Eight Ways for Climate Tech Startups to Avoid Pitfalls

by Jonathan Weitz and Claire Broido Johnson

Apr 17, 2024

We need climate tech startups and the entrepreneurs who build them to solve the climate crisis. And the positive environmental impact of these startups is only unlocked through successful scaling. Navigating that journey is challenging, and may become more so in a tighter financing market.

From our experience as serial entrepreneurs, climate tech investors, and advisors, we've seen first-hand the patterns that can make or break a startup.

Drawing on an analysis of hundreds of startups, we identified eight common pitfalls to avoid, as well as examples of startups that successfully navigated these challenges.

1. Leadership and Culture

We have seen four organizational elements that underpin a climate tech startup’s ability to scale successfully.

First, culture and communication: without proactively nurturing culture, the founding team’s values that initially drove success can become diluted.

Second, companies need a well-structured HR function with a strong recruiting machine. Startups sometimes take too long to fill leadership and skill gaps, but equally important is hiring the right people for each stage of growth. For example, hiring a senior corporate sales executive too early may not be a fit for startups that need flexibility and go-to-market strategy planning.

Third, companies can falter if they are not aligned on decision-making processes, clarity of roles, accountability, and mutual trust.

Finally, founders and leadership teams that strike a balance between driving rapid growth and ensuring profitability are best equipped to navigate their startups through uncertain times. This requires thinking dualistically, keeping “growth mode” and “profit mode” in mind simultaneously.

2. Market Sizing and Go-to-Market Strategy

Many startups in our analysis faced a common challenge of insufficient demand compared to initial projections, or the go-to-market strategy didn’t fully address potential challenges such as distribution.

Startups sometimes overestimate Total Addressable Market (TAM). Founders should regularly seek feedback that challenges their assumptions around differentiation and market competitiveness, and maintain customer feedback cycles in operations.

In other instances, entrepreneurs overestimate Serviceable Addressable Market (SAM) due to assumptions of market readiness, speed of adoption of new climate technologies, and their understanding of incentives.

Some startups find the Serviceable Obtainable Market (SOM) is lower than expected when markets have high entry barriers, strong incumbents, competitive concentration, insufficient differentiation, or an incompatible business model. The estimate of SOM should capture customers with a realistic willingness to pay.

3. Product Velocity and Direction

We found three challenges around product velocity–the speed and direction of development–are often the root cause of product-related issues.

First, sometimes products take longer to develop than the path to revenue can support. Estimating the cost and time needed to reach commercial scale can be hard, but is essential for effective sales and securing sufficient financial runway.

Second, the product roadmap may lack the necessary sequence of steps to progress logically from the current product to the future vision. Articulating the staged roadmap is half the battle; the other is aligning everyone in the direction, including the executive team, staff, and stakeholders.

Third, sometimes product development may leave unresolved scalability issues that lead to downstream operations or finance challenges. Although Faraday Bikes' product was beloved by many buyers, it included customized components that necessitated support, yet lacked comprehensive local maintenance coverage.

4. Unit Economics and Revenue Model

Investors are keenly interested in startups’ path to profitability and scalable unit economics, especially during times like today when capital flows less freely. We found three root causes of unit economics challenges: Willingness to pay, cost to sell, and cost to serve.

For startups selling into commodity industries such as concrete and steel, customers must either be willing to pay a green premium, or cost structures must become sufficiently cheaper as the product scales to reach price parity, or both. Do Good Foods upcycled unsold grocery food waste into animal feed, then sold chickens raised on the feed. Some buyers will be willing to pay a premium, but most are likely price-sensitive.

Second, cost to sell. Investing in sales teams can be a valuable lever for growth, but can drive higher cost to sell when payback time is longer or demand is lower than expected.

Third, the fixed and variable cost to serve. Convoy, a freight logistics company, scaled rapidly with aggressive discounts. It raised capital for fixed costs such as technology development and equipment, but a recession in the freight industry caused revenues to decline, and the company fell out of compliance with debt covenants. The lesson is to maintain an updated, realistic view of how cost to serve will look as you scale, and evaluate in advance the levers available to adjust cost to serve in a scenario of lower revenue.

