<aside> 💡 Key learnings
1️⃣ Funding a hardware climate startup through to exit is hard, but gradually getting easier as more capital is coming in.
2️⃣ It is important to explore a variety of financing options such as grants and debt financing.
3️⃣ Each investment vehicle operates within its own risk-return profile. Your capital should work for your business and not the other way around.
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📝 Contents
If you’re a founder looking into how you can finance your business, you have most likely come across the default funding advice floating around on Medium pages and VC blogs. The only problem is that most of the articles and funding napkins out there are focused on the typical software company that raises one VC round after another before (in an ideal world) going public. If you look up companies like Amazon or Google on Crunchbase, you find a total number of 3-4 funding rounds, all constituted of equity. However, if you look up more hardware focused companies like Tesla or Northvolt, you end up at anything between 10-40 funding rounds, with a wild mix of grants, equity, debt and other financing mechanisms. This alone showcases the complexity of a climate hardware company’s funding journey quite well: it usually follows a bit of a different trajectory than what many players within the tech ecosystem - most of all, investors - are used to. The results from our survey underline this: when asking for one thing to change within the current funding environment, most respondents mentioned investors’ openness towards the timelines and return rates of hardware solutions:
“An understanding from VC's that [...] hardware development is a 10 year process with a sensible rate of return for those companies that are not selling fantasy tales. Too many VC's are lured by bright sparkly objects and Founders who blatantly lie about their technology readiness in order to secure funding.” — Late-stage founder
Most hardware founders need to at some point face the “Valley of Death”, the part of the funding landscape that separates those who reach escape velocity and can cross Moore’s chasm to the mainstream market, from those who plummet to, well, their death. The “Valley of Death'' refers to one of the most difficult moments within a hardware venture’s lifecycle (see chapter 3 “The funding gap”): you have proven that your tech works in the lab and now you need money to build a first pilot facility, or how it is often called in the industry, your “First-of-a-kind (FOAK)” plant. When it comes to financing FOAK plants, this is where companies encounter the biggest holes in the climate capital stack.
“The First-Of-A-Kind phase is not just important, it’s existential for the life of the project. To secure funding, it’s essential to have well-developed and well-defined projects. This involves clear goals, structured plans, and a vision for the project’s lifecycle.” - Mario Fernandez, Head of Breakthrough Catalyst (2023)
Crucially, the FOAK stage is also the stage where most traditional VCs shy away due to the lack of traction, debt or project financiers are not yet comfortable with the risk of failure, and climate infrastructure funds cannot invest due to their revenue thresholds. As a result, Series A companies have raised the least amount of funding in the past (as shown on the right). The good news is that the whole ecosystem is now well aware of this gaping hole in the stack.
Efforts are being made to bridge it, including government support (e.g. Innovate UK FOAK grant), new dedicated funds and initiatives (e.g. the EU’s & Breakthrough Energy’s Catalyst Partnership), and some existing capital providers adjusting their strategy. However, it is likely to remain the deepest canyon in the Valley of Death for quite a while, and this is not a “cross that bridge when we get to it” kind of deal, you need to be building your own bridge as you drive towards it.
Of course, we cannot fully solve the question of who will finance climate hardware's initial demonstration facilities, but with this next section. we hope to at least provide some guidance on how to plan for your funding journey, how to keep your startup well capitalised at every step, who will be the key providers of that capital, what will the financiers want to see, and how all this should inform your business KPIs and resource allocation.
<aside> 💡 Find the right investor: Sign up for the Net Zero Platform and create a profile for free. You will gain free access to a curated database of investors, grant sources, and debt providers to connect with, including contact data and portfolio information. Link here
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Sounds like fun. Let’s dig in.
