Building climate hardware is a whole lot more capital-intensive than most VC-backed tech. Climate tech needs to tap into more diverse funding streams.
I spoke to real estate developer, investor and founder of SUB\URBAN WORKSHOP Martin Prince-Parrott about why startups should consider approaching real estate investors — and how to get their pitch ready.
Why should climate-tech look to real estate investors?
I’m always surprised when VC investors say that physical investments such as buildings, developments or anything physical at scale is "too risky".
If a startup is building battery gigafactories or energy hardware, they’ll need a lot of diversified capital. In real estate investment, we’re used to systematically balancing project execution with the priorities of different investors.
The mistake those in the climate tech space are making is that they're trying to follow the same trajectory as B2B SaaS startups. It would make more sense for climate-focused hardware/infrastructure startups to optimise their businesses, investment theses and roadmaps for post-Series B, real estate-minded investors.
I could see real estate investors being particularly interested in biotech labs, energy infrastructure and gigafactories. There's a whole range of financing models and partnership structures that could work. From leasing and fitting out space (like Arrival and their micro factories), to securing a real estate equity investor or raising a fund with a fund manager.
How does real estate investment differ from VC?
VCs are very good at understanding business models and what's possible, and they're good at making bets on the future of things.
Real estate private equity is the opposite. They make investment decisions based on how an asset has performed empirically and how a team has managed risks to date. They tend to heavily discount what "might" happen, unless it’s a risk. Any startup that wants to attract real estate investors needs to be able to tell the story of how it's grown, managed risks and plans to deal with potential headwinds.
So what do startups need to do to approach a real estate investor?
There are a lot of things real estate investors would want to see that you’d need to think about in advance. Companies need to prove that they understand how to manage development risks. Broadly speaking, development risk can be categorised into four areas:
Site risk: Identifying where you want to build, why and what the business model is. I think there’s a real opportunity here for a startup to use their imagination and create new revenue streams for themselves. For example, if they’re going to build something large, what stops them from teaming up with other startups, or even better, leasing the premises or tech to other businesses? It would require serious thought but it could be done.
- Planning risks: If the construction is visible, you need to be able to demonstrate that you can manage the planning process. Startups should have a slightly easier time here because local authorities appreciate innovation and love sustainable job creation.
Construction risk: This is one of the largest, most palpable risks because it's very expensive. Managing this risk requires experience, effective controls, reporting, management and (ideally) a good, positive construction partner. If you can bind the construction partner into a deal or agree "pain and gain" terms you’ll be doing yourself a massive favour.
Financing risk: The key to succeeding at this is getting your (pessimistic) calculations correct in the first instance, partnering with capital partners that understand the scheme, respect the team and fundamentally understand what can go wrong — and trust you have the right strategies in place to handle it.
Once a startup team has properly worked out how they will address these risks they’ll be ready to approach a real estate investor.