Written by Antoine Pradayrol, September 2025
When pension funds think of climate “hard tech” – batteries, new materials, advanced manufacturing – the first words that often come to mind are risky and capital-intensive.
The prevailing perception is that hardware startups burn through cash faster than software, take years to prove commercial traction, and are a poor fit for institutional investors.
But our experience as Climate Tech venture investors tells a different story. In fact, when it comes to reaching meaningful revenues, many hard tech companies require no more capital than their software counterparts. Hard tech is not as hard as you think.
The myth of capital intensity
Conventional wisdom suggests that hardware companies need expensive factories before they can generate revenue. Making innovative things is complicated, so inevitably product cycles are long, and this slows the path to commercialisation. “They take 10+ years before revenues.”
Hence, so received wisdom goes, hardware businesses need high capex, and therefore they need repeated large rounds of investment, diluting early investors; they scale more slowly, face execution and financing risk if markets tighten, have lower gross margins and end up delivering lower exit multiples. The result – so it goes – is fewer shots on goal, longer time to liquidity, and compressed MOIC/IRR versus software-like models that can scale with minimal incremental capital.
Clearly, this must mean that hard tech investments are a poor fit for early-stage VC and institutional LPs like pension funds.
We have heard and read this view many times. As US VC Alex Reinhart put it: “I meet so many investors who won’t touch a hardware business. That is because it takes a deeper level of patience, commitment, and diligence to place one of these bets.”
Such a widely accepted narrative has led many institutional investors to favour software – where capital-light scaling and faster exits are assumed.
Yet, this is an incomplete picture.
The reality: hard tech can be capital efficient
Our own portfolio shows a very different dynamic.
An analysis of our 22 portfolio companies which are currently active and post-revenue shows that:
- They have raised a cumulative total of £174m, corresponding to an average of £7.9m each (over their lifetime, to date).
- They generate annual revenue of £54m (£2.4m each, on average).
Based on these two metrics, we have derived a (crude) ratio representing the companies’ capital intensity – calculated as the amount burned by a company since inception per pound of revenue generated in the last 12 months.
Across our portfolio, this capital intensity ratio stands at 3.2.
This means that, on average, for each £1 of revenue generated by a typical company in our portfolio in the last 12 months, that company has previously used, or burned, £3.20.
Now, comparing these metrics for the post-revenue hardware and software businesses, we found that:
- The 14 hardware companies have raised £101m to date and generate £27m of annual revenue. This points to a capital intensity ratio of 3.8.
- The 8 software companies have raised £73m in total and generate £27m of annual revenue, pointing to a capital intensity ratio of 2.7.
Portfolio evidence of relative capital intensity – Hardware vs. Software
Our real-life portfolio data, across a large variety of UK-based climate tech companies, shows that the capital intensity of software startups is 30% lower than for hardware startups.
This is a far cry from the common wisdom that hardware companies require an order of magnitude more capital than software ones.
And of course, the above-mentioned figures are averages.
There are a number of hardware companies in our portfolio that show remarkable capital efficiency, including:
- One which currently generates £8m+ in annual sales, with a strong gross margin, having raised less than £8m over its lifetime;
- Another fast-growing company with current annual sales of c.£5m, also with a strong gross margin, having raised less than £10m in total.
One is a B2C company, the other one a B2B company – and both have successfully established a global presence.
These single companies’ journeys are proof that hardware can be lean.
Naturally, software-based climate tech also has its standout successes in terms of capital efficiency. For example, one of our companies has reached (and passed) annual recurring revenue of £5m, having burnt less than £4m to date.
Finally, looking at failures, out of the six across our portfolio to date, four were hardware companies and two were software/service companies – a 4:2 ratio, in line with the ratio of our total investments. To date, for us, hardware and software companies have failed at similar rates.
Overall, our experience is that scaling global software businesses does require significant investment as well as time – investments which are not, in fact, too dissimilar from those needed for hard tech startups.
