In the vast landscape of innovation lies a pivotal point where groundbreaking concepts collide with the formidable challenge of commercialization. This nexus, often termed the “first-of-a-kind (FOAK) puzzle,” presents a unique set of hurdles, especially in industries dedicated to combatting climate change. This article delves into the complexities of navigating this puzzle, with a specific focus on climate technology and the capital expenditure (CAPEX) demands it entails.
Figure 1 – The financing structure of a FOAK
FOAK projects are those pioneering endeavors that herald the debut of a new technology, business model, or production process at a commercial scale. These ventures hold immense promise for advancing climate change solutions while offering substantial opportunities for exponential growth if successful. However, the novelty and capital intensity of FOAK projects erect significant barriers, creating what is often referred to as the “first-of-a-kind valley of death.”
Indeed, the journey from prototype to full-scale commercial deployment involves traversing various stages, including lab pilots, pilot plants, and commercial-scale demonstrations. At each phase, startups encounter escalating capital requirements, coupled with escalating risks.
Innovative projects, particularly those considered “First-of-a-Kind” (FOAK), face a significant funding challenge known as the “chicken and egg problem.” This conundrum arises from the reluctance of traditional funding sources such as venture capital (VC), private equity (PE)/infrastructure finance, and debt lenders to invest in FOAK initiatives. The inherent risk and capital-intensive nature of such projects make them unappealing to these investors, who prefer more established ventures with proven track records. Consequently, there exists a pronounced funding gap, especially during the mid-stage of development, where FOAK projects require substantial financial support to progress.
Furthermore, even corporations, which might be proactive in entering offtake agreements with FOAK projects, encounter their own set of challenges. They often lack sufficient risk-bearing capital and are burdened by slow decision-making processes.
While public grants could potentially fill this funding void, they typically come with limitations. These grants are often too small in scale or contingent upon securing additional funding from other sources mentioned above. This creates a circular dependency, exacerbating the chicken and egg situation – FOAK projects need funding to progress, yet traditional investors are hesitant to invest without proof of viability, perpetuating a cycle of financial uncertainty and stagnation.
From the founders’ perspective, ensuring successful project and infrastructure financing requires a comprehensive understanding of investor needs. This entails familiarity with various financing methods, including grants, debt, and equity. Such expertise can be cultivated through the guidance of a proficient CFO or by seeking advice from external advisors. Moreover, establishing technical proof-points is paramount. This necessitates demonstrating the technology’s viability with a Technology Readiness Level (TRL) of 6 or 7, often achieved through the operation of fully functional demo plants or through strategic partnerships. Finally, granular planning and meticulous documentation are essential for satisfying project financiers and debt providers. This involves providing comprehensive details of the business model, market projections, patents, regulatory approvals, contracts, and contingency plans.
From a financial players’ perspective, it is imperative to involve more engineers in the investment evaluation process, particularly for technologies that have yet to attain full commercial scale. This ensures a thorough assessment of the technical potential of solutions and helps in making informed investment decisions. Furthermore, fostering strong multi-stakeholder alliances among founders, venture capitalists (VCs), private equity (PE) firms, infrastructure investors, corporates, banks, foundations, government entities, and universities is essential. These alliances facilitate risk mitigation and expedite the development of First-of-a-Kind (FOAK) plants.
Figure 2 – Illustration of FOAK deals
In summary, tackling the FOAK puzzle offers both significant hurdles and unique chances for progress, especially in fighting climate change. Startups can overcome these challenges by adopting a comprehensive financing strategy, tapping into various funding sources, and forming strategic alliances. In essence, solving the FOAK puzzle requires not only financial ingenuity but also strategic foresight, collaboration, and perseverance—a journey essential for realizing the transformative potential of climate technology and capex-intensive ventures.
At Aster Fab, our primary mission revolves around supporting hard-to-abate industries in tapping into the potential of climate technology (see our 9 industries of focus here). So, if you are seeking to engage with Climate Tech startups or exploring ways to decarbonize your operations, feel free to reach out to Hélène Maxwell (Climate Tech Expert) hmaxwell@aster.com or Léonard Stéger (Head of Sales) lsteger@aster.com.
