Every startup faces a critical challenge: they build a working prototype, but then must sell the product and produce at scale to survive the “valley of death” that claims so many companies. As Josh Felser, co-founder and managing partner of the early-stage venture firm Climactic, explains, these companies are stuck in a chicken-and-egg dilemma.
This hurdle is especially high for startups making physical goods. Felser observed it was a common struggle for companies producing novel materials. Coming from a background in software startups, he found the problem somewhat unfair. Software companies often sell at a negative margin initially, like Uber or Lyft. But materials companies are not afforded that same flexibility. Felser questioned why that was.
He discovered a key difference. Unlike software firms that can instantly add capacity through cloud services, materials startups face a skeptical market. Potential customers doubt their ability to scale production without a guaranteed order, and they lack the funds to scale without a committed customer.
Felser decided to become that guaranteed customer. While he doesn’t run a company with a large materials budget himself, he knows many that do. As a climate tech investor, he also knows numerous startups that would benefit from having a well-known buyer.
This led to a new project called Material Scale, which connects the two sides. It uses a hybrid debt-equity investment vehicle to boost materials startups, initially focusing on climate tech within the apparel industry. Material Scale targets startups with commercial-ready products poised to scale if a bulk purchase is secured. Buyers commit funds to cover the material at market price, and Material Scale funds the production cost difference through loans and warrants in the startup, an approach Felser describes as minimally dilutive.
Ralph Lauren is joining as a buyer for the initial launch. Investor Structure Climate is joining Climactic as a general partner. The process involves purchase order money flowing from the buyer through Material Scale to the startup. Effectively, Material Scale buys the material and simultaneously sells it. The deals with the buyer and the startup are signed concurrently, significantly changing the startup’s value by providing both a customer and scaling capital.
Material Scale has not yet executed any deals, but Felser reports strong interest from large apparel manufacturers and a long list of startups eager for the funding. The first investments will come from a special purpose vehicle totaling about $11 million. Felser hopes to eventually expand into similar markets like alternative fuels, growing the concept to a nine-figure operation.
He even hopes other investors will adopt his model. He believes novel financial instruments like this are necessary to attack climate change, allowing for nimble responses to opportunities beyond traditional investing.