Can debt financing save ClimateTech hardware startups?

Tooraj Arvajeh
April 19, 2023
Death Valley is breathtaking. Just don't let it steal your momentum.
Death Valley is breathtaking. Just don't let it steal your momentum.

The short answer is only if it immediately increases predictable revenue. Unlike equity, debt is not runway and is very impatient.

There are many reasons why startups die. Paul Graham of YC is credited for saying that startups don't die from homicide but, instead, from suicide. Startups fail not because of external factors such as competition but because of execution risks and bad decisions.

For climate-tech startups, it is both - internal and external factors. They face structural challenges as they operate within incumbent infrastructure territories and deal with slow, risk-averse development cycles. To avoid “death by pilots,” some startups had to build additional in-house departments, such as project development and finance, and become “full-stack” - a necessary evil.

Full-stack models give startups more control over their commercialization and help them deploy their technology by offering zero upfront hardware-as-a-service (HaaS) solutions to customers. However, they suffer from execution risks, grow much slower, and are less agile as they add overhead. They are capital-intensive and pose a significant risk during market downturns.

The winter is coming to tech startups. Down rounds have become widespread in 2022 and are forecasted to worsen in 2023 (Source: Reuters). Equity is becoming less available and more dilutive. In addition, the high cost of equity capital can push hardware startups to over-prioritize growth at the expense of healthy unit economics - a poor strategy during these times. Capital-intensive companies must build a business with strong fundamentals and an optimal mix of equity and debt finance to weather this storm. Equity can be used for “swing for the fences” innovations but debt needs to be structured around healthy and predictable cash flows.

The process of raising a structured debt is complex. Lenders allocate their funds efficiently by rigorously analyzing all aspects of a project - particularly its financial feasibility and risks. To an unprepared entrepreneur, this can be a potential minefield without the right tools and often lead to significant time and cost overruns.

To help climate-tech hardware startups build scalable venture-backable business models, Perl Street launched the HaaS Financing platform. It enables founders to build and refine HaaS revenue models, achieve bankable cash flows, and raise significant debt funding. They can stay lean and profitable while deploying their revenue-generating assets faster and without dilution. This platform eliminates those expensive and potentially deadly time and cost overruns common in building and financing HaaS businesses. It keeps the startups focused on what matters to their core business: customer acquisition and product innovation.

A set of tools powers the HaaS Financing  platform:

  1. Structures: These built-in templates split the company’s business into different entities, such as HoldCo and AssetCo, with different cash flow predictabilities and transform a novel hardware tech startup into a familiar and de-risked borrower appropriate for lenders.
  2. Simulator: It simulates the relationship between the key commercial and operating terms (e.g., HaaS price) and credit metrics (e.g., DSCR) and guides startups in developing the right set of contracts with customers, suppliers, and operation and maintenance providers.
  3. Financing Offers: Based on the Simulator outputs, relevant lending partners in venture lease, asset-based lending, or project finance provide their debt financing terms. The Simulator helps the borrower decide the best option for their needs.
  4. Roadmap: It is like “Jira for HaaS developers.” It enables them to build and follow a clear financing workflow and meet the lender’s due diligence criteria.
It is a “parallel dance”.

40+ climate-tech startups have used our platform and received $220M+ debt financing offers. Currently, the platform works with projects in distributed energy resources, energy and resources management, smart city and IoT, e-mobility, nature-based solutions, circular economy, and food- and ag-tech.

To jumpstart your development of bankable HaaS projects and get on the fastest path to increase revenue and unlock scalable debt financing, sign up here or reach out to schedule a meeting with our team.

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Whether a seasoned project developer, infrastructure startup, or a forward-thinking lender, if you play a part in building the future, we should be working together.

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