Climactic launches hybrid fund to get startups through the ‘valley of death’
Source: TechCrunch
The “valley of death” is a well‑known hurdle for startups that have moved beyond a prototype and need to scale production and sales. While software companies can often operate at negative margins while they grow, materials startups face a tougher reality.
“Software companies sell at a negative margin all the time in the beginning… But for materials companies, they’re not allowed to do that. One of the questions I had is, ‘why is that?’” – Josh Felser, co‑founder and managing partner of Climactic
Materials companies must convince skeptical markets that they can scale without a guaranteed customer, a problem that Felser set out to solve.
Material Scale: A Hybrid Debt‑Equity Vehicle
Felser has been developing Material Scale, a hybrid debt‑equity investment vehicle that pairs climate‑tech startups in the apparel sector with large buyers. The model works as follows:
- Buyer commitment – A buyer (e.g., Ralph Lauren) commits to purchase a bulk order at market price.
- Funding the gap – Material Scale provides a loan and warrants to cover the difference between the purchase order price and the startup’s production cost.
- Minimal dilution – The startup receives capital with limited equity dilution.
“In effect, we buy it and then simultaneously sell it,” Felser explained.
The purchase order funds flow from the buyer through Material Scale to the startup, and the related agreements are signed simultaneously, giving the startup immediate revenue and the investor a clear path to upside.
Early Participants and Future Outlook
- Ralph Lauren is the inaugural buyer on the platform.
- Structure Climate joins Climactic as a general partner.
Material Scale has not yet closed any deals but reports strong interest from both large apparel manufacturers and a pipeline of candidate startups. The first investments will be made from a special‑purpose vehicle of roughly $11 million.
Felser envisions expanding the model beyond apparel into other climate‑tech markets such as alternative fuels, aiming to scale the concept to a nine‑figure fund. He hopes the approach will inspire other investors to develop similarly novel instruments to combat climate change.
“We need more novel instruments like this to attack climate change. We want to be nimble and be able to take advantage of opportunities when we see them and not just be doing the same old thing.” – Josh Felser
References
- “Valley of death” article: https://techcrunch.com/2024/04/27/climate-startup-valley-of-death/
- Climactic: https://www.climactic.vc/
- Structure Climate: https://www.structureclimate.com/