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 &