The Inflation Reduction Act opened up a whole new avenue for project financing when it allowed clean energy developers to sell the tax credits that they earned on their projects to any willing buyer on the open market. It also opened up a lucrative fintech opportunity: A digital marketplace where buyers and sellers of these credits could easily transact.
One of the first — and certainly most successful — startups to jump on this opportunity was Crux Climate. But by the time Crux announced its $50 million Series B funding round last month, however, some Congressional Republicans were already considering axing tax credit transferability in their budget proposal. Then last week, the House of Representatives’ Ways and Means committee followed through on this rumored threat, proposing a plan to get rid of transferability for all credits by 2028 (though the details are still in flux). So what’s to become of Crux now?
Everything’s going to be okay, Crux’s co-founder CEO Alfred Johnson told me late last week. In fact, “the business is in great shape,” he said. I was a tad confused. But as Johnson reminded me, the company always planned on being more than a mere tax credit marketplace. The question is whether developers will buy into this vision of Crux as the everything store for project financing.
In March, right before the company announced its Series B, Crux launched a debt marketplace, where developers and manufacturers can access financial tools such as short-term bridge loans, construction financing, and flexible lines of credit to fund the buildout of renewables projects. “The market size for transferable credits is $30 billion per year, while the market size for project finance debt is more than seven-and-half times as big: $230 billion,” Johnson told me.
This new offering may have come just in the nick of time. It’s also likely just the first in a series of platform expansions, some of which are already in the works.
“There are many more multibillion-dollar markets among the thousands of developers, manufacturers, investors, and corporate buyers that make up the market for U.S. energy and manufacturing project finance,” Johnson told me. Playing in all those markets is a lofty goal for a company that was founded just two years ago, but so far Crux has been good at defying expectations. After all, it’s been profitable since its second year, Johnson told me, a rare and rapid rise for an early-stage startup.
Crux shared some exclusive numbers with me that illustrate some ways in which it’s starting to outgrow its roots. For one, Johnson told me that Crux’s revenue for the first one-and-a-half quarters of this year is nearly 10 times higher than for the same period last year. While he wouldn’t reveal what portion of that was comprised of tax credit deals versus debt financing deals, he did say that in the two months since the debt marketplace launched, “lenders have issued $1.3 billion of term sheets.” Those are nonbinding loan offers, $700 million of which have turned into actual deals so far. “It took more than a year for the tax credit market to reach similar throughput," Johnson said.
In the meantime, Crux is by no means giving up on the embattled transferable tax credit marketplace. The company sounded a relatively optimistic note last week as it published a list of takeaways from the Ways and Means Committee’s proposal, stating, “This is the starting point and we anticipate that the final bill will take a more favorable stance on transferability and tax credits.” The company looks like it’s preparing to fight for that outcome, too, as a few months ago it hired new teams of tax lobbyists and brought on Hasan Nazar, former federal policy lead at Tesla, to direct these lobbying efforts.
Johnson said that the debut of Crux’s debt marketplace had developers, manufacturers, and investors rushing to its website in numbers not seen since the company launched. It logged more “inbound interest” on that one day in March than when it announced its Series A and its Series B — that is, more than on both of those days combined.
“We didn’t invest in Crux with the belief that this would be a transferable tax credit business forever,” David Haber, a general partner at Andreessen Horowitz, told me. The venture capital firm led the company’s $18.2 million Series A funding round. “We viewed that as a great wedge product to bootstrap a financial exchange that could help facilitate the types of financial products needed for this ecosystem,” he said. Clay Dumas of Lowercarbon Capital, which led Crux’s Series B, also saw the company as a so-called “wedge” into a “multi-hundred-billion-dollar opportunity to finance energy and advanced manufacturing through debt and a wide range of other products.”
Not all investors felt as confident that companies built around tax credit transferability could become a one-stop financing shop, however. As of now, most of Crux’s direct competitors — such as Basis Climate, Reunion Infrastructure, and Common Forge — haven’t expanded into other parts of the climate capital stack.
“We know the fundamental risk that a stroke of the pen can have in any of these sort of marketplaces,” Juan Muldoon, a partner at the climate software VC firm Energize Capital, told me. Thus far, Energize has not funded any tax credit-based marketplace, diligence platform, or underwriting tool. “We wanted to wait for signs of resilience and more complete platforms, more complete business models, versus solving for things that might be more transient in value,” Muldoon said. Last week’s committee proposals validate Energize’s core investment strategy, he added — supporting nimble software companies that can withstand political headwinds and change tacks quickly.
Crux certainly hopes that expanding into the debt market will put any fears of its potential transience to rest. After all, Johnson told me, “all parts of the capital stack are opaque, illiquid, bespoke and manual.” That includes not only transferable tax credits, but also debt and equity financing. “These are private transactions that require a ton of documentation, models, advisory lawyers. But it doesn't have to be as bad as it is,” he said.
But if the transferable tax credits do indeed disappear, many renewable energy developers may be forced to return to one of the most opaque funding mechanisms of all: tax equity financing, which Crux is not currently set up to facilitate. As my colleague Emily Pontecorvo recently explained, prior to the passage of the IRA, renewable energy developers who wanted to liquidate their tax credits had to partner with tax equity investors — usually banks — who would give them cash in exchange for an equity stake in their clean energy project and the benefits of their tax credits. But forming these types of partnerships is both legally complicated and costly, and thus not a viable option for many smaller developers.
Presumably, Crux could shake up and simplify this space, too. And while it’s made no official commitments to a tax equity product, the company’s website has been reconfigured to advertise it as the go-to platform to “source new opportunities for lending, equity, and tax credit transfers,” as it commits to “financing the future of energy.”
Crux has its work cut out for it, though, as often the more complex the financial transaction, the more customized it must be. “The competitors are offline advisors for the most part,” Haber told me. Thus, standardizing and digitizing as many esoteric and project specific elements of the capital stack as possible is going to be, as he put it, “their opportunity and their challenge.”
Johnson says Crux is up for it. “It’s never going to be, you know, one click buy it on Amazon. That’s a ridiculous and implausible concept for deals of this size and importance. But these negotiations and transactions can be so much better.” Efficiency, at the very least, seems to be something we can all get behind. So as the partisan fighting over tax credits and transferability commences and the clean energy incentives start to fall, maybe at least this one climate tech darling can weather the storm.
A chart from the study.The Big Green Machine
