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How to Diligence a Cleantech Firm

7 min read How to Diligence a Cleantech Firm

Diligence for a cleantech firm requires a different lens than for traditional software, CPG, or marketplace investing. Whether you’re an angel investor, family office, strategic, or VC, evaluating a cleantech business means examining technology readiness, regulatory compliance, unit economics, carbon impact, capital intensity, and infrastructure dependencies.
Here’s a structured, risk-aware playbook to diligence a cleantech company with confidence.

1. Understand the Business Model & Unit Economics

a. Revenue Model & Cost Structure

Determine whether the company generates revenue through hardware sales, SaaS layers, project development, installation contracts, or long-term service agreements (e.g., O&M or energy-as-a-service).

Break down COGS: components, engineering labor, installation, freight, commissioning, and warranty obligations.

Ask how margins improve with volume:

Are hardware components commoditized or proprietary?
Do economies of scale significantly reduce manufacturing costs?
Are service contracts profitable over their lifecycle?

b. Lifetime Value (LTV) & Customer Acquisition Costs (CAC)

For enterprise or municipal customers:

What is the expected contract term?
How often do customers expand deployments?
What is the churn for service agreements?

For residential solutions (e.g., solar installers, battery providers):

Evaluate gross profit per project.
Compare customer lifetime profit to CAC and installation labor costs.

c. Pricing Strategy

How price-sensitive is the market?

Does the company compete on cost savings, performance, or sustainability ROI?
How do market incentives (tax credits, grants, utility rebates) affect pricing?

Ensure the pricing model remains viable even if subsidies decrease or competition intensifies.

2. Technology Readiness & Scalability Risks

a. Technology Validation (TRL Levels)

Assess technology readiness: Has it been lab-validated, pilot-tested, or commercially deployed?

Request:

Independent validation reports
Performance data
Warranty or reliability metrics

Identify any unproven assumptions that could hinder commercialization.

b. Manufacturing & Supply Chain

Where and how is the product manufactured?

In-house, outsourced, or contract manufacturing?
Are critical components single-source (e.g., rare earth metals, lithium cells)?

Evaluate supply-chain resiliency:

Lead times
Supplier diversification
Exposure to geopolitical risk

c. Scalability Constraints

Does scaling require:

Large capex investment?
Specialized labor?
Utility interconnection approval?
Local permitting or environmental assessments?

Assess whether physical constraints—not just demand—could limit growth.

3. Market & Go-to-Market Strategy

a. Target Market & Adoption Curve

Who are the customers—utilities, industrials, municipalities, real estate developers, corporates, or consumers?

Analyze:

Market size
Market fragmentation
Regulatory tailwinds (e.g., IRA incentives, net metering policy)

Determine if the market is ready for the solution or if customer education will slow sales cycles.

b. Sales Model & Distribution

Is the company using direct sales, channel partners, installers, EPCs, or distributors?

For enterprise or government sales:

Review sales cycle length
Contract structure
RFP dependency
Proof of traction with anchor customers

c. Customer Proof & Brand Positioning

Evaluate customer testimonials, commercial pilots, and measurable outcomes (e.g., kWh reduction, CO₂ saved, O&M savings).

Assess whether the company’s differentiation—performance, sustainability, cost savings, or reliability—is real and defensible.

4. Regulatory, Policy & Compliance Considerations

a. Certifications & Safety

Request certification documents such as:

UL, CE, ISO standards
Grid interconnection compliance (e.g., IEEE standards)
Environmental or emissions certifications

Check whether the product has undergone third-party testing.

b. Policy Dependencies

Many cleantech firms depend on incentives. Understand:

How the business performs with and without subsidies
Risks from policy changes
Exposure to tariffs, import duties, or trade restrictions

c. Permitting, Interconnection & Local Regulations

For grid-dependent products:

Interconnection timelines
Utility approval processes
Permitting risks

For environmental tech:

EPA, state-level environmental regulation
Potential liabilities (e.g., waste handling, emissions compliance)

5. Product & Innovation Pipeline

a. Product-Market Fit

Review pilot results, customer feedback, reliability metrics, uptime rates, and warranty claims.

