Depending on who you talk to, it is estimated that to reach net-zero by 2050 Capital spending on physical assets for energy and land-use would amount to about $9.2 trillion per year on average, an annual increase of as much as $3.5 trillion from today.
Although venture capital and private equity investments in climate tech have grown, with H1 2021 alone delivering record investments of more than $60bn, this investment is not enough to tackle the increasing climate crisis and shift to low-emission, climate-resilient development pathways.
One alternative avenue for fundraising climate tech capital is soft-funding, a form of non-dilutive funding with no direct requirement for return of investment for the investor.
Soft funds have the potential to play an important part in helping fill the climate tech investment gap. This is because fundraising is an already difficult task for startups, and the availability of soft funds is vital to investing in and supporting startups to overcome private investment barriers. It is especially poignant for early-stage ventures that have a lack of demonstrable success, uncertain returns, and lengthy payback time frames with risks too high for many investors.
“It is especially poignant for early-stage ventures that have a lack of demonstrable success, uncertain returns, and lengthy payback time frames with risks too high for many investors.”
Multiple grant/award programs have been established by tech companies, industry associations, and governments that have launched global, regional, and national capital commitments through soft funding programs. These programs aim to support the next generation of climate-focused startups to reach climate net-zero targets.
How Soft Funds Benefit Climate Tech Startups Addressing the Climate Crisis
1. The Funding Gap
Soft funds can help close funding gaps to increase the value of a company and enable a solution to reach the market. They can also substantially support startups needing to overcome the ‘valley of death’ and capital-intensive sectors, such as the energy sector.
By closing the gap soft funds can enable startups to lower risk perceptions and stimulate venture capital & private equity investment opportunities by focusing on growth to fund product development, conducting pilots, and building a broader customer base to be set on a trajectory to become the next climate tech unicorn.
2. Limited Sacrifices
Aside from the time invested when applying for awards/grants, being rewarded with soft funding often means startups will receive non-dilutive capital (any capital a business owner receives that doesn’t require them to give up equity or ownership). This is most attractive for companies who want to retain full control over their ventures.
Grantors providing non-dilutive capital to startups are often uninterested in driving company strategy. Instead, they believe in the longevity and fruition of the company to prevent climate change, a crisis not only negative for the planet but also for the global economy.
Soft funding offers more than just money. The competitive nature of grants, if chosen, can help strengthen a company’s investment image. This is because being selected out of thousands of applicants is a signal to potential investors that they are worth taking notice of and provides extensive visibility to grantor networks of global stakeholders.
Soft Funding Limitations
Grant evaluators that allot soft funding by sealing the fate of funding proposals can be ill-placed in terms of expertise and biases and as a result, can fail to appreciate how innovation can transform an industry. This was evident with the EU funding program, Horizon 2020, between 2014-2020. Isabel Vergara, a specialist in evaluations at the Commission’s R&D referred to the difficulties of sourcing applicable evaluators in saying, “in some cases, some specific areas, we can’t find the expertise we need.”
“Grant evaluators that allot soft funding by sealing the fate of funding proposals can be ill-placed in terms of expertise and biases”
Furthermore, if successful, some grants do not allow the company to change the project structure that they won the award with. If they change the grant project structure, it can diminish the impact of the intended grant and waste time for startups that need to follow through with the project purely to receive the grant capital. This can be limiting when considering that startups tend to pivot, especially in the early stages. This is a very different approach to the way VCs fund innovation. VCs assess projects at a high level of abstraction, understanding the need for startups to be flexible when developing and scaling up.
For startups, finding the right soft funding can feel like looking for a needle in a haystack. It requires a structured funding strategy, an organized proposal process, and time to conduct these processes. Another strong limitation is strict grant criteria. Several conditions including funding needs, geographic location, and specific topics of interest can hinder the eligibility of an enormous pool of startups aiming to impact climate change.
