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How can we adapt current investment models for next-gen materials?
In 2023, Bioenergy & Biomaterials saw the largest investment increase amongst other categories, accumulating $3 billion (up 20% from 2022)*. These statistics are encouraging, but there is still much to be done to support start-ups in this challenging economic environment.
Climate-tech start-ups face significant funding challenges due to the limitations in current venture capital (VC) models. How can investors help plug this funding gap to finance future infrastructure? What alternative funding models could be explored and how can we decrease risk and increase viability? Is there a scale-up challenge – and how do we address it? We spoke to pioneering material investors to attack challenges head on and decipher the solutions.
Meet these leaders at the Rethinking Materials summit on May 14-15 at the Hilton London Bankside.
Firstly we spoke to Nicolaj Reffstrup, Founder of GANNI and LOOK UP VENTURES, a green investment fund focused on funding businesses that can help solve issues related to the climate crisis through green tech. Nicolaj appreciates the common challenges faced by climate-tech start-ups: trying to become commercially viable whilst combatting costly developments, long timelines, and hesitancy from brands to commit to early off-takes:
“Climate-tech start-ups often grapple with capital-intensive development and long timelines. VC or PE models are not always well-equipped to handle the associated risks and capital requirements. Additionally, most innovators are targeting commodity markets where cost competitiveness is essential. Achieving cost competitiveness necessitates scale, but scaling is hindered by upfront financing needs and uncertain demand in opaque markets. This situation is compounded by brands’ reluctance to commit early to off-takes, making it difficult for start-ups to navigate the path to commercial viability and scale.
We can leverage the strengths of existing funding models if we manage to reduce the fragmentation across the distinct asset classes and instead take a more systemic approach to financing and de-risking the scale-up journey of start-ups. Currently, most models for financing and commercial de-risking rely on bilateral agreements between start-up and off-takers or financiers. Alternative models should focus on aggregation and diversification to foster a more robust ecosystem. There is great inspiration to take from success stories like Frontier’s Advanced Market Commitments for carbon removal, Vargas Holding’s off-take and financing model for Northvolt and H2 Green Steel, and infrastructure developers like Copenhagen Infrastructure Partners.
Early-stage investors should set the right scaling focus for start-ups. Often, start-ups (and investors) tend to think that scale-up blueprints, techno-economic models, and off-take agreements can wait till the next round of funding. This leads to ‘pilot fatigue’ – an over prioritisation of capsule and marketing projects with no clear path to large-scale off-take agreements. From the outset, a strategic focus should be on building clear pathways to scaling products that can compete with existing commodities on all aspects. On top of this, the investment community must configure models that reach across the different asset classes so start-ups can receive the right mix of financing at each stage of their journey.”
“…the investment community must configure models that reach across the different asset classes so start-ups can receive the right mix of financing at each stage of their journey.”
Guillaume Gras, Investment Director, Bio-Materials Investment Team, European Circular Bioeconomy Fund (ECBF) echoes Nicolaj’s sentiment of timing being a major road block to scale-up and gaining the right investment:
“Timing is one of the main challenges with current investment models, in relation to material innovation start-ups. It takes an average of 7 years to launch a new material on the market and get a decent market share. This is too slow for a VC investment.
Contract manufacturing is the easiest way to de-risk commercially before raising more substantial funding to establish in-house production capabilities.
Corporates could ease the scale up challenge by committing to offtake agreements. Once the commercial part is de-risked, VC can bear the technical uncertainty.”
“It takes an average of 7 years to launch a new material on the market and get a decent market share. This is too slow for a VC investment.”
Lucy Mortimer is the Co-Founder of ARCHIPELAGO VENTURES, a private equity impact investment fund focused on addressing the issues of plastic waste and climate change. Lucy agrees with Nicolaj and Guillaume, that patience is required when it comes to trialling innovation in materials:
“Traditional VC is excellent in bringing start-ups through a growth cycle where they fit the model – SaaS for example, and fintech – but within a new “sector” like Circular Economy, the expectations around growth, from investors and sometimes within the VCs themselves, can be a bit of a mismatch to the needs of the start-ups themselves. The development and commercialisation of new sustainable materials for example, is likely to take much longer than the 3-5 year investment timeline VCs may expect in other sectors. Just the trials of new materials with the brands for example, can take considerable time to reach agreement on and embed – as will the incremental scaling up of production, and the construction of the infrastructure needed to reach that scale. With these kinds of investments, a more patient kind of capital can be what’s required. When we talk about impact investment, as VCs we need to consider not only about where we make investments and their targeted impacts and outcomes, but how our own capital supports those impact outcomes.
