Creative capital comes from Main Street

September 27, 2011 - Michael Brownrigg

In basic economics, a company uses two inputs – capital and labor – to take raw materials and convert them into finished goods for sale.  In the last century, a great deal of effort was put into making labor more productive through education, training, machinery, and information technology.  Whether on the shop floor or in the Board Room, labor became much more valuable.

By contrast, much less effort was put into making capital more productive, and what efforts existed were largely confined to Wall Street.  Indeed, Wall Street has enjoyed a special hegemony over capital creativity, more than once to our detriment.  We at TIA believe the 21^st century will see capital creativity move out of the exclusive purview of Wall Street, to the benefit of companies, non-profits, and society at large.

One recent example is the work done by Ygrene Energy Fund (spot the pun?), a creation of Sir Richard Branson and a non-profit environmental think tank.  Ygrene aims to retrofit old buildings to make them much more energy efficient, thereby saving money and preserving energy resources for better uses, and to do so in profitable and therefore scalable ways.

As anyone knows who has considered installing solar panels on one’s roof, there are two significant capital barriers.  First, the upfront costs are significant, and second, the benefits take a long time to pay one’s investment back.  In the context of real estate, this creates a secondary concern since if one sells the house, then the advantages will be reaped by a buyer who has not paid for the initial investment.

In a world of profits first, there is no obvious way to overcome these barriers, so there has been no solution coming from Wall Street.  However, the City of Berkeley recognized that it could at least help address the temporal disconnect.  Their creative capital solution was to allow solar installations to be paid for over time through modest property tax increases.  This would mean that a future buyer would bear the costs as appropriate to the savings that he was also enjoying.

Ygrene expands Berkeley’s breakthrough concept with major strategic partners (as described in a recent New York Times story). Ygrene understood that a steady flow of property taxes could be used to borrow at a low rate to help finance the upfront installation expenses.   Ygrene’s partners, including Barclays Capital and Lockheed Martin, will put $650 million to work retrofitting old buildings in Sacramento and Miami.  A retrofitted building will save on average 30% of its energy costs and the funders will also make money.

Note where the capital innovations came from: a city that cares about energy conservation, and a non-profit funder who understands how to use finance to scale the idea.  Where the idea did NOT come from was Wall Street, although if it works out, one can bet that Wall Street will copy it.  In this case, for Ygrene, Berkeley, Sir Richard and our country, imitation truly will be the most sincere form of flattery.

Next time: Incentive Structures