This is a challenge every startup faces. You’ve built a prototype and proven it works, but now you have to sell and produce the product enough to get past the “valley of death” that kills many companies.
“They’re stuck with the chicken and the egg,” Josh Felser, co-founder and managing partner of early-stage venture firm Climactic, told TechCrunch.
The hurdles are particularly high for companies that make physical products. Felser found this to be a common phenomenon among startups producing new materials. Fesler, who previously founded and invested in software startups, said the challenges they face seem somewhat unfair.
“Software companies always sell at negative margins in the beginning. You see examples like Uber, Lyft, and many others,” he said. “But materials companies aren’t allowed to do that. One of the questions I had was, ‘Why is that?’”
Felser found that unlike software companies, which can quickly add more capacity from cloud service providers, materials startups face market skepticism about their ability to scale production without guaranteed customers.
Felser decided to give them one.
Felser may not run a company with a huge budget to use quirky ingredients, but he knows a thing or two. And as a climate tech investor, he knows more than a few startups that could benefit from well-known customers.
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Felser has been quietly working on a new project called Material Scale, which brings the two sides together using a hybrid debt-equity investment vehicle to revitalize materials startups, TechCrunch has learned. Material Scale will initially focus on climate technology startups in the apparel industry.
Material Scale invests in startups with commercial products that can scale when customers can purchase in volume. The buyer commits sufficient funds to cover the cost of materials at market prices. Material Scale will raise the difference through a combination of loans and warrants from the startup.
“This actually minimizes the dilution effect,” Felser said.
Ralph Lauren joined the platform as a buyer for Material Scale’s initial launch. Investor Structure Climate has joined Climactic as a general partner.
Funds from the purchase order flow from the buyer to the startup through Material Scale. “Effectively, we buy it and then sell it at the same time,” Felser said.
Transactions between Material Scale and the buyer and between Material Scale and the startup are essentially concluded simultaneously.
“It’s going to be interesting because once the deal is signed, the valuation of the company has changed significantly because now we have a buyer and we have the funding to achieve scale,” he said.
Material Scale has not yet executed any transactions. Felser said there is a long list of large apparel manufacturers interested in participating and startups that could use the funding. “Every startup wants that,” he said. “We have a long list of candidate companies that we are discussing.”
The first investment will come from a special purpose vehicle totaling $11 million. Felser hopes to eventually branch out into other similar markets, such as alternative fuels, and eventually grow the materials-scale concept into nine figures.
He hopes other investors will steal his idea.
“We need more new tools like this to tackle climate change,” he said. “We want to be able to seize opportunities with agility, rather than just doing the same thing.”