Building expectations with our investors around longer timeframes within mandates is one aspect we focus on, and really understanding the sector in great depth to allow us to see where a solution can be put to work most efficiently. We are building our own alternative funding models with our roll out of our accelerator programmes, which target very specific impact outcomes and allow us to really dig deep into the sector and the solutions needed to accelerate change. We work really closely with our investee companies, and we’re very proactive in promoting these companies within our wider network, to provide two-way access and build a strong investor base for each of our investees, and identify opportunities within industry. Having a diversified, knowledgeable, well connected group of investors at an early stage is a really valuable tool to support the viability of a young company.
Scaling up can mean different things across the sector; probably the biggest challenges we see lie in the scaling up of capital intensive infrastructure, as right now there isn’t a huge amount of risk appetite for capex heavy infra solutions within the wider investment community. This in particular is where we see the need for supportive capital from government. There are so many ways this can be built in to plans – first loss provisions, contracts for difference on output, subordinated debt etc – and yet in the UK the levelling up agenda is again in the news for failing to deploy 90% of the £10bn that’s available in the Levelling Up Fund. Sometimes its not the availability of capital itself, but the failure to connect the capital to the outcomes because of a lack of mandate, flexibility, or just knowledge around what is needed by industry. The role of investment groups is not to plug the gap here, but to highlight the gaps and keep it on the agenda; if its not talked about, its unlikely to be resolved any time soon!”
“We are building our own alternative funding models with our roll out of our accelerator programmes, which target very specific impact outcomes and allow us to really dig deep into the sector and the solutions needed to accelerate change.”
Frank Klemens, Managing Director, GENERATION FOOD RURAL PARTNERS FUND (GFRP), a Big Ideas Venture’s investment fund designed to drive economic growth and development in rural communities in the US. Frank suggests that when it comes to ‘highly technical technology’ there needs to be a better understanding of commercial viability in tandem with technical development:
“Several challenges exist for climate-tech start-ups, the main one being that this is a highly technical area, so understanding and commercial development of scientific technology is needed. Understanding the science of the technology can be taught, but commercial development of highly technical technology is not taught, so many start-ups get lost in the technology buildout before getting to a commercial product.
Grants are an option for funding, and many start-ups go this route. However, grants are time consuming and also cannot be used for all aspects of a start-up’s financial needs. Furthermore, grants in the US look like they will be taxable. This takes the team away from the commercialization of the technology.
With the GFRP Fund, we fund our NewCos for the first 2 rounds so they can focus on the technology, business model, and scaleup. We need to treat highly technical start-ups differently. They do not fit the SaaS VC model.
Scaling up is not a challenge when you combine scale-up development alongside technical development. You will figure out fast what is needed to get to a commercial product so that you can plan for it. VC investments for capital use is not favored, but all debt is not advantageous for the start-up – VCs in this area need to provide some equity funding for scale-up, especially if revenue from this activity is within a quarter or two.”
“Scaling up is not a challenge when you combine scale-up development alongside technical development.”
Finally, we wanted to find out from each investor what technology they are excited about, to give us an idea of what they are actively scouting for.
Nicolaj, Ganni/Look Up Ventures: “We are especially excited about companies applying synthetic biology and biocatalysis to develop materials and products that can scale and are easily integrated into existing supply chains. We are also actively looking for start-ups that enable up and downstream supply chain resilience.”
Guillaume, ECBF: “We are interested in how AI can be applied to materials design, production and end of life mgmt.”
Lucy, Archipelago Ventures: “We are super excited for the solutions we are seeing in sorting and separation right now – particularly with EU regulations coming into play in 2025. These tech solutions are working to build purer waste streams for recycling and recovery, often supported by AI, from textiles all the way to post construction waste. We’re also really starting to focus on microplastics and their sources, so the solutions set around alternative biomaterials, and the avoidance of microplastics within supply chains, are really interesting. We hope to be making several investments in the next few months in this space within a new accelerator we’ll be launching.”
Frank, GFRP: “We are interested in any technologies that replace petroleum-based plastics with bio-based materials. Solutions offering improvement of protein sources – from livestock or alternative. And finally, solutions that are reducing the carbon footprint of farmers and ranchers.
*Date source: AgFunder’s AgriFoodTech Investment Report released in March 2024.