The journey from a scientific breakthrough to a successful commercial venture is often a challenging one for startups. This is particularly true for climate tech companies that focus on hardware and infrastructure, as they face unique obstacles in raising the necessary funds to bring their projects to the market. This gap between early-stage venture capital and infrastructure funding is known as the “commercial valley of death.” Startups in this space struggle to secure the significant amounts of capital required to scale their operations and build their first-of-a-kind projects.
While software-as-a-service (SaaS) startups can attract venture capital more easily due to their lower capital needs, hardware and infrastructure companies face a different reality. The capital requirements for these companies are significantly higher, making it harder to convince investors to provide the necessary funding. Moreover, the current investment landscape is not designed to support these types of ventures, as it was built primarily for digital innovation rather than hardware advances.
The commercial valley of death has claimed several victims in the past, with companies like A123 Systems and Sunfolding failing to overcome the manufacturing and scaling challenges they encountered. Many startups fall into the trap of diversifying their focus too early, losing sight of their core value proposition and struggling to execute their plans effectively. To bridge this gap, investors are pushing startups to hire experienced professionals in manufacturing, construction, and project management earlier in their development.
Raising more substantial funds and securing additional sources of capital is crucial for climate tech startups. Some firms have opportunity or continuity funds reserved for their most successful portfolio companies, ensuring they have the resources needed to survive the valley of death. Bigger war chests not only provide startups with financial security but also increase their credibility with debt financiers. However, there are limits to how far this approach can take bleeding-edge projects like fusion startups, which require significant upfront investment before generating meaningful revenue.
To address this issue, investors should adjust their return expectations for hardware-focused climate tech startups. Instead of aiming for tenfold returns, as is typical for early-stage venture investments, a more realistic target would be 2x or 3x returns. This would attract follow-on investments from growth equity funds before handing off to infrastructure investors that seek higher returns. However, investor collaboration remains a challenge, as many are not incentivized to work together.
Traditional venture firms have been hesitant to invest in climate tech due to a lack of understanding of the associated risks. Some firms, such as Spring Lane Capital, have adopted a hybrid approach that combines venture capital and private equity. They conduct thorough due diligence and provide ongoing support to portfolio companies, helping them navigate the challenges of scaling up. Others advocate for more catalytic capital, including government grants and philanthropic dollars, to absorb the risk that traditional investors are unwilling to take.
Ultimately, addressing the financing gap in climate tech is crucial for creating solutions to combat climate change. The urgency of the challenge requires significant investment in technology and infrastructure. While the road ahead may be challenging and costly, there is optimism among investors that the future will look different and that innovative startups will play a crucial role in driving change.