Understanding the Capital Stack for Climate Tech Scale-Ups
Looking towards Series B and beyond, your next big fundraising is likely to involve several types of capital combined together at once: the capital stack. Once venture capital (VC) is onboard, securing funds from other sources adds layers to this stack, making it crucial for scale-ups to understand and navigate these complexities effectively.
Why scale-ups and investors need to think about the capital stack
Climate tech companies are entering a capital-intensive maturation period. The funding capacities of traditional VCs often fall short for the large-scale projects necessary to scale impact. These projects can only succeed if later-stage funds and debt providers step in to support them. Hence, understanding the capital stack becomes vital for both scale-ups and investors aiming to maximise their potential.
What happens after VC?
VC funding is just one part of the equation. As entrepreneurs prepare to scale, an increasing range of capital sources becomes available, including growth equity, private equity, debt, project finance, and blended finance.
Growth equity: typically invest in larger equity rounds once a company has proven the technology and demonstrated market fit (TRL 9 and beyond) – though there is a large range to choose from in terms of ticket size and risk tolerance.
Private equity: comes in at a more mature stage when the company has fully established its market position, revenues are stable, and risks are minimised. Often prefer to take a majority holding, or even acquire 100% of the company.
Debt: typically provided by banks, though there are some private debt players who can be more flexible in their requirements. Require most output to be covered by offtake contracts to ensure ability to pay down interest and the principal amount.
Project Finance: investing in real assets that are standalone projects, often in a Holding Company. Again require offtake (and sometimes feedstock) agreements to be in place to ensure recurring revenues and cash flow to pay down debt and generate returns.
Blended finance: this is typically defined by a combination of different parties with different risk tolerance participating in the round, and notably with some kind of participation from a government body. Government support can crowd-in private capital for several reasons, including providing guarantees that ensure a minimum return for investors, or creating incentive structures that provide enhanced returns and therefore help increase investors’ risk tolerance,
Finally, it is worth highlighting the value of support from a strategic industry player for a company at this stage. Strategic support lends credibility and access to a significant pool of resources, including capital from their own substantial balance sheets.
How to navigate the capital stack as a scale-up
Understanding investor preferences across this capital stack can be challenging, as they may be labelled differently but the categorisation can be blurry. Each layer serves different purposes and comes with varying risk profiles and ticket sizes. It is essential to look deeper beyond the label to know what they are truly looking for to determine what could be a good match.
Key things to check when determining which type of capital to raise from which type of investor:
- What is your ticket size range?
- What amount of technology risk are they willing to take (or which TRL)?
- Do they want a minority or majority stake?
- Can they participate in follow-on rounds to support with your future scaling?
- What type of security will you need on a loan?
- What is the maximum amount of leverage you will accept?
Conclusion
As climate tech companies progress into more capital-intensive stages, understanding and navigating the capital stack becomes crucial. Moving beyond venture capital, scale-ups must explore growth equity, private equity, debt, project finance, and blended finance to secure the necessary funding. Strategic industry partnerships can also provide significant support, adding credibility and access to extensive resources. Ultimately, recognising investor preferences and aligning them with your capital needs will be key to successfully scaling your impact.
Any questions?
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