360 views on tech #47: The Climate Capital Stack

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10 min readDec 6, 2022

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The Climate Capital Stack

by Kim Zou, Sophie Purdom — CTVC

A buyer’s guide to financing your climate venture (not just with venture)

Despite the climate tech market’s accelerating pace, scientifically-speaking, it’s still nowhere near enough. To avoid a climate catastrophe, we must invest an estimated $4T annually (just in infrastructure!) into the clean energy transition globally. This year, $800b were invested — and just $32b in venture capital.

Science tells us that we need to scale up total climate investment at least 5x annually. Venture capital investment into climate tech is doubling YoY, but the funding gap is not closing fast enough. To cross multiple technical valleys of death, particularly in hard tech, innovators need not only more capital, but more types of financing.

In any industry, there are different kinds of capital for different kinds of businesses and the kind of capital you take will likely inform your business strategy. The capital you bring on board should either be a) cheap and/or b) value add.

Some general attributes for founders to evaluate capital by:

📈 Expected rate of return: What are your investors (and their investors/LPs) expecting from you? The degree of risk (early) determines the rate of return (high). If you’re early and can deliver high return, you can access smaller amounts of riskier though oftentimes more expensive capital.

⚖️ Dilution / ownership: What will your investors’ bet on you cost you inequity ownership? Ownership vs. debt prescribes different expected versions of future revenue share. Your dilution during fundraising rounds also impacts your ability to issue equity to new hires, advisors, and other key stakeholders during the early days of your startup.

⌛ Complexity: What do your investors do to, for, and with you? There’s an inherent tradeoff between complexity of operational / financial covenants, control, timing, effort spent fundraising and associated costs. Simpler, no strings capital may not add as much as really getting to know a few investors that can be significant value adds.

Various types of funding across stages

Pre-seed | You’re working on an idea, but have limited clarity into product, commercial strategy, or market

Oftentimes, novel technologies without a clear path to revenue languish due to lack of initial funding to prove out a concept. Non-dilutive, project-based funding is typically unavailable at early stages due to lack of track record. Dilutive funding at this stage tends to be more open-ended, but at a much higher cost if the idea proves viable.

Pre-seed generally has the fewest rules and the least cookie-cutter approach to capitalization. The tradeoff is typically time (e.g. filling out grants) to dilution.

Philanthropic Foundations/ Private Grants/ Prizes: Non-dilutive project-based grants or competitions offering prizes to focus research on a specific area; typically tied to some timelines or demonstrations or progress. This can range from no-strings-attached cash to high signaling factor branding to primarily auxiliary benefits.

Government grants: Non-dilutive (public) capital to support specific technologies and research activities.

Angel Investors / Syndicates: High net worth individuals, previous founders, etc. often pooling together into SPVs (group one-off deals) which are typically very network-based, low on diligence, and thesis / category driven.

Catalytic Capital: Funds bringing investment rigor and process to deals with a bias towards impact potential over financial returns.

Rolling Funds: Investment vehicles structured like venture funds (LPs front capital so GPs can do multiple blind deals) but raised on a rolling quarterly basis, minimizing the hurdle to fund launch. Typically thematically or community-focused, with similar terms to VC deals albeit mostly following and unpriced (e.g. SAFE notes).

Crowdfunding: Product-focused and marketing-heavy fundraise hosted on a tech platform that enables access to greater pool of potential backers who do not need to be accredited investors.

Accelerators/ Incubators/ Fellowships: Programs offering funding and resources such as strategic partnerships, advisors, and workshops to help founders build and iterate on their thesis.

Early | You have a product or solution and are going to market

Once a technology, company, or concept has some evidence of commercial viability or traction there’s a marked increase in the type of financing available to it; however, that financing boom comes with expectations of a return on investment. Capital here becomes critical for hitting product market fit, testing out go-to-market strategies, and building out the team to enable growth.

By Seed or Series A, you’ll likely have some proof of traction in the form of revenue, scale of your in-field pilot, or a prototype. Demonstrating customer demand or future potential revenue (with LOIs/MOUs) will be your main lever for preserving ownership and getting better terms. Clarity in your expected milestones and an understanding of how much capital you’ll need to hit them, will keep current and future dilution in check. Specifically, you want to be mindful not to lock in future investment expectations from those you take money from early if you’re interested in exploring other sources of capital in the future.

Early-Stage Venture Capital: Seed to Series A capital in exchange for ownership of the company, dependent on fundraising terms of round size and valuation.

Venture Debt: Loans designed for fast-growing Series A to C stage startups that allow founders to extend their capital and save dilution on the backend. Founders can pair equity with venture debt as a non-dilutive cushion to fund cash flowing assets. While commercial debt is typically underwritten to a company’s cash flows or physical assets, venture debt bets on the same adage of venture equity that valuations will continue to go up and the startup can raise more capital to repay the debt.

Alternative Credit: Other forms of credit that exist underwrite based off inventory, purchase orders, and revenue. Inventory and PO financing is useful for companies to pay for inventory and purchase orders before generating revenue. Revenue-based financing exchanges cash investment for a portion of revenue for a pre-agreed term or up until a cap is met. Although factoring, royalty financing, and other revenue-dependent instruments have existed in capital markets.

Pilot Funding: Non-dilutive funding options to build first of a kind (FOAK) projects. Typically companies must fund their first pilot or factory buildout off their own balance sheet with (expensive) venture capital. FOAK projects have a challenging credit profile, given the high upfront risk of being first of a kind and generating lower infrastructure returns. There’s a huge gap for alternative loan financing to bridge this valley of death of putting the first steel in the ground.

