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Over the past 18 months, I’ve joined Lior Handelsman, Grove Ventures’ General Partner and co-founder of SolarEdge, in evaluating climatech startups. We’ve made it our mission to meet with most (if not all) of the Israeli founders in this sector. We wanted to thoroughly assess every Seed stage opportunity in the market, in hopes of investing in the most promising climatech startups. After making a couple of investments in the field, we’ve decided to share our most valuable insights – our five most practical tips for establishing a fundable climatech startup:
1. Look beyond carbon-credits
Banking solely on voluntary trade of carbon credits is not a viable business plan. Carbon markets, while growing, are still relatively small and uncertain – and steady revenue flows aren’t guaranteed. Startups that focus only on the voluntary trade of carbon credits may be perceived as risky, and although big tech companies like Microsoft, Shopify and others have made pledges to purchase credits, VC investors usually don’t like to rely solely on promises, and neither should you.
Simply put, you should identify a distinct pain-point that decision-makers are willing to solve and pay for. Alternatively, if there isn’t an obvious pain, there should be an obvious and direct gain. Take reference from Lior’s experience with SolarEdge, where they provided their early end users, such as farmers, the means to generate their own electricity and create additional revenue streams for themselves.
2. Stress test your unit economics
We always ask founders to send us their unit economics (the revenues and costs associated with each unit of their business). Once we get the materials, we analyze them thoroughly. Unlike most enterprise SaaS startups, climatech ventures often involve hardware as well as software, which complicates unit economics. It is essential to meticulously outline the costs per unit, and then stress test all the assumptions in growth conditions to determine the costs at scale. This process will help you understand whether your venture is simply an intriguing science project, or rather a scalable business.
If the unit economics indicates that the probability of reaching substantial revenues is low, securing an investment will be a challenge.
3. Conjure a solid plan for crossing the Valley of Death
The Valley of Death is a critical phase for companies that have passed the proof-of-concept stage, and now require significant funding to finance commercial projects. This phase is particularly ‘deadly’ for climatech startups, as oftentimes, their solution is viable for commercial customers only at scale. For scalability, founders need to raise tens of millions of dollars, but investors are often hesitant to put money before they see proof of commercial credibility. Here lies the paradox: you won’t be able to sell a single unit without being able to build it first – and you won’t be able to build it before having paying customers.
At SolarEdge, Lior and his co-founders mitigated this risk in a creative way: instead of focusing on the large commercial projects, they started off by selling a few thousand units to private homeowners. This was a much cheaper, less complex go-to-market strategy: The revenues gave them some breathing room (they were in the valley, but they weren’t gasping for air). Their story was also much more appealing for investors – they proved that they could sell, that their product worked, and that they could retain happy customers. Now all they needed was a bit more capital to move to the next stage: selling to big commercial customers, with a large Annual Contract Value.
Think outside of the box and start selling without millions of dollars in your pocket. If your plan is to open a factory before you sell your first unit – you might not make it out of the valley alive.
4. Plan for your B round before raising your Seed round
This tip is a well-known secret amongst early-stage investors, and founders should also be familiar with it.
Engaging with growth-stage investors who have already backed climatech companies and asking them about their benchmarks for successful climatech startups can prove extremely beneficial. This will give you insights into what investors consider a promising and viable company. You will be able to plan, gain a better understanding of the market and the adequate unit economics to present. The feedback of late-stage investors will help you meet the expectations of potential early-stage investors and gain a better understanding about the feasibility of your venture.
5. Demonstrate a clear and scalable Go-to-Market strategy
Customers in climatech are unique. Investors want to see a well-thought-out plan on how your climatech startup will be able to captivate this particular market and achieve sustainable growth. Your Go-to-Market strategy should identify your target customers, outline your distribution channels, and include your marketing plans. Highlight how you are going to acquire and retain customers and demonstrate your understanding of the competitive landscape. A scalable GTM strategy will instill confidence in investors that your startup can grow efficiently and capitalize on market opportunities. Remember to back up your strategy with data and market research that support your claims. You’ll get bonus points if you verified your GTM approach by conducting validation calls with real customers.
Tal Abuloff is an Associate Investor at Grove Ventures. This article was co-written together with Lior Handelsman, General Partner at Grove Ventures who leads ClimateTech investments at the fund.
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