Back in 2018, Johanna Wolfson saw a worrying trend: Many climate tech solutions were struggling to come to market because they were too new and too risky to attract the financing they needed to mature out of the lab.
“Society really needs solutions that aren’t maturing under the current environment, and I saw a need for a different kind of financing instrument and financing ecosystem to bring [them] to market,” Wolfson told Latitude Media.
So, along with Matthew Nordan and Prime Coalition founder Sarah Kearney, Wolfson created the Prime Impact Fund, an initiative of the U.S. nonprofit Prime Coalition. Co-founder Amy Duffuor joined in 2019 and then in 2021, the group spun out to become Azolla Ventures; the firm continues to manage that first fund in partnership with Prime Coalition.
The company aggregates tax-exempt philanthropic capital from foundations and donors that would have otherwise given it to NGOs and nonprofits, and uses it in a venture capital context to fund the first steps of high-risk startups. In its first years, Azolla mostly focused on climate mitigation, providing funding for solutions such as geothermal exploration, carbon capture, and energy storage. But now, the firm is zeroing in on a new urgent funding gap: adaptation and resilience.
Adaptation solutions, which can vary from wildfire detection and water level monitoring to bus shelters and early-warning systems for vector-borne disease, are gaining some traction among climate investors, but they’re still underfunded. A report published last December by investment and advisory firm Tailwind Climate found that adaptation companies only receive 3% of climate tech funding, despite representing 12% of all climate tech companies. One of the biggest funding gaps is at the pre-seed and seed level, exactly where Azolla would intervene.
The funding gap is a symptom of how “we’re ignoring the truth about where we’re heading,” according to Wolfson — and that will require a shift in mentality.
“We [venture investors] are thinking about unlimited upside and future markets, and that’s a different mentality than part of what’s needed in adaptation and resilience solutions, which are about protecting against downsides,” she said. “There’s a mental shift and a learning that needs to happen in the venture technology and climate tech community to be able to embrace this.”
A high tolerance for risk
Wolfson believes that one of the reasons Azolla is well-suited to fund new adaptation and resilience solutions — many of which are risky, place-based, and “not fundamentally tech IP-enabled,” and therefore hard to scale — is the company’s high tolerance for risk..
Azolla Ventures may look like a traditional venture capital firm raising funds to back a portfolio of new and promising startups and technologies. But because it leverages tax-exempt philanthropic capital, it pursues higher-risk opportunities than its venture capital peers, and is less focused on returns than on impact.
“When you distribute tax-exempt capital you need to distribute it to a charitable purpose…in our case the mitigation of climate change or the reduction of harm for people on the planet,” Wolfson explained. “And when the primary purpose of our investment is impact, meaning that we’re not competing with market investors yet because of some outsized risk that is being taken on, it’s an appropriate use of charitable capital.”
That distinction allows Azolla to take on more technical, policy, or market risk than conventional venture might be willing to; and it also means the group can fund climate solutions that would otherwise have a hard time scaling up. That’s because Azolla’s investors are not expecting to make a profit. But the return on the philanthropic investment they get from Azolla can be reinvested in other causes, propagating a virtuous cycle.
“Let’s say you have a donor-advised fund, and you put $100,000 into our fund; if those companies are successful in the portfolio returns, you get your tax-exempt capital back in multiples, and you get to give it to some other good cause,” Wolfson said. “It’s an innovation in philanthropy as well.”
Since the creation of Azolla, this unusual approach to venture capital investments, as Wolfson describes it, has gained some traction in other organizations as well. Trellis Climate, for example, uses the same model to help companies bridge the so-called commercial Valley of Death and build their first-of-a-kind infrastructure projects. That program, which was launched in April 2024, is also part of Prime Coalition.
After derisking
The group’s first fund, Prime Impact Fund, closed on $50 million in 2020. Then, in 2023 — post spin-out — Wolfson and her partners raised $239 million for Azolla Fund I, which includes about $80 million in tax-exempt philanthropic capital, but also roughly $159 million in conventional venture capital.
“It’s a pool of two funds wired up next to each other,” Wolfson explained. “As we’ve evolved, we’ve paired that very risk-embracing catalytic capital with additional funds that are not tax-exempt in nature, but can continue supporting companies after they [scale up].”
The idea is that after the philanthropic capital has helped a solution de-risk, Azolla can keep funding that solution via conventional venture capital.
One of Azolla’s 30 portfolio companies is Zanskar, a start-up using artificial intelligence and generative models to derisk geothermal exploration. Azolla led Zanskar’s stealth seed round through its Prime Impact Fund back in 2021, when the idea of leveraging AI for that purpose was much more “wild” than it is now, according to Wolfson.
Zanskar has since grown, raising a $30 million Series B round in May of 2024. But Azolla hasn’t invested further in Zanskar as it grows, because of the firm’s policy against using multiple funds to invest in a single portfolio company.
The fact that Azolla wasn’t able to invest in Zanskar past the seed round “is a great example of why we need the dual sleeve model, because otherwise we’re sort of missing out on this value that we’ve created,” Wolfson explained. “And so we’ve corrected for that in the current fund.” Moving forward, Azolla will be able to invest in companies as they evolve — first from the catalytic funding pool, then from the conventional capital pool as they mature.
Like the majority of companies in Azolla’s portfolio, Zanskar is a mitigation investment. But Azolla has already invested in multiple adaptation and resilience solutions, such as Vesta, which pursues coastal nourishment projects with materials that absorb carbon from the ocean, and Rain, which develops autonomous aircraft for rapid wildfire response. And from now on, the focus on adaptation and resilience will become an “explicit” part of its investment strategy.
“We will explicitly be widening the set of impact dimensions that we’re evaluating companies on, to include things like biodiversity, and preservation of human health and livelihoods,” Wolfson said. “That’s just what you would need to do if you’re going to value adaptation and resilience solutions.”
