Climactic launches hybrid fund to get startups through the ‘valley of death’

Every startup eventually runs into a familiar problem: a prototype is built, the technology works, and early proof points are in place — but selling the product and producing at a level that supports real growth can be the brutal stretch that pushes companies into the “valley of death,” where so many stall out.

“They are chicken and egg stuck,” Josh Felser, co-founder and managing partner of early-stage venture firm Climactic.

That gap is even harder for companies building physical products. Felser said he kept seeing the same issue among startups working on new materials. Coming from a background of founding and investing in software startups, he described the situation for materials companies as strangely lopsided.

“Software companies sell at a negative margin all the time in the beginning, you know, Uber, Lyft, you can look at lots of different examples,” he said. “But for materials companies, they’re not allowed to do that. One of the questions I had is, ‘Why is that?’”

He found the answer comes down to scaling risk. Software startups can ramp capacity quickly by buying more infrastructure from cloud providers. At the same time, materials companies face a market that doubts they can scale production unless they already have a guaranteed customer.

So Felser decided to help provide one.

He doesn’t operate a company with a massive budget for experimenting on cutting-edge materials, but he knows several that do. And as a climate tech investor, he also knows many startups that could benefit from landing a recognised, high-confidence buyer.

That thinking led him to a new project called Material Scale, which is designed to connect those two sides. The concept uses a hybrid debt-equity investment structure to help materials startups clear the early scaling barrier. Material Scale will start by focusing on climate tech startups in the apparel industry.

The platform is backing startups with products that are commercially ready — the kind that can scale if a customer is willing to purchase in bulk. Under the model, buyers commit enough funds to cover the material cost at market price. At the same time, Material Scale finances the remaining gap through a package of loans and warrants in the startup.

“It’s really minimally dilutive,” Felser said.

Ralph Lauren is joining as a buyer for the initial launch of Material Scale. Investor Structure Climate is also joining Climactic as a general partner.

Funds tied to purchase orders will flow from the buyer through Material Scale and then to the startup. “In effect, we buy it and then simultaneously sell it,” Felser said.

The agreements between Material Scale and the buyer — and between Material Scale and the startup — will be finalised at approximately the same time.

“Once they sign the deals, this’ll be interesting because the value of the company has significantly changed because they’ve now got a buyer and they’ve got funding to achieve scale,” he said.

Material Scale hasn’t closed any transactions yet. Felser said multiple large apparel manufacturers have expressed interest in participating, and he already has a long list of startups that could use this type of funding. “The startups all want it,” he said. “We have a big list of companies that are candidates that we’re talking with.”

The first investments will come from a special-purpose vehicle totalling roughly $11 million. Over time, Felser hopes to expand into other markets with similar dynamics — such as alternative fuels and grow the Material Scale approach into a nine-figure effort.

And he’s hoping others copy it.

“We need more novel instruments like this to attack climate change,” he said. “We want to be nimble and be able to take advantage of opportunities when we see them and not just be doing the same old thing.”