Navigating the Valley of Death: Climate Startups Struggle to Scale Hardware Solutions
Jonathan Strimling faced a dilemma. His company had spent nine years working on chemical processes that could turn old cardboard boxes into high-quality building insulation. The good news was the team had finally cracked it: CleanFiber’s technology pumped out insulation — really good insulation. It had fewer contaminants and produced less dust than other cellulose insulation made from old newspapers. Insulation installers loved the stuff.
Now CleanFiber had to make more of it. A lot more.
Many founders and CEOs might be envious of the problem. But the transition from science project to commercial outfit is one of the hardest to pull off.
The Challenge of Transitioning from Lab to Commercial Scale
“It’s hard to launch your first-of-breed plant,” Strimling, the company’s CEO, told TechCrunch. “It did cost us more than we expected. It took us longer than we expected. And that’s fairly typical.”
Any startup is laced with a certain amount of risk. Early-stage companies are often unsure whether their technology will work or whether their product will find enough customers. But at that point, investors are more willing to stomach the risk. They know fresh startups are a gamble, but the amount required to get one off the ground is relatively small. It’s easier to play the numbers game.
Climate Tech: The Hardware Financing Conundrum
The game changes, though, when startups emerge from their youth, and it becomes especially challenging when the company’s products are made of atoms, not ones and zeros.
“There’s still a lot of hesitancy to do hardware, hard tech, infrastructure,” Matt Rogers, co-founder of Nest and Mill, told TechCrunch. Those awkward middle stages are particularly hard for climate startups, which are dominated by hardware companies.
“You can’t solve climate with SaaS,” Rogers said.
The problem has come to dominate conversations about finance and climate change. There has been an explosion of startups in recent years that seek to electrify homes and buildings, slash pollution in industrial processes, and remove planet-warming carbon from the atmosphere. But as those companies emerge from the lab, they’re finding it hard to raise the kind of money they’ll need to build their first commercial scale project.
The “Commercial Valley of Death” for Climate Tech
“That transition is just a really, really difficult one,” said Lara Pierpoint, managing director of Trellis Climate at Prime Coalition. “It’s not one that VC was designed to navigate, nor is it one that institutional infrastructure investors were designed to take on from a risk perspective.”
Some call this the “first of a kind” problem. Others call it the “missing middle,” describing the yawning gap between early-stage venture dollars and expertise on one end and infrastructure funds on the other. But those terms paper over the severity of the problem. A better term might be what Ashwin Shashindranath, a partner at Energy Impact Partners, calls “the commercial valley of death.”
Sean Sandbach, principal at Spring Lane Capital, puts it more bluntly, calling it “the single greatest threat to climate companies.”
The Financing Struggle for Hardware Solutions
The valley of death isn’t unique to climate tech companies, but it poses a bigger challenge for those that seek to decarbonize industry or buildings, for example. “When you’re making hardware or infrastructure, your capital needs are just very different,” Rogers said.
To see how, consider two hypothetical climate tech companies: one is a SaaS startup with revenue that recently raised a $2 million round and is looking for another $5 million. “That’s a good story for a traditional venture firm,” said Abe Yokell, co-founder and managing partner at Congruent Ventures.
Contrast that with a deep tech company that doesn’t have any revenue and is hoping to raise a $50 million Series B to fund its first-of-a-kind project. “That’s a harder story,” he said.
