Energy Capital Ventures and AllegisCyber Capital say the bill opens new opportunities for start-ups.

Venture firms see the recently passed infrastructure bill as a boon for the industry and a way to expand their investment potential into such sectors as clean energy and cybersecurity.

The $1 trillion bill presents some of the largest government outlays and tax incentives for infrastructure in the country, including clean energy, broadband technology, railways and highways. It also points to government funding for securing critical infrastructure from cyber threats. The bill is awaiting a vote in the House and, if passed, will go to president Biden for his signature.

With that much money going into the industry, VCs expect more markets to open up and the innovation potential could grow. The infrastructure bill is mainly concerned with enhancing the electric grid’s resiliency and provides funding for several clean energy initiatives from the government. These include decarbonization projects, battery manufacturing and regional hubs for clean fuel.

Natural gas sector investor Energy Capital Ventures managing partner Vic Pascucci said the government committed to protecting the clean energy industry when it passed the bill.

“For a fund like Energy Capital Ventures, which focuses on ESG and the digital transformation in the industry, this bill has the potential to drive innovation in our space,” Pascucci said. “If you have strong infrastructure, it’s only going to enable that innovation.”

For Pascucci, even the presence of the government would push innovation, as it will act as a late-stage investor, which also allows start-ups within the environment to see their products or services come to market. He pointed to the regional hydrocarbon hubs created by the bill as one of those new markets.

In addition, the infrastructure around clean energy may also attract new entrepreneurs to the industry, much like technology giants have entered the financial sector and gave rise to innovations in fintech.

VCs differ from some private equity players in their views, as reported in affiliate publication PE Hub, with the latter lauding the bill while saying it is not a game-changer. Instead, VCs, who typically work with earlier-stage companies, feel the legislation provides more opportunities for portfolio companies to develop their work further.

Greg Smithies, partner at early-stage “built world” investor Fifth Wall, said the infrastructure bill provides additional government grants for research into clean energy, something that will be good for researchers looking to bring their innovations to commercialization.

VC Energy Climate
Greg Smithies, Fifth Wall

“Why I’m so excited about it is we’ve got a whole lot of money going into fundamental research, which means we will probably go and invest in those companies in a couple of years as this money helps them get out of the lab,” Smithies said. “Then on the customer side, we’ve got two big buckets of money that are going into tax incentives that bring down the cost of clean power, which mean that our customers want to buy these technologies because they are way cheaper.”

But beyond expanding the market for portfolio companies and more research grants for innovations that can turn to potential new start-ups, the legislation could also open up new partnership opportunities. Pascucci of Energy Capital Ventures said that venture firms might even have the chance to enter into public-private partnerships with the government.

Pascucci and Smithies said that while they spoke to LPs about the potential impact of the infrastructure bill, it was still the innovations and strides made in the clean energy industry that attracted many investors. The bill, they said, enhances what is already an appealing value proposition.

Cybersecurity market

Clean energy will not be the only beneficiary of the infrastructure bill. Much of the legislation sets provisions on cybersecurity and securing critical infrastructure. For Robert Ackerman Jr, founder and managing director of early-stage investor AllegisCyber Capital, the bill is a long time coming. But it still doesn’t reach far enough.

“It’s an encouraging sign and I even think that it’s about bloody time,” he said. “This is a critical down payment to secure our critical infrastructure. But we have to make sure those dollars get to the practitioners with the expertise who understand cybersecurity is constantly evolving and dynamic.”

Robert R Ackerman Jr, Allegis Capital

The challenge is for companies to get government contracts to set up cybersecurity projects. Ackerman said many VC-backed cybersecurity start-ups tend to avoid bidding for government contracts because of the lengthy procurement cycles. But if the infrastructure bill is successful, and the start-up plays its cards right, it may gain experience working with other agencies to get contracts.

The VCs said the infrastructure bill is a good start in pushing clean energy and cybersecurity, but if the government truly wants to improve infrastructure, it needs to allot more capital.