Growth & later stage | You’re feeling product-market fit and it’s time to hit the gas pedal

As you’re starting to hockey-stick your growth and have a viable path to scale revenue, your financing pathways open up exponentially — as do your means of spending all that cash. Your reasons for raising should be dollar for dollar compelling and create a path to shorter term, less dilutive capital now that you’ve reduced much of the typical execution risk. If you have real business metrics, the array of potential investors clamoring for the opportunity to invest will continue to expand — so long as your performance continues to exceed.

Growth Equity: A later breed of venture capital in the Series B+ stages, again exchanges capital for ownership of the company, dependent on fundraising terms of round size and valuation. Backers of growth stage climate tech companies space from traditional venture capital funds and corporate VCs to private equity, public-private crossover funds, and everything in between.

Commercial Debt: Non-dilutive capital suited for later stage companies who have proven performance (aka EBITDA positive) and can borrow based off their cash flows or assets. Commercial debt can be sourced at earlier stages, but often comes at a hefty price tag and conditions. Depending on the credit profile of your company, cost of capital for commercial debt is likely the cheapest form of capital. Here, the typical lenders will be commercial and investment banks. Later-stage debt comes in all types of colors and shapes — from lines of credit to smooth out working capital or secured debt backed by collateral.

Project Finance: Venture equity and debt fund companies, while project finance funds projects. Most mature hardware solutions get deployed commercially through infrastructure projects handled by a utility or project developer. At this stage, a project itself becomes a company (with its own LLC) and has an entire capital stack including equity and debt that’s walled off from the corporate level.

Purchase/ Procurement/ Partnerships: The power of the purse from corporates or governments can powerfully accelerate climate tech companies’ growth through early purchases or offtake agreements, guaranteeing future revenue. By signing up early for orders pre-launch and paying some portion upfront, corporate or government purchases can fund climate startups’ buildout. For financing capital-intensive hardware or factories, it can make sense to form a JV, leveraging the corporate’s development and operational experience (and credit profile for bankability) and the startup’s technology innovation.

Exit | You made it! Sort of

There’s a lot of ink out there already on multiple paths to exit, most of which are not unique to climate except for two key points: 1) later stage climate companies, particularly those with heavy government or project based financing, likely already have a high level of disclosure and obligatory reporting, and 2) public markets, due to various growing ESG mandates, are thirsty for companies that offset carbon or demonstrate a positive environmental benefit. These two factors make climate exits, when eventually they do come, a more attractive option to reducing your cost of capital to public market levels even if your business may be earlier by market cap or revenue than traditionally techy debuts.

IPO/ SPAC: These acronyms both boil down to becoming a publicly-traded and owned entity. Good SPAC candidates should have some traction (or iron-bound offtake agreements from corporates), proven pipeline, and strong ESG story with a big TAM.

Acquisition: A good old M&A purchase from a strategic or financial buyer could provide the right platform for climate tech companies and teams to thrive.

How to think about capital working for you

Venture capital is one (of many) pathways to financing climate ventures; your capital should work for your business and not the other way around.
Capital is a positive feedback loop — the more hot climate tech companies there are, the more innovative financial products will emerge to support its’ growth.
The climate capital stack is evolving. As climate as a category matures, so will the financing options available to pursuing different business opportunities and paths to liquidity. Whether from capital abundance, regulation, or market shifts, be mindful that your approach today won’t have to be your approach tomorrow.
Know what you’re solving for when you’re looking to raise capital. If you’re trying to accelerate growth, higher top talent, and achieve recognition in the market and ascribe a value to you then venture capital is a good path. If you’re looking to fund a factory or scale a project, non-dilutive funding route through debt or project finance makes more sense.
Value less constrained capital, many types of funds are structured to solve temporal challenges via return windows. Permanent capital that’s unconstrained can be a bit more flexible, as can asset managers that house different kinds of funding under one umbrella and are incentivized to graduate you through their programs.
Capital is one of many needs for a successful startup, and ultimately it’s a means to an end. Your talent, your product, and your customers will determine your success as much as your capital. At a certain point, capital will make less difference — your relationships and capability to generate partnerships will.

🔴🟠🟡 At 360 Capital we recognized the potential of climate tech early on and we understood the crucial need for capital of this sector. In 2020 we launched a 30M fund in collaboration with the Italian energy provider A2A focused on climate tech and we are now planning to expand it to a 150M fund to continue supporting innovation for ecological transition.

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💸 Money matters

Le Collectionist, the traveltech startup prioritizing personalisation in travel experiences, raised €60M, from Highland Europe, OLMA, X Ange, Famille C, Swiss banks Pictet and Lombard Odier, Kostogri, Red River West and business angels.
Classified Cycling, creates drivetrain products that transform the riding experience and performance of all cyclists, raised €22M, from Active Partners, Bridford Investments Limited and was backed by Olympic and World Champion riders, Tom Boonen, Anna Van der Breggen, Andre Greipel and Marcel Kittel.
Orora Tech, provides actionable insights into the planet’s temperature using space-based thermal-infrared data intelligence, raised €15M from Edaphon, Findus Venture, Ananda Impact Ventures, BayernKapital, ConActivity, APEX Ventures, SpaceTec Capital.
Jobtech, a recruiting tech startup, raised €6M in a round led by Oltre Impact and participated by Lumen Ventures.

New Funds

Partech, announces Partech Entrepreneur IV, a €120M Seed Fund to back visionary teams in Europe and across the globe
Exited telehealth founder launches €100M healthtech VC fund, YZR Capital
Terna, the Italian company managing the energy grid, launched Terna Forward, a €50M corporate VC program.