First things first: let’s look at the different sources of capital you’ll be tapping into, and their key characteristics. Climate hardware companies no longer have to simply go through seed, A, B, and C equity rounds, as software companies are used to, but should look into a wide variety of grants, debt financing, equipment finance, and additional money from infrastructure and asset finance. The following table gives a good overview of the available funding sources out there:
| Type of financing instrument | Description | Stage | Dilution |
|---|---|---|---|
| University/ | |||
| research funds | Using their scientific research capabilities strategically, universities can cultivate both innovation and entrepreneurship, which, in turn, can generate economic advantages and amplify funding for innovative research efforts. | Pre-seed | No |
| Incubator/ Accelerator | Incubator and accelerator programmes provide early-stage startups with investment and hands-on support. | Pre-seed, Seed | Both possible |
| Business Angels | Business Angels are individuals with substantial financial means who are willing to undertake risky investments in exchange for a percentage of the equity in early-stage startups. | Pre-seed, Seed | Yes |
| Venture Capital | Venture capital is a type of private equity financing where investors provide funds to startups and emerging companies with high growth potential in exchange for equity. Venture capital funds generally raise from well-off individuals, family offices, investment banks, and any other financial institutions. | Pre-seed - Series C/D | Yes |
| CVC | CVC is the investment of corporate funds directly into external startup companies. This type of venture capital is typically sourced from large companies seeking strategic, financial, or innovative gains through investments in promising startups or emerging technologies in their industry or related fields. | Seed - Series C/D | Yes |
| Corporate Investment | Direct balance sheet investment from (potential) customers to further deepen the relationship to the startup. | Seed - Series C/D | Yes |
| Venture Debt | Venture debt is a form of debt financing for startups and growth-stage companies that usually lack the assets or cash flow for traditional bank loans but have backing from venture capitalists. It serves as a complement to equity financing, providing capital for growth while minimising equity dilution. | Series A-D | No |
| Grants & public funding | Public funding and government grants for startups are financial support provided by government bodies to new and emerging businesses, typically aiming to stimulate innovation, research, and development. Unlike loans or venture capital, these grants usually don't require repayment or equity, offering startups a financial boost without dilution of ownership or future financial obligations. | Pre-seed - Series D | No |
| Blended Finance | Blended finance is a type of financing that combines public and private funds to support projects that generate both financial returns and positive social or environmental impacts. It is used with the aim of leveraging public capital to attract private investment and includes various alternative sources of funding such as impact bonds or guarantees. | Pre-seed - Series D | Yes |
| Project Finance | Project finance refers to the long-term financing of infrastructure and industrial projects based on the projected cash flows of the project rather than the balance sheets of the project sponsors. Typically, a project financing structure involves a number of equity investors, known as 'sponsors', as well as a 'syndicate' of banks or other lending institutions that provide loans to the operation. | Series A-D | No |
| Revenue-based financing | Revenue-based financing offers capital for small and expanding businesses. It operates by providing investors with a cut of ongoing gross revenues. Payments are linked to the enterprise's revenues, which are measured on a monthly basis, leading to fluctuations in payment amounts. | Series B-D | No |
| Equipment leasing | Equipment leasing is a financing arrangement in which a company rents equipment needed for its operations instead of buying it outright. This approach allows businesses to use the latest machinery, vehicles, or technology without the high initial cost, often with options to upgrade or purchase at the lease's end. | Series B-D | No |
| Infrastructure funds | An infrastructure fund is a type of investment fund that allocates capital to various infrastructure projects like transportation (roads, airports), utilities (electricity, water services), and energy (renewable energy plants, oil pipelines). These funds typically invest in long-term, income-generating assets, offering investors the potential for steady returns and diversification away from traditional equity and fixed-income investments. | Series B-D | Yes |
| Other institutional Investors | Other institutional investors include pension funds, sovereign wealth funds, family offices, insurance, philanthropies, and charitable organisations. | Pre-Seed - Series D | Yes |
As described above, the capital available to you will depend on the stage you’re at, and what the key risks your business faces when you’re raising. Each investment vehicle has a risk-return sweet spot, which will determine how good of a fit it is for your company at the current stage. In a specific risk-reward zone, such as seed-stage venture capital, you'll encounter different investors with varying levels of comfort towards taking on technical versus commercial risk and their ability to guide you through both. Prior to pitching investors, it is essential to do your homework. Make sure to network with your peers and find out which investors have and have not worked out for them, and why. Dig into publicly available information, and connect with former investees and portfolio companies, to determine what these investors' sweet spot is.
This not only holds for private capital, but also public funding sources: you’ll need to access non-dilutive capital from day 1, and lots of it. 80% of our survey participants have accessed some sort of grant money at pre-seed stage, and over 50% at Seed stage. However, even at a later stage (until TRL 9), it can make up a crucial part of your funding strategy.
“Historically, Ineratec has received more than €20 million in grants - so it has always been able to finance itself well through this, even very early on” — Caspar Schuchmann, Ineratec
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Europe provides a growing (!) plethora of options, from national to regional levels, with a total number of 435 grant-giving organisations (Source: Net Zer0 Insights). Some grant programs focus on specific sectors, such as clean energy or sustainable agriculture. Others focus on specific stages of development, such as the pilot or commercialisation stage. To get the application right, there are grant-writing and -advance companies available, such as ZAZ Ventures, Climate Finance Solutions, and country-specific providers like Berliner Strategen in Germany, that can offer support in securing grant funding from various sources. There is also an awesome online EU climate tech funding navigator by the Cleantech for Europe initiative. Your ability to access non-dilutive capital will also make you more attractive to dilutive capital, as it mitigates their fear of being heavily diluted in future rounds.