What makes a cleantech startup investible? What we’ve learned

December 18, 2023

Relocalize has been fortunate. In 2023, we made a major leap forward on our mission to decarbonize food and beverage supply chains. We were only able to do this thanks to the support of our investors over the past two years, As any cleantech startup founder can tell you, the process is not easy. For us, every dollar was hard fought for, and the stakes were very high. For a tech startup.  every round is a life-or-death battle for survival. 

There are exceptions of course. This past week, I spoke with a good friend in Silicon Valley who raised seed capital with remarkable ease, but he earned with multiple exits and an amazing network of well-known tech rockstars. I know he remembers how hard it was in his first startup too. For the rest of us without massive wins under our belts, expect a good fight.

So what differentiates an investible cleantech startup? What makes a cleantech startup stand out from the others? Looking across the ups and downs within the industry over the years, we have identified 3 key principles that make a difference.

3 principles of making a cleantech startup investible

  1. Make sure the sustainability impact is immediate, understandable, and quantifiable.

Innovative cleantech startups have introduced numerous exciting ideas to the market. From carbon capture and sequestration (CCS) to vegan meat alternatives and seaweed farming, all share the goal of reducing carbon emissions and addressing climate change. But they are not equal. The ones that are easier to understand raise more money.

Over the years, there has always been one cleantech that has always made the list of the top cleantech trends: renewable energy. Despite being the first generation of cleantech available to the market, renewable energy has consistently earned trust and advocacy as the most reliable cleantech among climate leaders.

Firstly, the concept of renewable energy is easily understandable—it converts naturally recurring energy into electricity. Secondly, its impact is direct and immediate, replacing fossil fuel reliance on the grid, allowing traditional power plants to be shut down, and reducing greenhouse gas emissions. Thirdly, the emission reduction effort is easily quantifiable thanks to years of research in carbon accounting and adherence to internationally recognized standards. Every kilowatt of electricity generated from renewable energy can be converted into a quantifiable amount of GHG reduction.

At the user end, the generated electricity makes no difference compared to unsustainable alternatives. The impact mechanism is straightforward. These characteristics instill great confidence in policymakers, investors, and society to support its development, differentiating it from other cleantech.

  1. Ensure the economic viability of the product or service.

In 2023, cleantech investors confronted a sobering reality as the once-prominent vertical farming industry witnessed a downturn, marked by a series of bankruptcies. Despite an uptick in investments and consumer expenditure on sustainable products, these innovations often incur a higher cost compared to conventional alternatives, posing a significant threat to the revenue model.

The concept of vertical farming, initially embraced for its potential to facilitate mass production within limited spaces and resources, garnered substantial investor support in 2021. Startups such as Plenty, Infarm, and Aerofarm secured substantial investments in the hundreds of millions. However, recent developments indicate a shift in the narrative, with Plenty closing its San Francisco facility, Infarm ceasing its entire European operation, and Aerofarm declaring bankruptcy in mid-2023.

Analysts attribute the downfall of these ventures to substantial issues within the unit economics of their products. Elevated initial capital and operational costs, particularly the deployment of LED technology for plant growth in vertical farming, have proven to be expensive. The surge in electricity prices by almost 50% in certain locations in the US and Europe since 2021 has worsened these financial strains, resulting in higher product prices to achieve profitability.

Following the challenges posed by the COVID pandemic and subsequent inflation, consumers are finding it increasingly difficult to afford the green premium, placing considerable strain on household budgets. Traditional sources, such as fields and greenhouses, offering products at a lower price, intensify competition for farmed produce. Agriculture experts estimate the cost of vertically farmed lettuce to be approximately 5x higher than conventionally farmed alternatives. Without sustained premium support from consumers, vertical farms find it challenging to maintain revenue, prompting investors to withdraw their backing.

This financial predicament extends beyond vertical farming, affecting numerous cleantech startups focused on vegan meat and alternative protein sources. Despite these obstacles, there remains optimism that these companies can navigate the financial turbulence and persist in their contributions towards creating a more sustainable world.

