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We spend a lot of time writing and talking about the many aspects of building a climate tech company–and for good reason! Building an enduring company is hard, complicated work which requires founders to wear many hats.
But when it comes down to it, there’s only one thing that matters: revenue. And there’s only one place you’re going to find revenue: the market.
Revenue is amazing. It means you have customers. Your technology is living and breathing in the real world. And you’re generating non-dilutive capital for your business. The more you generate, the more you’ll be forgiven for all your other shortcomings (true in business and life).
Revenue just doesn’t arrive at your doorstep. As my dad always said, you’ve got to spend money to make money, and that expression is very applicable to building a climate tech company. Very applicable (we’re looking at you, fusion!). We talked about the importance of revenue in the Startup Playbook before. But this summer,
we’re taking it to a whole new level, because humanity is taking the CO2 level in the Earth’s atmosphere to a whole new level (425.10 PPM in March 2024!). We will spend this hot summer talking about taking climate tech to the marketplace and what it means to generate revenue for your growing company.
We’ll cover this topic in five installments (including this one), with a particular focus on financing first-of-a-kind physical technologies:
Call it the Race to Revenue: A Climate Tech Marathon. I call it the way you’re going to scale and pay back your investors. Let’s get to it.
Any founder should have an intense and immersive understanding of the market they are entering and the challenges that lie within. For founders looking towards commercialization of their technology, which should be done at the earliest stages of the business, there are three simple questions to ask:
1. What are you selling?
The way you generate revenue depends an awful lot on what you’re actually selling. And because nothing in climate tech is easy, there are a few different types of climate tech products a startup could sell:
These days, many climate tech businesses have a product that combines hardware and software. But just because your hardware has software doesn’t mean you’re no longer a hardware business. Investors will still focus on the most capital-intensive part of your business!
Public Service Announcement–service revenue can be an interesting way to bridge financing gaps in your business. I’m not saying that is what your investors or board want you to focus on, but you’ve got to do what you’ve got to do to survive, and sometimes that means offering up your expertise as a consultant to other businesses. It can be a useful bridge, especially if you’re struggling to raise capital or your product has a long sales cycle.
Alright, back to our regularly scheduled programming. The second question founders need to ask:
With an understanding of what you’re selling, it is now important to explore your plan for how you are going to sell it. For this section and the next, let’s focus on software and hardware.
Software provides two basic opportunities to sell: a license and a subscription. Most investors will prefer a subscription because it provides recurring revenue at an ostensibly high margin. Provided you have a reasonable cost of customer acquisition and low churn, you’ve got the foundation of an enduring, scalable business.
Hardware and physical goods can be more complex. If you have a physical good, like a commodity, whether it be green cement or green methanol, then you’re likely aiming to replace incumbent, carbon-intensive businesses with your low carbon alternatives. These goods tend to be lower margin that software and sold on a per unit basis, which seems straightforward until you start thinking about how you are going to manufacture your goods. Suddenly, you are asking: am I running my own plant, contract manufacturing my production run, or licensing my technology to a company that has the resources?
Hardware is even more complicated when the technology is a physical plant that produces a good or some sort of clean energy commodity. These physical plants are expensive, time-consuming to build and often the first of a kind. Oh FOAK!
We’ll start with the easy one first. If you’re building a service business, then you’re most likely going to finance your business with your own capital. The VC community will be a hard pass.
If you’re building a software business, then there’s a good chance that you can finance your growth primarily with venture capital and growth capital. The beauty of a high margin software business is that your COGS (cost of good sold) is low! Of course, as you scale, you may want to think about venture debt, working capital, and institutional debt and equity. But those will come after you experience meaningful revenue growth.
Now, if you’re building hardware, financing is going to be... wait for it... hard. Whether you’re contract manufacturing a good or building a physical plant to produce your product (be it clean electrons, clean molecules, ways to store or transport either one, or a low carbon commodity like green steel), you must build an. intimate and obsessive understanding of the costs of manufacturing and selling your good.
Why? Because it is going to be very expensive and take a long time. Think of it as the most expensive marathon you’ve ever run. You’ll have no choice but to get creative and sophisticated with your financing, and we’re here to help! We are going to dissect what it takes to finance a capital-intensive climate tech hardware company in the next 4 installments and share many helpful tips along the way. Like Clippy, but way cooler.
Stay tuned!
