Climate tech is a very broad industry that includes everything from software to deep-tech. Therefore, the challenges that each climate tech company faces when scaling will be very different. In this mini guide, we will cover the unique challenges that climate tech companies face when scaling, and how to overcome them.
Government policy in climate tech
“It doesn’t matter if something is clean or green—if it is way more expensive than an alternative, it will not have lasting financial support.”—Amy Francetic
In many ways, scaling climate tech companies is very similar to how other companies have scaled in the past, but there is one key difference: the massive role of government in the climate tech industry, both in policy setting and funding.
The climate crisis has created a sense of urgency for start-ups to provide solutions, and the government pours a lot of funding into the climate tech industry as a result. Most notably, the recent Inflation Reduction Act allocates around $370 billion in spending to tackle climate change. In the past, government policy and funding made certain technologies economically viable that otherwise would not have been. Therefore, says Amy Francetic, Managing General Partner at Buoyant Ventures, having a deep understanding of government policy in the climate tech space is crucial for founders to determine how and when to scale their companies.
“It doesn’t matter if something is clean or green—if it is way more expensive than an alternative, it will not have lasting financial support,” Francetic says.
Francetic gave the example of innovation around biofuels from 2008 to 2010. The government never succeeded in passing a production tax credit for biofuels, which meant that biofuels were always significantly more expensive than ethanol and other kinds of fuel. Many biofuel startups were funded during this time period but then failed because they were never able to successfully bring down costs. This example shows how important it is for founders to understand how government policy or a lack of government policy affects their ability to scale their climate tech company.
Assessing whether your technology is ready to scale
“We need strong scientists and engineers. We also need a strong focus on the business side and people coming in with humanities degrees, economics degrees—all of that stuff.”—Mia Diawara
Before you start scaling, it is critical to assess whether your company or technology is ready. Attempting to scale when the timing is not right, the technology is not ready, or your founding team is not adequately prepared could cause your company to fail or face serious obstacles in the long run. Mia Diawara, an investment partner at Lowercarbon Capital, provided insight into how Lowercarbon Capital determines whether your company is ready to scale.
Different types of climate tech companies experience different challenges, and indicators of when a company is ready to scale will depend on the type of technology. According to Diawara, for products that are deep-tech and more scientific in nature, like nuclear fusion or battery materials, Lowercabon Capital looks to see if your technology has accomplished certain scientific milestones, specific to your product, that indicate that your technology is ready to be commercialized. For companies that are differentiated by their unique business model, like a novel way to sell heat pumps or rooftop solar, Lowercarbon Capital looks for an innovative go-to-market strategy.
But regardless of the type of technology, every founder needs to have an in-depth understanding of the market and how government policy affects the market, sound business judgment about the potential for their technology, and the drive to assemble a stellar founding team with complementary skillsets. These are all key factors that VCs use to determine whether a company is ready to scale, says Diawara.
“We need strong scientists and engineers. We also need a strong focus on the business side and people coming in with humanities degrees, economics degrees—all of that stuff,” she says.
“You can go after very mission-driven people…And then you can create a very unique culture around that mission, instead of hiring people that want the highest salaries.”—Jonah Greenberger
Scaling software technology for climate will look very similar to scaling any other kind of software. The only difference is being aware of the impact of policy on your product. According to Jonah Greenberger, founder and CEO of Bright, and Francetic, hiring the right people in the beginning is crucial for the success of the company down the road.
“You can go after very mission-driven people who are looking for a fulfilling career. It can give you an advantage when recruiting. And then you can create a very unique culture around that mission, instead of hiring people that want the highest salaries,” says Greenberger.
Hiring people from the same industry can be helpful to benefit from their expertise. Find yourself a co-founder who’s skills and expertise are different from your own so that you complement each other well. If you are more technical and contributed to building the software, find yourself a co-founder who has a business background who can help develop a go-to-market strategy and understand the dynamics of the market. To learn more, read our mini guide on how to find the right starting team and why it’s important.
Diawara says a common misconception that founders and VCs have is that hardware takes a lot longer to scale than software. However, Lowercarbon Capital’s portfolio demonstrates that hardware, especially products that are substitute goods, can scale much faster than software because the demand for the product is already there. Once the technology is ready, a smart business model and go-to-market strategy is needed to scale the product. This might involve reaching out to customers and clients who already use the existing products and convincing them to switch to yours.
According to Greenberger, scaling hardware that involves lots of manufacturing, like electric vehicles or solar panels, comes with its own set of challenges. Because manufacturing requires a large amount of capital upfront, entering a market that can bring in lots of revenue for your company is important. Tesla demonstrated this concept by initially only selling luxury EVs for wealthy customers. This provided Tesla with the revenue to scale their manufacturing and eventually introduce more affordable options to the wider public. By selling to a more lucrative market first, you can ensure that your company has the revenue it needs to overcome the costs of manufacturing as you scale.
In summary, while many of the traditional pieces of advice on scaling companies still hold true, there are differences about the climate tech industry or certain climate tech companies that present unique challenges for scaling. Ultimately, understanding the market and how the industry works, knowing how your product fits into the market, and having a great founding team will help you overcome many of the challenges you will face as you scale.