Climate tech has a bankability problem, but there are 3 ways to fix that

Let’s face it, it’s tough to fund climate tech. With typical check sizes 5x or 6x higher than fintech deals, climate tech startups need more capital than early-stage VCs usually provide.

In addition, private equity firms tend to stay away, as they generally invest in cash flow-positive businesses, and banks find it challenging to finance companies in the industry, as there isn’t sufficient data to underwrite loans.

Today, only 16% of climate tech is serviced, with founders forced to close shop when the money runs dry.

Image credit: Timmy Loen

The key question in the space is how to make climate tech bankable.

Over the past few years, we’ve seen an influx of private capital flow toward climate tech innovations, and this is critical to facilitating our green transition – the public sector alone won’t solve the climate crisis. Yet, we’re still far from where we need to be, with Deloitte estimating a private funding gap of approximately US$2 trillion.

To plug this gap, I believe there are three things we must achieve — what I call the three Ds of climate tech: demystify, de-risk, and design.

Demystifying climate tech

Often, climate tech deals require deep technical knowledge to evaluate, which stems from the complex nature of the technologies involved. Investors who lack the expertise typically steer clear of these deals.

Making matters worse, many climate tech startups are shrouded in secrecy and fail to explain the mechanics behind their solutions.

Instead of keeping things locked in a black box, founders should explain that most risks are a matter of engineering, not physics. The science behind many net-zero solutions already exists and has often been proven in other applications as individual components.

Infinited Fiber is an example of a firm that has demystified its business model by providing clear explanations behind its recycling tech and dissecting its operational processes. It uses the established principles of chemical engineering to break down cellulose from textile waste at the molecular level before creating a liquid cellulose which is then spun into a new fiber filament.

The company has demonstrated that its solution is grounded in science. While one of its competitors shut its doors amid textile recycling uncertainty, Infinited Fiber closed a 40 million euro (approximately US$43 million) funding round.

By simplifying complex structures, reducing opaque processes, and presenting data- and science-backed solutions, founders can persuade investors that their ideas are feasible.

From an investor front, the onus is on fund managers to upskill through relevant programs and hire the right technical talent with industry know-how so they have the capabilities to assess climate tech deals and won’t miss a sizable chunk of the market.

De-risking climate tech

Designing fund mechanics to support climate tech

Bridge to bankability under construction