There is more need than ever before to enact positive environmental change, yet I would argue we are still too focused on acknowledging the limitations instead of how to take decisive actions to overcome them. To move forward, innovation in this space is an imperative.
The good news is, startups and early-stage companies are diligently crafting new solutions, many of which have the potential to change multiple industries. The common struggle we see, however, is scale-up of their technology, a phenomenon known as the "valley of death."
The "valley of death" is that challenging period between when a company gets its initial investment and when it starts generating revenue. The Catch-22 is that there is a need for funding to scale, but, to be funded, there is a need for scale. Hardware companies face hurdles traversing this stage, owing to the complexities of scalability and manufacturing times. Many startups succeeded to cross the valley of death by demonstrating strong commercial traction.
Revenue generation is a key milestone for all companies, not just in climate tech – but for hardware businesses mostly to demonstrate scale, market demand, and business model viability. However, there are ways to de-risk these factors without revenue. Ascend Elements, for instance, has successfully demonstrated commercialization feasibility by collaborating with the largest battery manufacturers and world’s leading suppliers of emissions-neutral energy solutions for heavy-duty applications. Despite not generating revenue yet, they are valued at $1.6 billion.
Securing funding for scaling is challenging, especially hardware in a slower market. However, more than 50% of sustainable focused unicorns in 2023 were deeptech companies. Their slow path to revenue clearly doesn’t impact their highly profitable results. This article aims to provide pathways and strategies for reducing the challenges encountered during this period and ultimately help startups successfully traverse the valley of death.
Three significant players are involved in this notorious valley: the innovator (often the startup), the investor, and the customer. Each has a role that is intertwined with the others, each inherently with risk, but less so when they work together.
To raise capital, many hardware startups race to generate revenue, often diverting resources towards side products, diluting focus from their core offerings in order to satisfy the market need. Side products are often targeted towards B2C to generate faster revenue and bypass B2B contracts.
The result is higher R&D, talent and marketing costs, which then reduces available capital for manufacturing and scalability of the main product. What we then see is the company requires even more time to generate stable, annual recurring revenue and a concrete environmentally positive impact. You’re probably now starting to see where it begins to go terribly wrong. Well, investors do, too. Missed milestones and revenue targets do not go unnoticed.
Instead of focusing primarily on generating revenue, startups should focus their resources on the key challenges of the valley of death. To achieve revenue generation, you must demonstrate substantial commercial traction. Focus on reducing unit economics and efficient manufacturing to be able to offer a market-adoptable solution.
A robust deeptech company must exhibit three things and three things only:
1/ A clear path to scalability
2/ Unit economics at price parity or cheaper than existing market offerings
3/ Strong customer traction.
At One Ventures is developing evaluation methods tailored to sustainable deeptech companies in the valley of death to effectively mitigate risks. Our due diligence process is based on physics fundamentals, unit economics, and customer assessment fit.
Early stage technologies can be analyzed through physics fundamentals: Matter, Energy, Time, and Space.
Matter: A robust feedstock and supply chain must be well established. The end materials should meet market standards. In the case of chemicals or materials, it should often exhibit high purity to ensure easy adoption. Cruz Foam, for example, excels in these efforts. Using 70% of upcycled food waste with excellent insulation, safety, and compostability performance, it provides a strong solution for the packaging industry.
Energy: Energy usage should be highly efficient, including considerations of processing/reaction temperature and yield analysis. Ravel recycles garments but does not depolymerize the fibers, leading to a significant energy reduction compared to most of their competitors.
Time: The manufacturing process must be time-efficient. Even if the matter and energy criteria meet market demands, a lengthy process time can hinder product adoption. MightyFly’s automated aircrafts, with vertical take off and landing, avoids airport traffic thus saving the shipping & logistics customer a substantial amount of time.
Space: The environment where processes or reactions occur must be safe for both the environment and human health. This includes considerations of waste management, water usage, and the recyclability of solvents and catalysts. Waste logistics should be considered and should not be more complex than current market operations. The end market must experience minimal disruption while accounting for upcoming environmental impacts and regulations. Avalo addresses this by creating a digital genotype panel, enabling the prediction of new crop variety performance. This innovation allows for the cultivation of stronger plants that can thrive in the same fields, requiring less water and exhibiting greater resilience to conditions created by climate change.
Focusing on the physics fundamentals reduces cost and results in stronger unit economics. A product that fails to obey any of these laws will have more challenges to scale and adoption.
Unit economics is crucial for early-stage companies as it provides a clear understanding of the profitability, scalability, and sustainability of their business model. It is key to our due diligence and very much linked to the physics fundamentals.
Companies should aim to be at price parity, but with a plan to reduce cost at scale. Margins should be of less importance than price at that stage. To give an example, if there were two companies offering the same product but one was selling it at price parity with 10% margins while the other was to sell it at a premium price to get to 30% margins, the price parity company would probably get to market faster. This would enable it to scale at a faster rate, leading to cost reduction and thus higher margins in the close future. On the other hand, the higher margin company will take longer to get to market and have difficulties to get enough volume to scale, potentially never getting to that cost reduction target.
Overall, the price parity company would generate profit earlier getting out of the valley of death faster. Be aware, I’m not saying that companies should not take into account margins but rather they should prioritize price during the first steps of commercialization.
Strong unit economics indicate a viable path to customer traction and adoption, which is in turn essential for attracting investors and securing funding. Moreover, it helps identify potential inefficiencies and areas for improvement, ensuring long-term growth and success.
Customers for deep tech startups are, more often than not, corporations. These organizations can support early-stage companies by providing Letter of Intents (LOIs), Proof of Concepts (POCs), Offtake Agreements, and contracts. While it might be tempting to do a free pilot or collaboration, remember that people don’t value what they don’t pay for. Whenever possible, push for a financial commitment from your strategic partner.
For investors, these customer references and contracts are critical. They are a clear way to demonstrate the market need and to prove the company’s business model. This customer traction is also highly valuable as it often enables third-party testing.
At One Ventures evaluates the collaboration between corporations and startups, paying attention to the value of these partnerships. This is also a reassurance that revenue will come with scale. Offtake agreements show engagement beyond the piloting stage and interest for significant volume. It represents the drive for such technologies, demonstrating a clear commercial traction. It not only leads to better equity funding but also easier debt or grants financing – a key part for facility production and scale up.
Noticeably, customers have increasingly agreed to offtake agreements based on At One’s thorough due diligence. The in-depth analysis of unit economics and physics fundamentals enhances collaboration between companies and mitigates the overall adoption risk involved in these transactions.
If all stakeholders, from innovators to corporations, can more accurately measure risk, and then collectively embrace it, we can narrow the valley of death.