Several vertical farming companies demonstrate solution paths. Robotic farming company Iron Ox shifted focus from the competitive, price-sensitive greenhouse produce market, to a B2B agtech platform. Vertical farms Oishii and Jungle found markets with higher willingness to pay, in premium strawberries and plant-based fragrances.

5. Operational Scaling

In our work and research, we found four factors that were consistently at the root of operational scalability challenges.

First, operations process standards become crucial, while maintaining flexibility. The complexity of product and sales can in turn drive operations complexity. Quality control is essential, as underlying product issues can multiply as operations scale.

Second, customer experience. Customer support teams need to be sufficiently staffed and trained, with strong communication pathways to product and sales teams. Customer coordination is especially critical for pilot implementations.

The third factor is automation. Founders should understand how turning up the dial on operations affects unit economics at each step of the process. Increases in operations capacity should be through process efficiency and automation, in combination with headcount growth, as opposed to headcount alone.

The fourth factor, coordinating the value chain, can hamper operations at scale. Partner and supplier management is challenging but essential: the recent bankruptcy of Renewcell illustrates the complexity of ecosystems for both supply and demand.

For earlier-stage startups, use these factors as part of your plan for scaling beyond product-market fit.

For scale-ups, let these lessons inform your operations hardening roadmap, in the same way that you update the product roadmap. Regularly assess operations maturity and risk areas, and dedicate resources to making operations a source of competitive advantage.

6. Capital Stack

We found climate tech startups that have successfully scaled and raised multiple rounds often do a few things well: Diversifying the capital stack, planning for different types of capital needs, and proactively approaching financial derisking from the perspective of different finance sources’ requirements.

Build a robust, diversified capital stack that will help you scale, and avoid relying solely on dilutive equity, layering in non-equity sources such as grants and project finance. We also suggest founders plan for their capital needs and align the right type and support needed for each stage.

Proactive financial derisking is essential to unlock larger pools of capital beyond venture. Founders should consider paths to longer-term offtake agreements, government incentives, and insurance.

Growth can also be derisked by managing cash and capex intensity. Capital-light approaches aren’t always feasible but may be worth considering ways to incorporate into your business model.

Another lever is finding earlier sources of revenue. An example is Solugen, which sold its hydrogen peroxide in small batches to hot tub companies before scaling production.

7. Competition

Another significant root cause of startup challenges in our analysis is competitive dynamics.

Startups can sometimes underestimate the power of entrenched competitors. High-profile closures among vertical farms such as AppHarvest underscore the risk of head-on competition with incumbents (i.e. existing farmers) that have established infrastructure and lower prices.

E-scooter companies such as Superpedestrian, faced competitive pressure from other entrants. Some companies offered lower prices, driving unsustainable margins. URB-E, the e-bike maker, recognized the challenge of scaling up in an increasingly competitive market. Rather than compete on price, they pivoted to focus on a premium niche: cargo e-bikes for last mile logistics.

8. Regulatory and Policy

We found two warning signs related to regulatory risk: insufficient regulatory engagement and exposure to political risk.

It’s easy to underestimate the complexity of regulatory systems–the variations between jurisdictions, as well as the rate at which policies change. Without sufficient engagement with regulators at federal, state, and local levels, startups may miss out on having a seat at the table or might be taken by surprise.

Business models may be dependent on a specific regulatory approval, or its timing. Anaergia’s Rialto Bioenergy plant was slow to ramp up because its feedstock of food waste was dependent on the enforcement of California’s organics collection regulation, which became delayed.

Climate tech startups can be exposed to political risks, at national and local levels. Within local communities, the example of NIMBYism with Atlantic wind farms demonstrates the high level of community engagement required.

Conclusion

Climate tech startups are tackling immense challenges with dedication and ingenuity–we should celebrate these impactful success stories. And we should also celebrate lessons learned.

Even the most prepared startups face headwinds outside their control. But by focusing on factors within their sphere of influence, entrepreneurs can reduce vulnerabilities and build resilience.

The climate tech community is rich with experience and support. Reach out to advisors, investors, and fellow founders.

By addressing these eight areas, climate tech startups can achieve outsized impact and returns, delivering the solutions our world urgently needs.

Connect with the authors Jonathan Weitz and Claire Broido Johnson to ask about your company, or share your learnings about how you have successfully navigated and/or pivoted with your company.

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