It’s a challenge every startup faces: they’ve built a prototype and proven the thing works, but now they have to sell the product and make enough to get past the “valley of death” that kills so many companies.
“It’s the chicken and the egg,” Josh Felser, co-founder and managing partner of early-stage venture firm Climactic, told TechCrunch.
The hurdle is particularly high for companies producing physical goods. Felser noticed that this is a common phenomenon among startups making new materials. Fesler, who previously founded and invested in software startups, said the challenge they faced seemed a bit unfair.
“Software companies sell at a negative margin all the time from the start, you know, Uber, Lyft, you can look at a lot of different examples,” he said. “But it’s not allowed for material companies. One of the questions I’ve had is ‘why?’
Felser found that unlike software companies, which can quickly add additional capacity from cloud service providers, hardware startups are beginning to face a market skeptical of their ability to scale production without a guaranteed customer.
Felser decided to give them one.
Felser doesn’t run a big-budget smart materials company, but he knows a few. And as an investor in climate technology, he knows more than a few startups that could benefit from a well-known customer.
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Felser is quietly working on a new project called Material Scale, which brings the two parties together using a hybrid debt and equity investment vehicle to back materials startups, TechCrunch has learned. Material Scale will initially focus on climate technology startups in the apparel industry.
Material Scale bets on startups with commercial products that are ready to scale if the customer can buy in bulk. The buyer shall deposit sufficient funds to cover the cost of the material at market price. Material Scale will finance the difference through a combination of loans and startup guarantees.
“It’s really minimally dilutive,” Felser said.
Ralph Lauren joins the platform as a buyer for the initial launch of Material Scale. The Climate investor structure joins Climactic as a general partner.
Money from purchase orders flows from the buyer through Material Scale to the startup. “We’re actually going to buy it and then sell it at the same time,” Felser said.
The agreements between Material Scale and the buyer and between Material Scale and the startup will be concluded substantially simultaneously.
“Once they sign the contracts, it will be interesting because the value of the company has changed significantly because they now have a buyer and they have the funding to achieve scale,” he said.
Material Scale has not closed any deals yet; Felser said he has major apparel manufacturers interested in participating and a long list of startups that could use the funding. “All startups want that,” he said. “We have a large list of companies that are candidates that we are talking to.”
The first investments come from a special instrument in the total amount of about 11 million dollars. Felser hopes to eventually branch out into other, similar markets, such as alternative fuels, eventually expanding the Material Scale concept into the nine figures.
He hopes other investors will steal his idea.
“We need more new tools 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 do the same old thing.”