The lines between climate tech and infrastructure startups have become increasingly blurred.
Many startups have set their sights on decarbonizing huge industrial processes, looking to make sustainable alternatives to cement, chemicals, and fuel.
But that typically requires building large capital-intensive facilities.
Most startups fail, falling victim to the ‘valley of death’ at around Series A where additional funding can’t be secured — and needing a huge amount of cash to build a first-of-a-kind plant typically doesn’t work in their favor.
Venture capital makes up a tiny fraction of funding going into infrastructure companies. The wider split between software and hardware funding is well documented, though hardware and deep tech have garnered more attention in recent years.
Such startups are now pursuing modularity — and they could be on to a winner.
Modularity means their tech is designed to be standardized, replicable, and mass-produced, allowing startups to scale up how and where makes sense at a lower price point. Increasing capacity just means adding another unit.
“Previously, when technology wasn’t as advanced as it is today, constructing extensive infrastructure for energy, water, and manufacturing was logical,” Katie Hoffman, a partner at climate tech fund Regeneration.VC, told Business Insider.
But modularity “is going to be the future.”
PitchBook
Modularity is seen as a winner among VCs
Modular designs allow for incremental changes, deployment, and reduces capital costs and project delays, investors said. The idea comes from solar, where the same panels can be mass-produced and scaled up to make a huge solar park or distributed across rooftops.
“Cost overruns typically for large transit projects and buildings and things like that. When you look at it, solar, wind, and data centers typically deliver very close to on time and on budget. That’s because they’re mostly very modular projects,” said Mike Schroepfer, the former CTO at Facebook who now runs his own VC fund Gigascale Capital.
For Schroepfer, the winners will take this on board and “scale out rather than scale up capacity,” which allows startups to hit competitive economics. He pointed to portfolio company Dixocycle, a Paris-based startup using this approach for ethylene production.
German chemical startup Ineratec and New York-based ammonia-as-a-fuel company Amogy are two others scaling this way. Modular systems take up minimal space and can be installed in constrained areas like on ships, Amogy CEO and cofounder Seonghoon Woo said in a 2023 interview with BI upon the company’s Series B. Ineractec’s Tim Boeltken also previously noted that modular production has lower upfront capital costs and makes revenues easier by starting small and growing over time.
Ineratec
Indeed, climate fund Voyager Ventures stays clear of quasi-infrastructure projects, instead favoring modular approaches that de-risk runway and optionality.
“Capital efficiency is something we look for in all business models — be they software, be they hardware — and then iteration, speed of iteration, speed of learning on product-market-fit,” said cofounding partner Sierra Peterson.
“We need to see that companies have the capacity to inexpensively and quickly iterate as they get to product-market-fit; that’s why we’re investing at seed and Series A. That’s tough to do if your first production facility is going to run you a couple $100 million and you have a long permitting timeline to get there.”
Permitting remains a massive roadblock for climate projects and modularity can be one way to “get around some of those hurdles,” added Ben Wolkon, partner at MUUS Climate Partners.
Modular tech can also be distributed and containerized, with some startups hoping to roll out with partners on-site. In this case, units could still require some customization for integration with their existing infrastructure.
Scaling with partners is a common pursuit, but the jury’s still out on whether it works as successful large-scale projects tend to be joint ventures, one investor noted.
It’s not just industrial startups that are going modular and distributed — it encompasses carbon capture, water filtration, food systems, and energy, said Regeneration.VC’s Hoffman. This is driven by demand from consumers, regional governments, and landlords, which see centralized systems as vulnerable and costly.
For instance, relying on a large power grid can result in power outages during storms, leaving households without electricity.