First revenues don’t require massive plants
Whilst it is true that commercial-scale manufacturing can require large capex – way more than early stage venture capital can provide – that is not the point.
What matters to an early stage venture capital investor is that the funding it provides brings the company to an inflection point where it can raise the required scale-up capital in attractive conditions.
To make this happen, the company must successfully pass a number of key milestones. Most notably, it must have de-risked its technology, proven strong product-market fit, and shown attractive unit economics.
However, having invested in 50+ climate tech companies, it is now clear that today’s hard tech startups can choose from a playbook of many different approaches to reach these essential milestones in a capital-efficient manner.
For example:
- Designing modular, scalable products or plants – In our portfolio, this is notably the approach taken by DEScycle and Lineat Composites.
- Leveraging contract manufacturers – This is the way Naked Energy and AirEx operate.
- Building strategic partnerships with corporates who co-fund pilots – For example, Power Roll has attracted such partnerships with Tokyo Gas, Amcor and Renolit.
- Securing offtake agreements – A client or partner agrees to buy the product that will be made in an upcoming factory, easing its financing. This is the approach taken by Mykor.
- Not to mention the many types of non-dilutive funding available, such as Innovate UK grants and loans, Horizon Europe grants, or local government subsidies available for UK-based manufacturing..
None of these hard tech companies in our portfolio has had to build a major factory upfront.
To summarise, today’s hard tech companies have many ways to prove commercial viability on leaner capital than the myths suggest.
Reframing the risk
Of course, hard tech companies require thoughtful diligence. But venture models have evolved.
Specialist funds like ours apply deep technical evaluation and collaborate with sector experts:
- Our experienced team has invested together in early stage UK-based climate tech companies for 8 years;
- We operate alongside Green Angel Syndicate, our network of 300+ specialist investors, many of whom are working (or have worked) in the sectors in which we invest. These investors not only help us select the companies that we back, but also take an active role in supporting them post-investment, including with Board seats;
- We have developed a vast network of relevant co-investors, including all the main specialists in our space.
As such, we are able to support startups in their journey, including enabling them to pursue asset-light growth models before scaling into capex-heavy deployment, as previously illustrated.
Finally, across hard tech sectors, we see a variety of exit routes: licensing deals, trade sales to industrial majors across the many relevant sectors of the economy (not just tech), and potentially public markets.
Rather than being riskier than software, hard tech can in fact offer more resilient growth pathways once commercial traction is achieved.
Why hard tech works for pension funds
Pension funds, which deploy long-duration capital, have a natural advantage in hard tech because their investment horizons align with the timelines required to scale.
Hard tech offers several attributes that are particularly attractive to long-term pension allocators:
- Defensibility: Physical IP, patents, and supply chain integration create barriers to entry that pure software rarely enjoys – especially in the era of AI, when software can now be generated in a fraction of the time previously needed by human developers alone.
- Strategic partnerships: Industrial and energy corporates often act as development partners, co-investors, customers, and ultimately exit routes.
- Alignment with the climate transition: Software alone cannot decarbonise steel, cement, aviation, energy storage, packaging or agriculture. Real economy transformation depends on hard tech solutions.
For pension funds which want to demonstrate a real climate alignment, investing in hard tech is not just prudent – it is essential, as hard tech is central to the net zero transition.
Hard tech startups are not necessarily riskier than software ones at the early stage. They are real economy solutions that can offer tangible, asset-backed growth. They also offer resilience against the hype cycles of pure software.
And the idea that it is “too capital-intensive” for pension investors is outdated.
As our portfolio demonstrates, hard tech ventures can reach meaningful revenues on similar levels of capital as software startups. They also offer durability, defensibility, and impact that align squarely with the fiduciary and sustainability responsibilities of long-term institutional investors.
If pension funds want to back the real economy transformation of energy, transport, agriculture, and materials, then investing in hard tech is not optional.
And as our evidence shows — it’s not as hard as you think.
