We’re worried about climate tech.

We lived through cleantech 1.0 (b. 2007 - d. 2011), and we see signs of similar mistakes unfolding this time around.

The last five years have seen an explosion in funds dedicated in whole or in part to climate investing. But too many venture capital dollars are chasing too few quality companies. Even among the quality companies, few have drawn in growth capital and even fewer have achieved notable exits for shareholders.

We believe that we’re in the early stages of a climate tech liquidity crisis. Climate tech needs exits — companies going public and performing well, or else getting acquired at attractive prices — to keep investor dollars flowing into the space along with the entrepreneurial talent that will follow it.

We believe many climate startups can succeed, and we want to help. We don’t have all of the answers, but we do have some advice for founders.

1. Don’t be seduced by the stories of companies with huge valuations

There will always be companies that capture the attention of capital providers. The competition to invest in these companies generates stories that too often define founder expectations. Founders trade these stories with each other. As a result, too many believe that VCs are irrational trend-chasers who will throw big money at you if you deliver the perfect sales pitch.

In general, we think that founders would do well to discount stories of large sums of money handed to companies with slim revenues and products. We think this is especially critical for climate tech founders. The strategy for capitalizing a climate tech company depends much more on the company’s business model than on its mission.

Don’t fit your company into the VC return profile if that’s not who you are. Most startups will not deliver 90% gross margins with $250 million in annual recurring revenue (ARR) and then go public — and that’s okay. What is not okay is pretending you’re something you’re not.

2. Know what kind of business you are building

Every founder is trained by VCs to say they’re building a billion-dollar business. Some companies may be headed for less lofty heights — but they may also have a greater likelihood of success.

For instance, a services company like an HVAC or solar installer is far more likely to be worth $100 million than $1 billion. These types of companies are more likely to be funded with friends and family capital, grow steadily into profitable businesses, and then be acquired by a private equity firm or larger services provider.

If you’re building a capital-intensive industrial business like a green cement company, though, you may need to raise significant non-dilutive capital from government or philanthropy to help you with your first-of-a-kind project, and possibly for the next several as well. Once you’ve built a few projects and figured out your unit economics, then you can attract project finance, which requires modest but predictable returns relative to venture capital.

3. Know your personal goals

We’ve spoken with plenty of founders who really don’t know what they’re trying to build. If you’re not clear on your own goals then you’re setting yourself up for failure.

Is your goal to get the company off the ground and then hand over the reins? How much money would you want to make in a perfect world, and what would be enough?

It’s worth thinking hard about impact goals as well. Very few climate founders chose the sector solely to make money. Building a profitable, regionally focused business that is making homes more efficient or putting more renewables on the grid is a climate win, even if it will never scale to be a billion-dollar company.

But be careful not to be blinded by your mission. Some companies might be great for the climate on paper, but if they’re terrible businesses, they not only won’t make anyone any money — they also won’t have any impact.

4. Always look for exits (even if you don’t take them)

Good exits don’t just magically happen; they are the result of careful strategic thought. Even if you believe your startup has the chance to be the Salesforce of climate tech, things inevitably happen that are out of your control.

If you’re not able to achieve your dream scenario, what is an alternative that would still make you, your investors, and your employees feel pretty good about the outcome?

Can the company become profitable without more outside capital? If so, then focus on profitability. Once you’re profitable, you will have more control over your own destiny.

Or is a merger or acquisition the more appropriate end goal? You’re much more likely to be acquired on reasonable terms at a time of your choosing if you’ve invested time in the relationship. This could take multiple years, but it could be the difference between selling your company in a fire sale and selling for a healthy, life-changing profit.

We say all of this as climate tech boosters who are deeply connected to the climate ecosystem and are invested in its success.

Climate tech needs to be a win for both investors and founders to seed the next generation of investments. That can only happen if the founders and the capital are clear-eyed about the task in front of them.

– Jim Kapsis and Michael Sachse