This is a challenge that all startups face. You’ve created a prototype and proven it works, but now you must produce enough to sell your product and overcome the “valley of death” that wipes out many companies.
“It’s a chicken-and-egg situation,” Josh Felser, co-founder and managing partner of early-stage venture firm Climactic, told TechCrunch.
The hurdles are particularly high for companies that manufacture goods. Felser found this to be a common occurrence among startups producing new materials. Felser, who previously founded and invested in software startups, said the challenges they were facing seemed a little unfair.
“Software companies always sell on negative margins to begin with. You look at different examples, like Uber and Lyft,” he said. “But for materials companies, that’s not allowed. One of the questions I had was, ‘Why is that?’
Felser found that unlike software companies, which can quickly add capacity from cloud service providers, materials startups are skeptical in the market about whether they can scale production without guaranteed customers.
Felser decides to give it to them.
He doesn’t run a company that spends a lot of money on great materials, but he knows a thing or two. And as an investor in climate technology, he knows more than a few startups that could benefit from high-profile clients.
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According to a TechCrunch investigation, Felser is secretly working on a new project called Material Scale, which uses a hybrid debt-equity investment vehicle to link the two to boost materials startups. MaterialScale will initially focus on climate technology startups in the apparel industry.
Material Scale is betting on startups with commercially viable products that can be scaled up quickly if customers can buy them in bulk. The buyer puts up enough money to cover the cost of materials at market prices. Material Scale will fund the difference through a combination of loans and warrants to the startup.
“The dilution is really minimal,” Felser said.
Ralph Lauren will join the platform as an initial launch buyer for Material Scale. Investor Structure Climate will join Climactic as a general partner.
Money from the purchase order flows from the buyer to the startup through Material Scale. “Effectively, we’re buying products and selling them at the same time,” Felser said.
The transaction between Material Scale and the buyer and the transaction between Material Scale and the startup will essentially be concluded simultaneously.
“Once they sign the deal, this is going to be interesting because the value of the company has changed significantly because they’ve got a buyer and they’ve got the funding to achieve scale,” he said.
Material Scale is not yet trading. Felser said major apparel manufacturers are interested in participating and there is a long roster of startups with funding available. “Every startup wants that,” he says. “We have a large list of potential companies and are currently negotiating.”
The initial investment will come from a special purpose vehicle totaling approximately $11 million. Felser hopes to eventually expand into other similar markets, such as alternative fuels, and ultimately expand the material scale concept to nine orders of magnitude.
He hopes other investors will steal his idea.
“We need more new tools like this to attack climate change,” he said. “We want to be agile and be able to take advantage of opportunities when we see them, rather than just doing the same thing.”
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