Examining recent economic history reveals a nuanced narrative surrounding the trajectory of Cleantech, characterized by periods of growth, setback, and adaptation.
From 2006 to 2011, the emergence of Cleantech 1.0 marked a notable surge in investment efforts aimed at addressing environmental concerns. Cleantech, an umbrella term encompassing various innovations in the energy industry, such as renewable energy and resource efficiency, garnered significant attention and resources during this phase. However, the initial enthusiasm was later tempered by what is colloquially termed the Cleantech Bubble.
During the Cleantech 1.0 era, prominent ventures such as Solyndra (solar panel manufacturing) and KiOR (biofuels production) symbolized the aspirations and subsequent challenges of the movement. These companies, supported by substantial investments, initially highlighted promising solutions for energy-related issues. Nevertheless, their eventual downturn, marked by Solyndra’s bankruptcy filing in 2015 and KiOR’s similar fate in 2014, underscored the complexities and uncertainties inherent in Cleantech ventures.
Figure 1 – The burst in the Cleantech bubble
The decline of Cleantech 1.0 stemmed from a combination of factors, including the emergence of fracking, which introduced cheaper alternatives to renewable energy sources, and the reduction of government funding for clean energy initiatives. Additionally, heightened global competition, particularly from countries like China, posed challenges for sectors such as solar panel manufacturing. The venture capital model, though instrumental in the initial stages, revealed its limitations in supporting the prolonged and unpredictable development cycles of clean energy technologies, often leaving startups stranded in what is commonly referred to as the “valley of death” due to lack of “patient capital.” Post-mortem analyses, such as those conducted by the MIT Energy Initiative, advocated for a collaborative approach involving diverse stakeholders, ranging from corporations to hedge funds to affluent individuals. Indeed, Successful Cleantech 1.0 companies like SunRun instead utilized other forms of financing like debt.
However, the setbacks experienced during Cleantech 1.0 prompted a reevaluation and the birth of Climate Tech 2.0—a more expansive and inclusive approach to addressing climate change. Unlike its predecessor, Climate Tech transcends energy solutions to encompass innovations across multiple industries such as consumer goods, agriculture, manufacturing, and transportation (see our blogpost on the definition of Climate Tech here).
Zooming out, it becomes clear that investing in climate solutions demands an abundance of patient capital and a clear path to exit. The difficulties faced by Cleantech 1.0 companies in securing late-stage equity financing and viable exit strategies underscored the need for a more resilient financial ecosystem. Fortunately, the landscape has evolved, with initiatives like SPACs and dedicated growth capital funds offering new avenues for climate-focused startups.
Additionally, corporate entities are stepping up to assume leadership roles in driving climate innovation forward. Company ArcelorMittal invested $36M in January 2023 in Boston Metal which develops electrochemical units to replace blast furnaces in steel manufacturing. Similarly, HeidelbergCement has partnered with Solidia Technologies, a company specializing in sustainable cement and concrete solutions. This shift signifies a deeper understanding of the interconnected nature of environmental challenges and the necessity for comprehensive, cross-sectoral solutions.
Nevertheless, a notable challenge persists: the funding dilemma known as “FOAK” or “First of a Kind” financing. Climate Tech, with its focus on pioneering solutions across various sectors, often grapples with securing funding for projects deemed too novel or risky by traditional investment standards. FOAK projects, while holding immense potential for transformative impact, face reluctance from investors wary of the uncertainties inherent in untested technologies or business models. For more insights, check out our blogpost Solving the FOAK Equation—CAPEX & Climate Tech here.
In summary, the transition from the Cleantech 1.0 bubble to the Climate Tech era marks a pivotal shift in addressing environmental challenges. While Cleantech 1.0 faced setbacks, it played a crucial role in driving down the prices of solar and wind energy, making them more accessible and essential for advancing climate technology. These advancements laid the foundation for Climate Tech 2.0, which expands the approach beyond energy, signaling a promising future of innovation and cooperation. Challenges like funding for novel projects remain, but with continued dedication, Climate Tech offers a pathway to a sustainable future.
