Climactic launches hybrid fund to support startups across ‘Death Valley’

It’s a challenge every startup faces: they’ve made a prototype and proven it works, but now they have to sell the product and produce enough to get through the “valley of death” that kills many companies.

“They’re stuck with chicken and eggs,” Josh Felser, co-founder and managing partner of early stage venture firm Climactic, told TechCrunch.

The hurdle is particularly large for companies that manufacture physical goods. Felser notes that this is common among startups producing new materials. Fessler, who previously founded and invested in software startups, said the problem they faced seemed a bit unfair.

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

Felser found that unlike software companies, which can quickly add more capabilities from cloud providers, materials startups face a market skeptical of their ability to ramp up production without a guaranteed customer.

Felser decided to give them one.

Felser doesn’t run a company with a big budget for smart materials, but he does know a few. As a climate tech investor, he knows of more than a few startups that could benefit from a well-known client.

TechCrunch has learned that Felser has been quietly working on a new project called Material Scale, which brings the two sides together using a hybrid debt and equity investment vehicle to give materials startups a boost. The Material Scale program will initially focus on climate technology startups in the apparel industry.

Material Scale is betting on startups that have commercially ready products ready to scale if a customer can buy in bulk. Buyers will commit sufficient funds to cover the cost of the item at market price. The Material Scale program will fund the teams through a combination of loans and guarantees in the startup.

“It’s actually minimally diluted,” Felser said.

Ralph Lauren joins the platform as buyer for the initial launch of Material Scale. Investor Structure joins Climactic as General Partner.

Money from purchase orders flows from the buyer via Material Scale to the startup. “In effect, we are buying it and then selling it at the same time,” Felser said.

The deals will be signed between Material Scale and the buyer and between Material Scale and the startup essentially at the same time.

“Once the deals are signed, it will be interesting because the value of the company has changed dramatically because it now has a buyer and has the financing to achieve scale,” he said.

Material Scale has not executed any trades yet. Felser said he has large 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 candidate companies that we are talking to.”

The first investments will come from a special purpose vehicle with a total value of approximately $11 million. Felser hopes to eventually branch out into other similar markets such as alternative fuels, eventually increasing the material scale concept to nine figures.

He hopes other investors will steal his idea.

“We need more new tools like this to combat climate change,” he said. “We want to be smart and be able to seize opportunities when we see them, not just do the same old thing.”