  1. Meet your customers where they are to achieve scalable market adoption. 

Sometimes, great ideas for the planet never gain traction in the market. Why? Usually, it is because the product asks consumers to change their behavior or compromise too much.

One recent example is plant-based meat, a great idea to reduce meat consumption, which causes a whopping amount of greenhouse gases. Despite the hype since 2020, Beyond Meat's sales have recorded a 30% downfall in 2023. Surveys suggest that despite 61% of consumers increasing their plant-based intake, 40% are reducing or cutting out fake meat from their diets. Almost half said taste was behind the decision. The current taste offered by these meat alternatives is not good enough. We need better products to change consumers’ diets.

A truly sustainable product with limited market adoption does not create a big enough impact to save the planet. However, when the market embraces your product, it provides significant leverage for the company's finances and impact. Tesla is a great example of a company that is doing it right.

Tesla began as a cleantech startup with the mission of bringing sustainable mass-market electric cars to market. Besides aligning itself with the predominant market trend of the day—going green to reduce global warming—Tesla also considered how it could compete with combustion cars.

Not only does Tesla make its cars stylish, comfortable, and reliable, it also provides a futuristic driving experience that alters people's interests, such as autopilots and remote controls. Tesla created its massive global supercharger network to close the infrastructure gap, easing concerns and stereotypes about EVs

As a result, consumers were not only provided with a more sustainable option but also a comprehensive driver experience package that could compete with or even surpass traditional carmakers. This disruption in customer loyalty towards traditional brands created strong enough traction to make significant growth and impact.

Putting these principles into practice

As the first cleantech startup focused on the relocalization of food and beverage manufacturing with autonomous microfactories, Relocalize's commitment extends beyond being responsible to our investors; we aim to demonstrate to the world that this concept is both feasible and practical. Over the years, we have incorporated three key principles into our business model to increase our chances of success.

Our microfactories, known as RELO, are strategically located in grocery distribution centers, eliminating unnecessary middle-mile transportation that typically connects traditional centralized production plants with these distribution centers. This, in turn, reduces greenhouse gas emissions from trucks and refrigeration units—a logical yet straightforward result chain that ensures a tangible impact.

As a cleantech startup, we consistently monitor our sustainability impact and develop quantifiable methods to showcase our efforts. We plan to share the results very soon.

We are committed to maintaining profitable unit economics in our business. Furthermore, we guarantee that our products are competitively priced compared to traditional alternatives—an achievement that cannot be claimed by many foodtech and cleantech companies. Relocalize eliminates the need for additional costs or efforts from our retail partners and consumers to access a more sustainable and premium product. We are creating a win-win solution for people and the environment, ensuring our business can operate indefinitely with healthy finances.

In the realm of packaged ice, we enhance the current value proposition by offering numerous benefits without imposing additional burdens on retailers, consumers, or the environment. Our product surpasses traditional offerings in every aspect. Our ice is crafted into perfect cubes and efficiently packaged in vacuum-sealed bags. The autonomous production process improves food safety by eliminating the number one source of contamination: human presence. The success of our pilot, featuring the world’s first micro-factory for food manufacturing in Florida, has generated significant traction, paving the way for scalable growth.

Recognition for the cleantech industry

These principles helped us earning numerous awards, including recent accolades from CogX, Business Intelligence Group, and Progressive Grocer. Joining this distinguished list is the prestigious Foresight 50, a compilation of the top 50 investible cleantech startups in Canada. These startups were carefully selected by a judging panel of 41 cleantech investors who evaluated detailed profiles based on criteria such as investibility, potential environmental and employment impact, leadership and team, and probability of success.

As time ticks away, urging us to alter our course from the climate doomsday, precise investments are crucial to supporting cleantech companies that strike a balance between sustainability and economic viability. There is no Planet B, and the future is intricately tied to sustainability. What are your thoughts on these principles? Are there other factors that render cleantech startups investible? Share this article on social media and let us know!

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