The (Spooky) Risks of Non-Dilutive Funding For Cleantech Founders

Cleantech often has the best access to non-dilutive funding, as governments view emissions reduction as part of their platform, but the funding comes with risks

Oct 31, 2024

Non-dilutive funding is very appealing for cleantech founders as the projects often require significant upfront investment amidst a landscape with regulatory and commercial risks. Not much traditional capital is available for these projects, even from funds that say they support them (see our previous newsletter explaining this dynamic here). Non-dilutive funding options, primarily supported by governments, have exploded as a result. This is good, and these programs help solve a critical problem, but they also create several risks for founders, as outlined below.

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If you are building a start-up and accessing non-dilutive funding, even some dilutive funding, it is very important to watch for the three things below.

Risk 1: Claims on IP

There are lots of funding sources where the agreement provides the funding party with some control over company IP.

This is fair, as these organizations answer to taxpayers and taxpayers want to fund innovation within their country (there is a debate on how much of this is for optics vs outcomes). These dynamics are even more common when the country believes that there is a real risk that the IP benefits accrue elsewhere (this is often the case in Canadian grant funding for example).

The problem is that this can actually hinder the more significant liquidity events (which the founders and the Canadians above would want). The outcome that sometimes occurs, as a result, is that the founder (in this Canadian example) will then go to raise US funds or to get a strategic investment from a critical industry partner, and the conversations get paused because the counterparty suddenly sees an entity they don’t know has a say on IP. As you can expect, that can kill conversations regardless of intention, assurances, or original goals.

For certain types of cleantech, the above becomes very risky. Take something like a cleantech solution for mining, where, depending on the metal, all your eventual strategic partners may be global in nature. They will naturally be averse to funding a technology that they may not ultimately have control over (a lot of those strategic investments have some sort of future ROFR on the tool or the company because the strategic investor obviously wants to deploy/control the tech if successful). In that instance, the IP claim may simply stop a very critical environmental technology from being used globally. This isn’t aligned with the founders or the broader goal of reducing emissions, which is inherently a problem with no borders (unlike the grant controls).

A businessperson in a sleek, eco-friendly office, presenting their cleantech company to potential investors. The room has large windows with natural light and views of a green landscape outside. The person is in formal attire, using a presentation screen displaying charts and images of clean technology, like solar panels and wind turbines. The investors are watching attentively, surrounded by a few clean energy symbols and office plants, symbolizing sustainability.

This is an accurate photo we took (not AI-generated) of someone trying to sell their cleantech company and people asking about the IP claims of a grant

Risk 2: Rigid milestones

Anyone who has built anything knows how important iteration is and how it’s often the primary source of innovation/growth.

The plan you started five years ago is almost never the one you ended up pursuing (and for good reason, as you learned more and it informed a different path, which was needed).

Some grants only provide funds if you stay close to the original milestones, though, and founders can accidentally sacrifice the future of the company because they are anchored by milestones that only their granting partner views as relevant. When faced with an opportunity to iterate, instead of considering only their customer, they now have to consider the milestones in their historical grant document as well.

This is important to be aware of, as it goes against how start-ups often find product market fit.

Risk 3: Success metrics based on immediate employment

A lot of grants are evaluated based on the number of jobs they create in the near term. This makes sense as economies want more jobs, and it’s likely the most tangible return on the investment in grant programs. In fact, dollars deployed and jobs created are on the main page of almost every grant institution. Tough to argue with this.

The problem is that for almost all new technologies the ultimate job impact is difficult to quantify. Facebook employs approximately 70,000 people. Even if you were doing a grant for them and said, “Okay, this could match MySpace,” you would only have listed a little over 1,000 people. And the granting officers would have said, “This is insane that in several years, you could match the industry leader.”

Measuring job creation for a new company is also more likely to provide funds to the least efficient companies, and this can cause founders to over-hire because they start thinking about job creation as their main metric instead of revenue and margin (which inherently leads to more job creation). If two companies solving the same problem were applying for a grant, and it takes the second company twice as many people (less use of technology, etc.), that second company may look more appealing to the granting organization. The problem is that the first company is likely better equipped to solve the problem efficiently and reduce emissions, which is the ultimate goal in cleantech. If emissions reduction is the primary goal, picking the company that requires the most people to do it, likely will be a slower, less efficient path.

Your next steps

Non-dilutive funding remains a critical source of capital in cleantech, and great funding partners understand the risks described here and are trying to mitigate them in their programs. For example, our community considers organizations like Alberta Innovates very founder-friendly (more flexible and aligned). Please let us know if you ever need intros to funding organizations, or want to chat with founders in our community that have had both positive and negative experiences with different organizations, and we look forward to making them.

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