<aside> 💡 Key learnings

1️⃣ De-risking their technology while scaling up fast is one of the main challenges of climate hardware companies.

2️⃣ The Technology Readiness Level (TRLs) and Techno-Economic Assessments (TEAs) are the main tools to manage product development.

3️⃣ Investors generally want to see a pathway to cost competitiveness and typically invest from TRL 2-3 upwards.

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📝 Contents

The technologies and solutions we need to tackle climate change are as varied as the problems we are facing. The common denominator they have is the hardware component involved, which is in most cases the centrepiece of value creation. This means that scaling and product development differ from software companies. The following chapter will provide a first insight into technology and product aspects. We dive deeper into the different types of climate solutions, outline the different technology readiness levels, present a basic guide on techno-economic assessments and highlight the importance of learning rates.

1. A Taxonomy of Climate Hardware Solutions

When thinking about climate hardware technologies we split them into three categories. The boundaries are blurry but it helps to conceptualise the role of different startups along the value chain:

• Production (Technology Providers): The 'Production' or 'Technology Provider' model is primarily centred around the creation and innovation of core technologies that drive climate solutions. This model is based on simple Input-Process-Output flows where raw materials are subjected to a specific technological process to yield a value-added product or outcome (output). Examples in the climate domain include electrolysers that split water to produce hydrogen, fermenters that assist in biofuel production, Direct Air Capture (DAC) systems that absorb atmospheric carbon dioxide, and the development of novel materials that are more energy-efficient or environmentally benign. Such companies provide the foundational technologies that many other businesses utilise and build upon.
• Assembly (Manufacturers): The 'Assembly' or 'Manufacturer' model emphasises the integration of different components into a cohesive and functional product. Rather than creating core technologies from scratch, businesses operating under this model often source various parts and then assemble them. Electric Vehicles (EVs) are a prime example; they incorporate batteries, electric motors, software, and many other components that may be produced by different suppliers. Similarly, heat pump production integrates compressors, heat exchangers, and control systems to deliver a product that can transfer heat from one environment to another. The assembly model is critical in bringing technology to the mass market, ensuring that the individual components of a product are harmonised and optimised for the end-user experience.
• Deployment (Developers): Businesses under the 'Deployment' or 'Developer' model often emphasise scaling and distribution. They take existing technologies and focus on their wide-scale application and rollout. Their expertise lies in project development, logistics, large-scale installations, and ensuring optimal conditions for technology operation. For instance, while the core technology behind solar panels might be developed by production companies, it's the developers who take these panels and integrate them into home solar systems, offering financing etc.. Similarly, the establishment of gigafactories involves a massive rollout of industrial infrastructure tailored to produce, for example, batteries or EVs at an unprecedented scale. Businesses following the deployment model are crucial for the large-scale realisation of climate solutions, taking technology from the lab or factory floor to the wider world where it can have a tangible impact.

2. Technology Readiness

Often climate hardware companies will not only face market and execution risk but also science and/or technology risk. Venture capital and, even more so, building a company, are about managing risks.  In order to evaluate and judge the risk associated with developing a new technology, most investors will refer to Technology Readiness Levels (TRL). This is a scale developed by NASA to classify the technical risk of physical components. It’s a simple 1-9 scale that describes the range from an idea on paper to a fully functional system.

‘In our case all of the experts say it takes 20 years to take this technology from TRL1 to TRL9. Start with TRL3 or 4, otherwise you won’t get there’ — Early-stage founder

This enables investors to compare different technologies and benchmark the maturity of a product. The average startup in our survey had a median TRL of 6 and it takes them an average of 4 years to get to a first-of-a-kind plant (max: 10 years). While the TRL scale comes with certain limitations, like the focus on individual components vs integration complexity, and ignores market risks, it is widely used by venture capitalists.

Venture investors would often come in at earlier TRLs, taking scale-up risks in the hope of outsized returns. In most cases, this would refer to TRLs 3-5 but depending on the level of complexity investors could also invest at lower TRL or expect more validation before progressing. However, few venture investors would take on fundamental science risk.

Our survey suggests that preseed/seed funds would feel comfortable with a TRL of 2-3 whereas Series A investors would want to see a minimum TRL of 5. Later-stage investors would want to see de-risked technology and demonstrated unit economics and would only invest at TRL 9.

3. Techno-Economics

Like every SaaS founder should know their metrics such as unit economics and LTV/CAC ratios, every climate founder building physical products should know their techno-economics. A Techno Economic Analysis (TEA) should be a basic exercise, performed early-on and refined at every development stage. In a nutshell, TEAs are a way to understand a product’s potential economic competitiveness by looking at technological and economic variables that influence cost-levels and thus prices.

In general, TEAs are an important strategic tool that can help founders understand the potential economic competitiveness of their technology. In the climate tech context, this is critical when assessing whether a technology can be economically viable and/or achieve price parity with incumbent approaches. This is particularly important for commodity markets such as energy, chemicals, or CO2. By identifying key cost drivers and levers, you can not only show the economic potential of your process but also sketch a roadmap to get there once operating at scale and assess sensitivities. In short: it’s a must-do exercise even at early stages.

Your TEA shows investors how you think and serves as a basis for assessing your technology. Below is a very simple non-technical guide on performing TEAs that can guide your initial thinking. Depending on your stage and the importance of accurate numbers, you should go into much more detail. The complexity is probably never ending but in essence, a TEA is based on the following logic:

• Look at your technological variables
• Estimate Operating Expenditure
• Estimate Capital Expenditure