Future-proofing your climate startup’s financial strategy

In climate, raising Series A onwards has been difficult since 2022, but the Trump presidency will likely make it even harder.  There’s less equity funding going around in general, but later stage transactions have collapsed across late stage equity, M&A, and IPO, and will likely not rebound anytime soon. To be successful, climate entrepreneurs need a long-term capital strategy that doesn’t depend on late stage venture capital as the sole form of financing. 

Shaun Abrahamson is a Managing Partner at Third Sphere. We sat down with him to discuss the different financing options that are available from Series A, what it means to be capital efficient, and why you should build relationships with later-stage investors as early as possible in the process.

Learning how to tell a better financial story

If you can’t raise Series A onwards from climate investors, you’ll need to look towards generalist growth investors, or take your pick from a mix of equity, grants, corporate debt, off-balance sheet finance, and project finance. In any case, you’ll need to communicate a level of financial sophistication to early stage investors that convinces them you’ll be able to see this complex capitalization strategy through, even as you raise your Pre-Seed and Seed rounds. 

Being able to portray a confident vision of the future starts with educating yourself about the financial pathways available to you. We’ve published a number of pieces that cover the various components of a well-oiled financing strategy, including Financing FOAK, raising venture debt, and securing financing for equipment, among many others.

Create a financial model that incorporates this knowledge

Now that you understand what investors are looking for at every point on your fundraising trajectory, including the metrics they expect you to hit, you need to make sure these are reflected in your financial narrative. Your deck, your model, your due diligence questionnaire, and your investment memo all need to show a unified front that will satisfy a broad array of investors at Series A, not just those within the climate tech ecosystem.

If those are other growth investors, you’ll need to show a path to a very large  market over the course of a few years, and you’ll need to show revenue by Series A, or offtake agreements or contracts if you’re a hardware business.

If you’re targeting a different capitalization strategy, you’ll need to show that not only do you know what the outside of equity looks like, and the capital stack that will enable you to achieve the outcome you want, but that you have a sense for what those investors want. That might even mean making engineering decisions to use certain things that you know you can get funding for. 

Throughout all of this, you need to demonstrate that you can grow your business in a way that’s capital efficient. So, if you run the math for the cap table all the way to an exit, everyone’s going to be happy – but as well as dilution, being a capital efficient company means taking the cost of capital and the complexity of financing into account in every capital decision.

Build relationships – and show them off to investors

In the same way you’d do customer discovery at the beginning of the process of creating a product, you need to take the time to do finance discovery before you start raising. Remember, it’s not enough now to only think about what you’re going to raise in the next 12 months – you need to think about what you’re going to raise over the next ten years. 

So, if your business will require you to build a $1bn pipeline of projects, you need to be talking to project investors in your ideation phase in order to understand what you should be building towards. In other cases, you’ll need to talk to people who can provide you with a line of credit, revenue-based financing, or equipment leasing. And don’t overlook corporate VCs, who are increasingly transacting not just at the growth stage but at pre-seed and seed. These CVCs bring multiple pools of cash, because they take on multiple roles, as a customer as well as an investor or lender. 

Whatever your end-game is, you should be putting out feelers as early as possible, and building relationships with key players so that you understand how to speak their language when the time comes. It also means you can speak to those relationships in conversations with early-stage investors, showing that you know what conditions you need to fulfill in order to get these other investors on board, and articulating how you plan to do so. 

Shaun Abrahamson is coming up on 2 decades of very early stage tech investing (i.e. great demos with poor logos and no customers). The last decade focused on climate mitigation and adaptation at Third Sphere with over 100 investments including Revivn, Near Space Labs, Kelvin, Onewheel, Climate Robotics, Cove Tool, Mill.