Climactic’s Innovative Hybrid Fund Aims to Propel Startups Beyond the ‘Valley of Death’
Navigating the treacherous valley of death—the critical phase between prototype development and full-scale production—has long been a formidable challenge for startups, particularly those involved in manufacturing physical products. Recognizing this hurdle, Josh Felser, co-founder and managing partner of the early-stage venture firm Climactic, has introduced an innovative solution: Material Scale, a hybrid debt-equity investment vehicle designed to support materials startups in scaling their operations.
The Challenge of Scaling Physical Products
Startups that develop tangible goods often encounter significant obstacles when transitioning from prototype to mass production. Unlike software companies, which can rapidly scale by leveraging cloud services, materials startups face skepticism from the market regarding their ability to increase production without confirmed customers. This skepticism creates a chicken and egg scenario, as Felser describes it, where startups need customers to scale but require scale to attract customers.
Felser, with a background in founding and investing in software startups, observed this disparity and questioned why materials companies couldn’t operate at a negative margin initially, as many software companies do. He identified that the core issue lies in the market’s reluctance to invest in scaling production without guaranteed buyers.
Introducing Material Scale
To address this issue, Felser launched Material Scale, a platform that bridges the gap between materials startups and potential buyers. By leveraging his extensive network, Felser connects startups with established companies willing to commit to purchasing materials in bulk. This commitment provides the assurance needed for startups to scale production.
Material Scale employs a hybrid investment model, combining loans and warrants to fund the difference between the market price and the cost of materials. This approach is minimally dilutive for startups, allowing them to maintain greater control over their companies while accessing the necessary capital to expand.
Initial Focus on the Apparel Industry
The platform’s initial focus is on climate tech startups within the apparel industry. Ralph Lauren has joined Material Scale as a buyer for its launch, demonstrating the platform’s potential to attract high-profile partners. Additionally, investor Structure Climate has partnered with Climactic as a general partner, further strengthening the platform’s foundation.
Operational Mechanics
The operational flow of Material Scale is straightforward: purchase orders from buyers are processed through the platform, which then channels the funds to the startups. This simultaneous transaction ensures that startups receive the necessary capital to scale production as soon as they secure a buyer. The agreements between Material Scale and both the buyer and the startup are executed concurrently, providing immediate value to the startups by securing a buyer and the funding required for scaling.
Future Prospects
While Material Scale has yet to execute its first deal, the platform has garnered interest from large apparel manufacturers and a roster of startups eager for funding. The initial investments will come from a special purpose vehicle totaling approximately $11 million. Felser envisions expanding the Material Scale concept into other markets, such as alternative fuels, with the goal of growing the platform to a nine-figure valuation.
Felser hopes that other investors will adopt similar models to support startups in overcoming the scaling challenges inherent in producing physical goods.
