4 winning offtake agreement strategies to scale climate tech

As the world works towards reducing emissions from fossil fuels, it is increasingly important to develop new technologies that can maintain our quality of life without contributing to climate change. Many promising solutions that could enable a circular carbon economy already exist, but not at the necessary scale. These first-of-a-kind (FOAK) projects need to scale up, but that’s easier said than done.

Scaling up takes financing, which can be difficult to acquire. This is because climate tech projects are inherently risky. New technologies that test well in a lab may not work in the real world. Investors know about these high risks, and don’t want to waste their money. But without investment no new technologies can be developed, preventing new climate tech from coming to market.

Offtake agreements offer a solution to this problem. Under an offtake agreement, a buyer agrees to purchase a certain portion of a seller’s goods once produced, guaranteeing cash flow as soon as the product is ready. This security makes a product seem less risky to investors, significantly increasing funding chances. Plus, offtake agreements demonstrate market interest to stakeholders, boosting a company’s credibility.

Not all offtakes are created equal. Different types of offtake agreements are useful at different stages of a project’s life. Think of this like Maslow’s Hierarchy of Needs, where the bottom of the pyramid is occupied by basic needs that must be fulfilled in order to build up to greater things.

The “Maslow Pyramid of Offtakes” looks a bit like this (bullet points start from the bottom of the pyramid):

When the right offtake agreement type is used, offtakes help founders secure project financing by de-risking projects for investors. Think of offtakes for climate tech as equivalent to Annual Recurring Revenue (ARR) for software startups – they're critical indicators of an ability to develop technology the market actually wants and will pay for.

Here are four best practices which can be used to build winning offtake strategies:

If you want to succeed in the long run, you have to be strategic from the very beginning. Strategic players repeatedly mention that they aren't interested in signing offtake agreements as customers – they want to be partners for the journey.

Secure key corporate partners who align with your vision at an early stage. This will allow you to collaborate on co-development opportunities, leveraging their expertise and infrastructure to help you refine your product, giving you credibility at an early stage and allowing you to negotiate for favourable terms. Use pilot plants to showcase your technology, allowing partners to test and validate it early.

For example, consider the partnership between Holcim and Sublime Systems, which included both equity investment and offtake agreements, creating a win-win relationship beyond mere customer-supplier dynamics.

Offtakes mitigate risks for investors, but they come with their own risks. Never put all your eggs in one basket. Offtake agreements can fall through, so it’s important to avoid over-reliance on a single customer. Instead, it’s a good idea to engage multiple offtakers across the value chain.

This means you’ll want to move beyond just your own direct offtakers, and start thinking about your offtakers’ offtakers. Having a diverse group of offtakers at different parts of the value chain reduces your vulnerability to market volatility and means that your projects can progress even if one partnership fails.

Uncertainty is a fact of life, so if you want to make investors feel comfortable financing your project, you need to ensure that your offtake contracts are adaptable in the face of those uncertainties. While early-stage agreements are flexible by default, as you move towards more binding agreements you’ll need to balance flexibility and preparedness to get the most out of your offtakes.

Include mechanisms like cost caps, tiered pricing, and competitive bidding to manage risks and align with ever-evolving project realities. Avoid rigid terms that could limit you in the future. Don’t rush into firm commitments, but keep agreements flexible until you’re ready. By staying flexible, you can ensure that both parties can adapt to changes without compromising commitments.

When making offtake agreements, it helps to remember that your offtakers are running companies of their own, which means they’re also beholden to procurement, R&D, or seasonal cycles. To get the most out of your offtake agreements, integrate them into your offtakers’ normal operational dynamics, ensuring seamless adoption of your product. Tailoring your agreement to their timelines significantly increases the likelihood of success.

Whatever you decide to do, and whoever your offtakers are, offtake agreements are a necessary part of financing your FOAKs. If you play your cards right, you can use your offtake agreements to help you negotiate complexities and balance your scalability needs with customer expectations, manage fluctuating demand and pricing uncertainties, and transition your FOAK projects to scalable, NOAK operations.

Start with low-risk commitments and work your way up to bankable agreements as you deliver on key milestones, and build customer relationships and trust. Take things step by step, be strategic, and soon enough, you'll make these contracts work for you, helping you scale up your solutions and tackle climate change.