The Traditional Funding Cycle Doesn't Work for Climate Tech
The Traditional Funding Cycle Doesn't Work for Climate Tech
by Yair Reem, Partner at Extantia Capital
In the venture capital world, startups are frequently asked about their funding stage. This is a question with only a few possible answers, such as “Seed”, “Series A” or “Series B”, all referring to stages in the startup funding cycle. According to conventional wisdom, one can understand the current state of the company based on where it is in the funding cycle. For example, startups in the Seed stage typically have an MVP, startups in the Series A stage have a few customers and early revenue, and startups in the Series B stage can demonstrate product-market fit and real traction.
But in climate tech, these definitions are not exactly straightforward. It’s not uncommon in this industry for Seed stage startups to seem far ahead of Series A firms, or for Series B companies to still be in the pre-revenue stage. Traditionally, each stage of a funding cycle implies a different level of product readiness. But in climate tech, research and development are often funded much earlier, at the university level, so that by the time outside funding is sought, the necessary technology is already far ahead of traditional startups at the same stage. Government funding and grants can play a role in funding even after the foundation of the companies, further skewing the traditional stage definitions, which were established for equity-only companies.
In our experience, trying to force climate tech into boxes made for companies with different sets of challenges often leads to confusion, which is ultimately unproductive. We need new metrics to gauge the true status of a climate tech startup.
While there are a few methodologies designed to describe the readiness of new businesses for the market, like Commercial Readiness Levels (CRLs), in our experience, only a small percentage of hardware founders are familiar with CRLs and can properly categorise their technology by CRLs.
This is especially glaring when compared to Technology Readiness Levels, or TRLs. These are metrics used to assess the maturity of a technology, moving from TRL 1 where basic principles are still being observed and reported to TRL 9, where the success of a technology has been proven in its operational environment.
Most of the hardware founders we work with already have a good understanding of TRL, making it a good metric to use when speaking to startups. But TRLs cannot tell the full story on their own. For instance, they don’t say much about a product’s durability, which needs to be assessed separately from the TRL. Also, high TRLs don’t immediately translate to high levels of commercial readiness. That’s why we use TRLs in combination with other metrics such as current scale status, which we quantify in tangible terms like grams or watts, and the company’s capital needs to gain a better picture of a company’s status.
For example, a technology with a high TRL may no longer require “early stage” venture capital financing if it is already capable of producing output at a higher scale, but another technology with a similarly high TRL may still be in the early stage because it is still dealing with low quantities and requires a large amount of funding to scale.
Climate tech is a new asset class that requires everyone involved, founders and investors alike, to think outside the box. Not all startups follow traditional paths to readiness, so it helps to develop new ways to discuss these new technologies.
Technological development is rarely a smooth and straightforward process, and a single metric cannot accurately account for every possibility. There will always be instances where the boundaries between categories blur, which is only natural for emerging technologies. Using multiple metrics offers a more detailed understanding of a technology’s readiness, giving us a way to holistically discuss the status of new companies.
So the next time a climate tech founder says they are raising “Seed round” or “Series B”, don’t immediately label them as “too early” or “too late”. Take the time to learn more. They may surprise you.
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