Evaluate whether early adopters are becoming long-term customers, and whether the product delivers measurable ROI.

b. R&D Roadmap

Ask for:

Pipeline of next-gen technology
Development timelines
Budget allocation between R&D and commercialization
Intellectual property strategy (patents, trade secrets)

Request evidence of technical milestones, not just conceptual roadmaps.

c. Competitive Moats

Assess whether the company’s innovation is defensible through:

Patents
Proprietary materials or algorithms
Exclusive supply agreements
Data advantages
High switching costs

6. Team & Operational Execution

a. Founding Team & Technical Expertise

Do founders have expertise in energy, engineering, sustainability, hardware, or manufacturing?

Have they brought physical technology to market before?

b. Organizational Strength

Examine structure across engineering, operations, sales, installation, and regulatory functions.

Evaluate whether the company has:

Solid program/project management
Scalable operational processes
Strong supply chain and field operations teams

c. Execution Metrics

Request KPIs such as:

Deployment timelines
Installation costs
Uptime and reliability metrics
Warranty claim rates
On-time delivery and backlog status

Look for signs of operational discipline like documented SOPs and audited processes.

7. Financials & Capital Structure

a. Historical Financials

Request:

2–3 years of financial statements
Cash flow breakdown (critical for capex-heavy firms)
Gross margin trends
Equipment and installation cost data

Assess whether the company’s growth justifies its burn rate.

b. Financial Model & Scenarios

Review projections with a focus on:

Unit economics under scale
Sensitivity to commodity prices
Capex requirements for growth
Working capital needs (especially for hardware)
Installation labor availability

Model downside cases: What if incentives drop, cost of materials rises, or deployment slows?

c. Cap Table & Funding Requirements

Request a detailed cap table including SAFEs, notes, and options.

Understand:

Existing investor rights
Liquidity preferences
Future capital needs and dilution risk
Dependency on project financing or credit facilities

8. Customer Validation & Market Risk

a. Customer References

Speak with customers in pilot or commercial deployments. Ask:

Did the technology meet expectations?
Was the installation smooth?
Did it generate real cost or carbon savings?
Would they expand usage?

b. Competitive Landscape

Map direct and indirect competitors:

Incumbents
Emerging cleantech startups
Cross-category substitutes (e.g., batteries vs. thermal storage)

Assess defensibility and switching costs.

c. Infrastructure & Channel Risk

Evaluate dependencies such as:

Utility approval cycles
Installation labor availability
Supply chain bottlenecks
Dependence on one large customer or geographic region

9. ESG, Sustainability & Risk Management

a. Environmental Impact

Request lifecycle analyses or carbon footprint data.
Verify claims around emissions reduction, recyclability, and energy savings.

b. Resilience & Risk Mitigation

Does the company have:

Backup suppliers
Redundant manufacturing options
Inventory buffers
Disaster recovery or incident response plans

c. Compliance, Liability & Insurance

Ask about:

Product liability insurance
Performance guarantees
Safety protocols
Environmental risk insurance

10. Exit Strategy & Investor Alignment

a. Likely Exit Paths

Consider:

Acquisition by energy majors or industrials
PE roll-ups in infrastructure or sustainability
Long-term infrastructure asset sales
IPO (rare but possible for category leaders)

Ask about conversations with strategic partners or utilities.

b. Capital Efficiency & Time Horizons

Cleantech often requires larger capital investment and longer timeframes than pure software.

Make sure the company’s capital needs align with your fund’s target return timeline.

c. Investor–Company Alignment

Does the mission resonate with you?
Are you comfortable with longer payback periods or infrastructure-driven growth?
Does the team value strategic partners or purely financial investors?

Diligencing a cleantech firm goes far beyond analyzing spreadsheets or early pilot success. It requires understanding technology maturity, supply chain resiliency, regulatory exposure, deployment constraints, unit economics, and long-term sustainability.

By applying a structured framework—assessing technical risk, validating scalability, modeling financial scenarios, evaluating market adoption, and verifying customer outcomes—you not only reduce risk but also form conviction about where the company sits in the future of the energy and sustainability landscape.

If you’re going to back a cleantech firm, make sure your diligence is as rigorous, evidence-based, and future-oriented as the innovation itself.