Avoiding cost overruns as a climate hardware startup

Poor financial planning means climate hardware startups can run out of money before what they’re building actually takes shape. So, what preventative measures should you take in order to avoid exhausting your funding, and successfully commercialize your technology?

Cyrus Wadia is CEO of Activate and a veteran of the climate technology space. We sat down with him to discuss how climate startups can steer clear of spiraling costs, from retraining investors to be more patient to having a hedge in place in case going public isn’t in the cards.

Why hardware startups go broke before they make it

There are three main reasons why climate hardware startups run out of money, beyond the obvious (i.e. they don’t have product market fit with their technology).

First, some go broke because they don’t raise enough capital in the first place - and while this is often due to bad planning, it can also be attributable to the state of the market at the time.  

The second most common reason is because they spend too much too quickly, either due to poor financial management or as a result of underestimating the time it’ll take to mature their technology and bring it to market.  Managing runway and burn in these contexts is incredibly challenging and requires a deep understanding of financial operations, so if you don’t have that background/skillset on your team, consider hiring for it sooner than later.

Last but not least, startups that don’t have a clear path towards profitability with the cash they have on hand, often neglect to plan for an exit pathway, and run out of cash despite making strong commercialization progress. 

Avoiding all these traps is pivotal, and by following these strategies, you’ll give yourself the best chance of seeing your startup through the rocky early stages.

How climate startups can avoid running out of money

1. Raise as much catalytic funding as possible
Diversifying your sources of capital will vastly reduce your risk of running low on cash, so seek out grants and philanthropic funding early and often. Applying for grants and nurturing relationships with program officers and philanthropic investors should be as much of a core strategy of your business as raising capital from VCs, project finance firms, or lenders. For tips on nailing your grant application, check out our pieces with Emelie Lucas on laying the groundwork before you apply and writing an accurate budget. You can also consider joining programs like Activate, which offer invaluable help and resources when it comes to winning grants.

2. Look for patient investors - and educate them further 
When you’re raising money from VCs, you’ll naturally seek out people with hardware experience, and these investors will already have an understanding of the long timeframes involved. However, even within that community, you’ll need to underline the patience that’s required in this space, and highlight the safeguards you’re putting in place to mitigate the risk of exit taking too long.

But even while you’re managing expectations, don’t undersell your potential. Emphasize that you’re confident you can still deliver an incredible payoff - it will just come further down the line. Show them that the Silicon Valley mindset they might be attached to overlooks the immense potential of a bet on hardware.

3. Make sure you’re on track to raise the right amount
When it’s time to fundraise, make sure you’re crystal clear on your capitalization needs for the next 24-36 months.  If you pull a number from thin air, you’ll risk running out of money before you hit your next milestones. Instead, start with the commercial objectives you hope to achieve, and work backwards, looking at all of the costs - from hiring to equipment - that’ll go into them. Then align your potential sources of capital to both costs and outcomes, to ensure a capital stack that’s perfectly tailored to your business.  To learn more about the math that goes into a raise, check out our piece with Kat Hunt. 

4. Communicate clearly and often
Moving too fast will result in you wasting money and crashing out, but the urge to do so can be strong, and often stems from investors’ expectations that you follow an aggressive trajectory straight away. One way of combating this is by communicating as often and as effectively as possible with your investors and other stakeholders - silence creates impatience. Demonstrating that you’re making steady progress towards your milestones will help keep them satisfied and relieve the pressure on you to rush ahead.  To learn more about how to write an effective update, and manage investor expectations effectively, check out our piece with Allison Myers here.

5. Build deeper support networks
In the very early stages, pairing capital with supportive mentorship will give you the time and space you need to find your feet. That might involve becoming a fellow at a program like Activate, launching your company from a venture studio, or becoming an entrepreneur-in-residence within a fund/accelerator/etc. Or, if you’re going after grants, make sure your budget includes bringing on advisors to help you chase the write opportunities and win. This element of community and support can be just as valuable for helping you avoid financial pitfalls as funding itself.

6. Work on your back-up plan
It’s likely your ideal exit is an IPO, but this might not be the direction your company is destined to take. Having a viable alternative route in place will help you maintain optionality and avoid the risk of your company flaming out despite making material progress. 

In practice, an exit of this kind will likely involve selling the whole business, or at least licensing your technology, to a much larger company. To make sure your back-plan can actually come to fruition, you’ll need to start putting the pieces into place from the get-go. One good way to do that is to build relationships with large enterprises who can not only buy your products as a customer, but can also act as an acquirer down the line.

With that, invest heavily in customer/acquirer discovery work as early as possible, making sure to understand who your end buyer might be, what their pain points are, and where you’re filling a gap today vs in the future. There might only be 3 or 4 companies with the capabilities to take your technology to scale - if so, you need to start building your relationship with them early. You can’t come to the table trying to sell yet, so your focus should be on nurturing the relationship and simply bringing what you’re building to their attention. Open a line of dialogue and have meetings on a regular cadence to keep them updated on your progress. There’s no guarantee that these conversations will lead to anything, but you’ll learn a lot, and regardless of the outcome it’ll help you build your business

Cyrus Wadia (he/him) is chief executive officer of Activate. Wadia was previously director of worldwide product sustainability at Amazon, vice president of sustainable business & innovation at Nike, and assistant director of clean energy and materials R&D in the White House Office of Science and Technology Policy. He was also a Silicon Valley entrepreneur, a senior program officer at Lawrence Berkeley National Laboratory, and the founding co-director of the Haas School of Business Clean Tech to Market initiative. Wadia holds a Ph.D. in energy and resources from UC Berkeley and an M.S. in chemical engineering from MIT.