At Aster Fab, our primary mission revolves around supporting hard-to-abate industries in tapping into the potential of climate technology (see our 9 industries of focus here). So, if you are seeking to engage with Climate Tech startups or exploring ways to decarbonize your operations, feel free to reach out to Hélène Maxwell (Climate Tech Expert) hmaxwell@aster.com or Léonard Stéger (Head of Sales) lsteger@aster.com.
The discourse surrounding Climate Tech, an umbrella term encapsulating solutions aimed at mitigating or adapting to climate change, has gained traction in recent years. Yet, defining this concept remains a nuanced endeavor, with various interpretations and frameworks proposed by different entities. Some interpretations of Climate Tech are narrow, focusing solely on renewable energy solutions such as solar, wind, and hydroelectric power. In contrast, others adopt a broader perspective, encompassing a spectrum of innovations across sectors like agriculture, transportation, construction, and waste management.
Aster Fab refers to Climate Tech as encompassing any product, service or technology designed to address at least one of the six core objectives outlined in the European Union’s (EU) Taxonomy Regulation.
It’s important to note its distinction from cleantech, which predominantly focuses on energy-related elements. For further elucidation, delve into our blog post “From the Cleantech 1.0 Bubble to the Climate Tech Era” for deeper insights here.
Figure 1 – The definition of Climate Tech according to Aster Fab
Here are the six pillars outlined by the EU Taxonomy, providing a structured framework for understanding Climate Tech and its criteria.
In conclusion, we advocate for a thorough framework that assesses the sustainability and climate impact of technological innovations. At Aster Fab, our primary mission revolves around supporting hard-to-abate industries in tapping into the potential of climate technology (see our 9 industries of focus here). So, if you are seeking to engage with Climate Tech startups or exploring ways to decarbonize your operations, feel free to reach out to Léonard Stéger lsteger@aster.com.
In conclusion, we advocate for a thorough framework that assesses the sustainability and climate impact of technological innovations. At Aster Fab, our primary mission revolves around supporting hard-to-abate industries in tapping into the potential of climate technology (see our 9 industries of focus here). So, if you are seeking to engage with Climate Tech startups or exploring ways to decarbonize your operations, feel free to reach out to Hélène Maxwell (Climate Tech Expert) hmaxwell@aster.com or Léonard Stéger (Head of Sales) lsteger@aster.com.
In our capacity as a consulting firm specializing in assisting companies to audit, design, and establish their corporate venture arms—as well as generate deal flow—we often confront the pressing question: What are the best practices in Corporate Venture Capital (CVC)?
Against the backdrop of the sobering fact that the average lifespan of a CVC is a mere 4 years, we recently organized a panel titled “The CVC Survival Game: Insights from European Survivors,” featuring experts from BMW (Germany), EDP (Portugal), and Equinor (Norway).
Moderated by Hélène Maxwell from Aster Fab, the conversation distilled into 8 actionable tips for mastering the CVC game. Link to the YouTube video here.
Mariana Costa of EDP Ventures highlights the crucial need for a well-defined, flexible investment mandate aligned with innovation priorities. “It needs to fall within the investment mandate and align with our strategic objectives,” Costa emphasizes. This nuanced perspective underscores the importance of adaptability in the ever-changing realm of corporate venture capital, ensuring responsiveness to emerging opportunities and evolving industry trends.
Margret Dupslaff underscores the benefits of BMW I Ventures’ single-LP, independent approach, drawing inspiration from venture capital practices. “Our independence allows us to make decisions swiftly, giving us a competitive edge in the VC space,” she emphasizes. This structure enables quick risk-taking, facilitating effective competition in the dynamic VC landscape and allowing investment decisions to be made in as little as 10 days.
All three CVCs—EDP Ventures, Equinor Ventures, and BMW i Ventures—emphasize investments in sustainability. Startups in climate tech and energy transition are particularly sought after. Kristine Marie Kvalø Johansson of Equinor brought attention to the need for a focus on solutions that will make a tangible impact. “Working with carbon capture and value chains is something that I think will be necessary, and we have to scale faster,” Johansson stated. In a landscape teeming with possibilities, the key lies in identifying ventures that align not just with corporate goals but with the broader narrative of making a positive impact on the industry and the world.