7 Soft Funding Application Tips
With multiple soft funding deadlines, it is vital that a startup efficiently plans their time when preparing each application. Despite applications being time-consuming, completing an application is an investment to potentially gain non-dilutive funding. This, like private fundraising rounds, must be well structured and planned towards reaching each soft funding application deadline.
Ensure the startup story is concise and to the point. Define the problem/solution clearly and tell the story through each section required within the application. It’s important to stick to the narrative of the startup.
It is important to understand whether the startup matches the requirement of the application call. Not only for the scope of the project but how the startup could potentially add value and beat competitors. Thus, it is important to make clear in the application how the startup is different from competitors or alternatives and what impact it can have.
Startups that will be invested in must have strong commercial prospects and climate impact potential. Hence, it is important to highlight any target user/partnership validation received so far. It is preferable to include communication with potential customers, testing of the technology to meet their needs, revenue generated and interested parties to highlight the startups potential.
It’s important to treat the reader as an investor. This means, a project must be presented with clear and realistic milestones, KPIs, and a budget for all activities to define what will happen during the funding project and onwards into the future.
Application feedback is important. This can be from team members or preferably someone who has no idea about the startup. Most of the time when people have been working closely with an idea they’re passionate and can miss explaining simple ideas that a reader requires to get the bigger picture.
Reviewing a submittable soft funding application is the last activity people want to do but it can pay off. Proofread, spell check, and ensure every point is clear for the reader. The simpler the better.
Conclusion: Greater Climate Impact
To realistically enable climate tech to act as a mechanism in reducing global emissions, an increased mobilization of effective and targeted soft funding capital is critical.
For this, funders of all types need to heighten their focus on certain climate investment areas for greater impact. Specifically, to align them with the greatest level of carbon emissions produced by economic activities. Furthermore, the level of climate need in terms of the condition of a country’s climate ecosystem should be used as an indicator for the quantity and quality of climate innovation. And last, of all, the maturity of capital should be used as an indicator to fill any funding gaps.
For startups seeking soft funding, greater access and visibility to soft funding is necessary. As well as greater funding options, such as blended finance by the EU EIC Accelerator program, which has an option to apply for a grant up to €2.5m (non-dilutive) or/and equity up to €15m (dilutive) at the same time.
Ultimately, the most impactful global startups need greater visibility and access to a wider range of soft funding programmes to supplement startup investment cycles. This will allow them to tackle climate change and help build a future where we can mitigate, adapt, and manage the problem for ourselves.
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To better ensure climate tech startups can find appropriate soft funding programs and initiatives we’ve created a database and would love your additions to it.
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Successful Climate Startups That Have Received Soft-Funding:
Soft fund Achievement: Awarded €1.7m as a grant and €15m as a blending financing option from the EIC Accelerator in 2021.
Founded: 2016, Netherlands.
About: In the hyperloop, vehicles travel autonomously through a network of low-pressure tubes. Every trip is direct towards your destination without any stops in between. For the users, departures are on-demand, with transport times a fraction of what is offered by other modalities, while pricing is competitive. For the infrastructure owners, hyperloop is easy to integrate into the environment, has low energy consumption and emissions, and has a low total cost of ownership.
Soft fund Achievement: Awarded £1m in prize money from the Earthshot Prize in 2021.
Founded: 2017, Germany.
About: Developed and produced Anion Exchange Membrane (AEM) electrolyzers for green hydrogen production from water and renewable electricity, enabling low-cost green hydrogen production at any scale. A patented and proven AEM technology is the foundation for mass-produced electrolyzer products, not projects. The project will make the cheapest hydrogen with scaled production, competing with fossil fuels purely on price.
Soft fund Achievement: Awarded €1m as a grant from the Google Impact Challenge on Climate in 2021.
Founded: 2014, Sweden.
About: Normative’s emission accounting engine automates the process of measuring emissions to help business owners get a clear view of their direct and indirect emissions, as the first step toward reduction.