Climactic Launches Hybrid Debt-Equity Fund to Bridge the Scale-Up Gap for Materials Startups

Every startup faces a critical challenge: transitioning from a validated prototype to commercial-scale production while navigating the notorious "valley of death" that claims countless ventures. Josh Felser, co-founder and managing partner of early-stage venture firm Climactic, identifies this challenge as particularly acute for companies developing physical products.

"They are chicken and egg stuck," Felser explained, noting that the barrier is especially high for startups producing innovative materials. Having previously founded and invested in software ventures, Felser observed an inherent market asymmetry.

"Software companies sell at a negative margin all the time in the beginning—Uber, Lyft, and numerous other examples," he noted. "But materials companies aren't afforded that luxury. The question becomes: why is that the case?"

The answer lies in scalability dynamics. Unlike software companies that can rapidly provision additional capacity through cloud infrastructure providers, materials startups encounter market skepticism regarding their ability to scale production without guaranteed customer commitments. Felser's solution: provide them with that commitment.

Material Scale: A Novel Financing Mechanism

Felser has been developing a new initiative called Material Scale, which bridges this gap through a hybrid debt-equity investment vehicle designed to accelerate materials startups' growth trajectory. The platform connects climate tech startups with corporate buyers using an innovative financing structure.

Material Scale targets startups with commercially-ready products positioned for scale-up, contingent on bulk purchase commitments. The mechanism works as follows:

• Buyers commit sufficient capital to cover materials at market pricing
• Material Scale funds the differential through a combination of debt instruments and equity warrants
• The structure minimizes dilution for founding teams

"In effect, we buy it and then simultaneously sell it," Felser explained. Transactions between Material Scale and both the buyer and the startup are executed concurrently.

"Once they sign the deals, the company's valuation fundamentally changes because they've secured both a committed buyer and the funding necessary to achieve production scale," he added.

Initial Focus and Partners

Material Scale will initially concentrate on climate tech startups within the apparel sector. Ralph Lauren has joined the platform as an anchor buyer for the initial launch, while investor Structure Climate is partnering with Climactic as a general partner.

While no transactions have been executed yet, Felser reports strong interest from both sides of the marketplace. "The startups all want it," he confirmed. "We have an extensive pipeline of candidate companies in active discussions."

Major apparel manufacturers have expressed interest in participating, and the startup roster continues to expand.

Scaling the Model

The inaugural investments will deploy from a special purpose vehicle totaling approximately $11 million. Felser envisions expanding the Material Scale concept into adjacent markets such as alternative fuels, with ambitions to scale the initiative to nine figures.

Notably, Felser actively encourages replication of this model. "We need more novel instruments like this to address climate change," he emphasized. "We want to remain agile and capitalize on opportunities as they emerge, rather than perpetuating conventional approaches."

This innovative financing structure represents a significant development in climate tech venture capital, addressing a persistent market failure that has impeded the commercialization of promising materials technologies.