Both EDP Ventures and Equinor acknowledged the inevitability of failures in the CVC game. “This is Venture Capital. It is what it is. Hopefully, we try to minimize them, but they are part of the game,” said Mariana Costa. The ability to embrace failures as learning opportunities defines the resilience of a CVC player. These setbacks, rather than deterrents, become stepping stones for future successes.
Parallelly, Margaret Dupslaff from BMW i Ventures aligns with this learning ethos, advocating for startups to adopt a similar mindset. Encouraging adaptability and openness, she emphasizes the significance of absorbing insights from corporate partners, leveraging collective expertise for mutual growth.
Effective stakeholder management emerged as a critical element, according to Equinor’s Kristine Marie Kvalø Johansson. She highlighted the importance of proving the value of CVC initiatives both internally and externally. “It’s all about being able to prove what we’re doing, not just externally but also internally,” she explained. This dual focus on maintaining external credibility and internal alignment underscores the delicate balancing act that defines CVC success.
CVC transcends mere financial transactions; it’s a strategic pursuit dedicated to creating lasting value. Mariana Costa from EDP Ventures emphasizes, “Focus on strategic return better reflects our DNA as a strategic investor,” prioritizing long-term collaboration over immediate financial gains. With over €100 million in signed contracts between portfolio companies and Business Units, EDP Ventures exemplifies the power of these strategic partnerships, showcasing a commitment to fostering innovation within the industry.
Investing in relationships is crucial in corporate venture capital, as Mariana Costa emphasizes the need for a close rapport with companies and internal stakeholders. This commitment extends beyond investments and is a partnership at all levels, with early engagement between startups and Business Units enhancing the likelihood of successful commercial contracts. Additionally, Mariana highlights that “VC is all about relationships”, evident not only in managing the investees but also externally. By cultivating external relationships, you can enrich deal flow, boost your reputation and attract startups, ultimately strengthening the reputation of the CVC.
Margret further underscores this by sharing insights from BMW Startup Garage (Venture clienting unit that created POCs with Business Units), where knowledge and deal flow are generously shared. As an illustration, she cites a recent instance involving a company with smart tire technology. While the innovation was intriguing for enhancing road awareness in vehicles, it lacked a substantial investment case due to the limited market size—a perspective that aligns with strategic decision-making in the venture capital realm.
EDP Ventures established in 2008, operates globally with a focus on climate tech companies and energy companies driving the energy transition. With a substantial investment of over €60 million, EDP Ventures has invested in 37 active portfolio companies across the globe. Their investment mandate spans from seed to Series B, with an average ticket size ranging from €1 million to €10 million. The portfolio aligns with EDP Group’s innovation priorities, covering renewable energy, smart networks, distributed energy resources, storage, and more.
Contact: Mariana Costa – mariana.costa@edp.com
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BMW I Ventures established in 2011, has thrived with a significant commitment. Operating with a fully independent fund II of BMW, they have €300 million to deploy. Having invested in more than 60 companies, BMW Ventures typically engages with startups in their Series A to C stages, with an initial ticket size of around €10 million. Notably, 13 of their portfolio companies have reached Unicorn status, showcasing the success of their financial approach. BMW I Ventures focuses on sustainability across the entire automotive value chain, leveraging BMW’s expertise for informed decision-making.
Contact: Margret Dupslaff – margret@bmwiventures.com
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Equinor Ventures, established in 1996, is Equinor’s corporate venture capital arm dedicated to investing in ambitious early-phase and growth companies. This is based on a belief that the innovation, creativity and agility of startups can accelerate the change towards a low-carbon future. Equinor Ventures engages with startups from early to later stages, all this is supported by technical, market and financial guidance, with a strong drive for piloting and implementing the solutions. We are looking to invest around USD 750 million over the next five years and are seeking to allocate 70% of the capital to renewables, low-carbon solutions and future opportunities
Contact: Kristine Marie Kvalø Johansson – krisjo@equinor.com
In view of the declining potential of its historical Oil & gas business, our client has a bold ambition to shift away from its old business by 2050 to become a leading, integrated sustainable fuels, chemicals and materials company.
In this context, the Low-carbon Business department wanted to evaluate the potential for diversification in the field of Carbon Capture Utilization and Storage (CCUS) and to identify innovative partners with whom to create a complementary business.
