The next generation of climate tech startups won’t look like the “asset-light” software startups that held favor until recently.
And they will not be financed like them either, explains Virta Ventures’ Russell Sprole on the latest Agents of Impact Podcast. As Virta has deployed its $9 million first fund, which closed last year, Sprole and his team have refined their strategies for the age of AI.
“AI is reducing, and certainly changing the moats and defensibility of pure software businesses,” Sprole tells ImpactAlpha.
Now, the San Francisco-based manager is targeting climate solutions that combine digital and physical capabilities. He says Virta is still looking for technologies that can decarbonize energy, transportation, industrials, agriculture and the built environment, but adds, “Oftentimes you will need to have a physical layer to your product.”
Stacked businesses
Virta is increasingly backing companies that combine software with hardware, services or financial products. The goal is to build what Sprole describes as an “innovation stack,” a layered model that allows startups to capture more value over time.
Sprole cites Virta investee Tyba Energy, which helps optimize energy storage. “They started as a more software-centric company, helping dispatchable energy assets optimize and maximize revenue,” Sprole says. “Over time, they’re going to be layering on a trading platform, layering on boots on the ground, physical services, and building out more of an innovation stack that is not pure software.”
Asset-heavy, equity-light
Sprole is holding firm to a core principle from Virta’s initial thesis: minimizing dilution.
“Even if something is capital intensive, it doesn’t necessarily mean it has to be super equity intensive,” he says. “You can still remain equity light while being an asset or capital intensive business over time.”
That requires a different approach to financing. Rather than relying primarily on venture capital, Sprole says he encourages founders to assemble a broader capital stack, including revenue, grants, project finance, asset-backed lending and corporate debt.
“The best founders are going to be great financial engineers that can bring the variety of capital sources to bear and minimize dilution.”
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