Climactic launches hybrid fund to help startups survive critical funding gap

A new investment platform called Material Scale is addressing one of the most persistent challenges facing climate tech startups in the materials sector: bridging the gap between prototype development and commercial-scale production. Founded by Josh Felser, co-founder and managing partner of early-stage venture firm Climactic, the initiative uses a hybrid debt-equity investment vehicle to help materials startups secure their first major customers while scaling production capabilities.

Material Scale will initially focus on climate tech startups in the apparel industry, with Ralph Lauren joining as a buyer for the platform’s launch. Investment firm Structure Climate is partnering with Climactic as a general partner in the venture, according to TechCrunch.

Addressing the Valley of Death for Climate Startups

The platform targets a critical obstacle that materials startups face when attempting to scale production. Unlike software companies that can quickly expand capacity through cloud service providers, materials companies encounter market skepticism about their ability to increase manufacturing without guaranteed purchase orders.

Felser told TechCrunch that materials startups often find themselves in a catch-22 situation. “They are chicken and egg stuck,” he explained, noting that potential customers want proof of production capacity while manufacturers need committed buyers before scaling up operations.

How the Investment Model Works

Material Scale operates by connecting startups with commercial-ready products to buyers willing to purchase in bulk. Buyers commit funds to cover materials at market price, while Material Scale finances the difference through a combination of loans and warrants in the startup company.

According to Felser, the structure is “really minimally dilutive” for startup founders. Money from purchase orders flows from the buyer through Material Scale directly to the startup, with deals between all parties signed essentially simultaneously.

The investor noted that this approach differs significantly from how software startups operate. “Software companies sell at a negative margin all the time in the beginning,” Felser said, citing companies like Uber and Lyft as examples. However, materials companies typically lack this flexibility in traditional funding arrangements.

Initial Launch and Future Expansion Plans

The first investments for Material Scale will come from a special purpose vehicle totaling approximately $11 million. Felser indicated that several large apparel manufacturers have expressed interest in participating as buyers, while numerous startups have already applied for funding consideration.

Additionally, Felser has long-term ambitions to expand the platform beyond apparel into similar markets such as alternative fuels. He envisions eventually growing Material Scale into a nine-figure operation that can support climate tech startups across multiple sectors.

Encouraging Innovation in Climate Finance

Beyond his own venture, Felser expressed hope that other investors will replicate the Material Scale model. “We need more novel instruments like this to attack climate change,” he told TechCrunch, emphasizing the importance of developing new funding mechanisms rather than relying on traditional investment approaches.

The platform represents an attempt to level the playing field for physical goods manufacturers in the climate sector. By providing both customer validation and production financing simultaneously, Material Scale aims to help startups overcome the scaling challenges that have historically contributed to high failure rates among materials companies.

Material Scale has not yet executed any deals, though Felser reported having extensive interest from both buyers and startups. The timing of the first transactions and which specific startups will receive initial funding remains to be announced as the platform continues discussions with potential participants.