5 Valleys of Death in Climate Tech Investing


Any entrepreneur knows that sufficient funding is the cornerstone to any startup’s success. The process of acquiring funding can be tricky, with a multitude of financial instruments to choose from. In many cases, funding can make or break a start-up. Even if the startup manages to raise a successful Seed round, over 90% fall into the “Valley of Death” to die. The valley of death, in the startup world, is the phase where the company has commenced operations but is yet to make any money¹. In such a situation, most projects don’t live to see the market reaction and disappear into oblivion.


For Deep Tech startups, this would be the dangerous interval between an innovation created in the laboratory, and its launch into the marketplace at a full commercial scale. It is at this point that the startup needs investor support more than ever.



Why is the valley of death a problem?

Startups at this stage are particularly vulnerable and marked by a heightened risk of failure. During this period, startups need to operate without any existing revenue, solely relying on their initial invested capital. The longer they stay in the valley, the more likely it is that the company will fail prematurely². Founders will often find themselves in a seemingly never-ending firefighting mode, unable to propel their company’s growth initiatives forward.

AI startups and VC funding should avoid potential death valleys as the complexity of achieving targets and the strength of AI technology are often illusive
Source: https://www.the-waves.org/2020/08/06/ai-startups-and-vc-funding-death-valley-to-avoid/

Surviving the valley of death marks a significant milestone in the life of a startup company, signalling to investors that the startup stands a stronger chance to scale up successfully. By this point, the startup would have begun to generate sufficient revenue to become self-sustainable before the initial invested capital runs dry.


Surviving the valley of death marks a significant milestone in the life of a startup company, signalling to investors that the startup stands a stronger chance to scale up successfully. By this point, the startup would have begun to generate sufficient revenue to become self-sustainable before the initial invested capital runs dry.


SaaS vs Climate Tech Valleys of Death

In general terms, the length of the valley varies, depending on factors such as the business plan, industry niche, geopolitical nuances, and the amount of seed capital invested in the startup. For a software tech company, the startup valley of death is the famed ‘J curve’³. In a nutshell: once the trapped startup nails its product-market fit and manages to gain enough momentum to escape the valley, the path forward remains fairly unobstructed.


However, finding that path is not so simple for climate-tech startups, especially those with hardware solutions. These technology areas are often considered risky, are capital-intensive, and require a longer investing horizon⁴. VCs often compare nascent clean technologies with the safer, predictable SaaS products, resulting in a woefully underfunded ecosystem of climate tech solutions.


In contrast, climate tech startups may have as many as 5 valleys of death: at the startup formation, product development, market validation, pilot projects, and track record establishment stages. When early-stage venture investors have a hard time grasping how a startup can reasonably cross from one valley to the next, they fail to see a path to exit, therefore hesitate to invest.


The 5 Climate Tech Valleys of Death


1. Startup Creation

When a company is churning out tech (usually from a university lab or transitioning from research grants), the founders often find it challenging to raise capital. As a result, the startup struggles to find and retain executive talent who are willing to take the plunge and join the startup to get it off the ground⁵. At this early stage, the startup does not have a full-fledged team, and may not have achieved successful repeatability, further branding itself as ‘risky’ to potential investors.


2. Product Development

Numerous early-stage climate tech startups struggle to produce their first minimum viable product or land a successful product-market fit. Core team members may find themselves overwhelmed with navigating their way through complex manufacturing processes and supply chains. Founders would have to ensure that their product meets and exceeds all the relevant specifications and industrial quality standards while sufficiently protecting their IP. It can be challenging for a team that lacks the relevant industry knowledge and experience to establish optimal and cost-effective operating processes.


3. Reinventing Business Models

By this point, most new enterprises have already reached their basic growth objectives but have failed to maintain a well-functioning business model. Reasons for this may include an unpredicted shift in the market (e.g., Tamagotchi), outdated technology (e.g. investing in mp3 music players before smartphones emerged)⁶, or mainstream products challenged by huge competitors (ride-hailing apps challenging the taxi industry).


What do all of these situations have in common? Their business models have become irrelevant, even with sizeable traction, and the business is now in a declining (soon to disappear) market. Startups would therefore need to pivot diligently to survive. This could mean changing or reinventing their business models, offering newer product/service streams, or even experimenting with different sales and marketing tools to acquire new customers.


4. Death by Pilot

After the startup has created a suitable business model, it may choose to scale up in volume, usually to establish a successful track record. Since many climate tech startups struggle to receive capital to demonstrate their first commercial-scale product or facility, launching a series of successful pilots is their best strategy to showcase their technology’s potential. Unfortunately, these startups can often get stuck in a rut of “pilot after pilot” with little commercial traction from key customers or partners. This also happens when the startup product’s stakeholders are risk-averse and have long developmental cycles (always the case for deep-tech startups).


5. Widespread Deployment

Climate tech companies are quite capital-intensive, so when they finally reach the point of large-scale market adoption, they need investors and VC firms with large cheque sizes to finance this at-scale enterprise. At this point, investors expect to see established, stable cash flows with a solid sales pipeline of customers. Startups can still falter at this final valley by not acquiring the necessary resources and capabilities to grow in line with the number of customers. Simply put, startups need to strategically fund their expansion and limit product experimentation in their pursuit to live up to projected growth expectations.


Moving forward

Over the last several years, there has been a renewed interest in green investments in an effort to combat climate change. One good example is the case of wind and solar power currently benefitting from an influx of investments - these technologies now possess stable cash flows and are no longer considered ‘volatile’ or ‘risky.’ As more and more novel technologies surface in the climate tech ecosystem, so does their potential to combat climate change when equipped with sufficient funding.


It is my hope that investors would be more willing to support and finance early-stage climate tech if they are equipped with the understanding⁷ and strategies to build a bridge that crosses all 5 daunting valleys.


#Sustainability #ContentSeries

 

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ARTICLE WRITTEN BY: CHANDNI JAGA

Chandni Jaga is a Ventures Associate (Sustainability) at Plug and Play APAC.

To know more about our programs in Singapore, click here.

 

References:

  1. https://www.investopedia.com/terms/d/death-valley-curve.asp#:~:text=What%20Is%20the%20Death%20Valley,when%20plotted%20on%20a%20graph.

  2. https://energy.stanford.edu/sites/g/files/sbiybj9971/f/the_valley_of_death_and_the_business_of_asset_management_0.pdf

  3. https://hbr.org/2022/04/an-entrepreneurs-guide-to-surviving-the-death-valley-curve

  4. https://www.jumpstartmag.com/the-startup-valley-of-death-and-how-to-avoid-it/

  5. https://www.third-derivative.org/blog/climate-techs-four-valleys-of-death-and-why-we-must-build-a-bridge

  6. https://techcrunch.com/2018/12/24/four-ways-to-bridge-the-widening-valley-of-death-for-startups/

  7. https://www.third-derivative.org/blog/climate-techs-four-valleys-of-death-and-why-we-must-build-a-bridge



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