We carried out a deep dive study divided into four steps:
We sourced 433 startups in Europe, the United States, and Israel in the CCUS market.
We used our proprietary scoring methodology to identify the most promising startups from a market point of view (based on a Venture Capital approach) and from the client’s point of view.
Following the collaboration scenarios that were recommended to them, 5 engagements for collaborations were initiated.
People generally link global warming with carbon dioxide (CO2) but, as the Intergovernmental Panel on Climate Change (IPCC) explains, 30% of the increase in global temperature since pre-industrial levels is due to higher methane (CH4) concentrations in the atmosphere. This is because methane is extremely more effective at trapping heat.
Where does methane come from?
The IEA has estimated that 40% of methane comes from natural sources (wetlands, biomass burning…), and the remaining 60% from human activities (agriculture, oil & gas production, waste). The two pathways to methane production are:
According to McKinsey, five industries could reduce global annual methane emissions by 20% by 2030 and 46% by 2050. Those are agriculture, oil and gas, coal mining, solid-waste management, and wastewater management.
What about methane capture from the air?
Methane is 200 times less abundant in the atmosphere than CO2 — a scarcity that makes removing it a technical challenge. Capturing methane would require processing a lot of air, which could require an extremely large amount of energy. And unlike CO2, which can be captured both physically and chemically in a variety of solvents and porous solids, methane is completely non-polar and interacts very weakly with most materials. However, researchers claim to have found a promising solution. A class of crystalline materials, called zeolites, capable of soaking up the gas. Regardless of this solution, the difficulty of capturing methane from the air is the reason why most technologies focus on oxidizing the greenhouse gas rather than “hooking” it out.
Startups are developing innovations to curb methane emissions
For the decomposition of organic matter:
For gas leaks:
A methane tax just like carbon taxes
Norway was one of the first countries to introduce a carbon tax in 1991. Aside from carbon, the harmful gases regulated by the tax also include methane. All Oil & Gas operators on the country’s continental shelf are now required to report all methane emissions from their activities. As a result, studies show that the country has succeeded to consistently maintain low methane emissions. Canada is proposing to require companies to inspect their infrastructure monthly, fixing the leaks they find as part of efforts to reduce the sector’s methane emissions by 75% by 2030 (compared with 2012). Although the EU is among 150 signatories to the Global Methane Pledge – an agreement to cut emissions of methane by 30% – EU energy chief warned early March that the EU was lagging in the race to curb methane emissions. Since the proposals on methane in 2021, they have been watered down.
In short, methane will be critical to solving the net-zero equation. The good news is that mature technologies are at hand. From feed additives for cattle to new rice-farming techniques, to advanced approaches for oil and gas leak detection and landgas methane capture. Where costs are prohibitive, there is a need for coordinated action to create the infrastructure and fiscal conditions that would support further action. Finally, across the board, there is a need for more monitoring and implementation.
Budget of $60-110 billion annually up to 2030
Full deployment of the methane abatement measures would cost an estimated $150-$220 billion annually by 2040 and $230-$340 billion annually by 2050.
< 100 funded companies
Tracxn
French-based startup founded in 2016 which is a developer of an energy analytics platform for traders, investors, operators and governments. Kayrros powers part of the Global Methane Tracker.
US-based startup founded in 2021 that has developed a biomineralization technology that seals miniscule leakage pathways in oil and gas wells.
Australian-based startup founded in 2021 which is a manufacturer of seaweed-based nutritional supplements for livestock that inhibit methane production. The startup is backed by Bill Gates’ fund Breakthrough Energy Ventures.
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As hard-to-abate industries increasingly foster deep decarbonization strategies, green hydrogen produced from renewables via water electrolysis is expected to be at the very heart of the energy transition. However, at present, water electrolysis accounts for only about 0.03% of global hydrogen production. This is largely due to the high cost of green hydrogen (>$5/kg versus <$1.5 for grey hydrogen) due in part to the high cost of electrolyzer systems.
In this newsletter, we will examine trends in water electrolyzer innovation that reduce their cost.
Water electrolyzers are electrochemical devices used to split water molecules into hydrogen and oxygen in the presence of an electrical current. Electrolyzers are divided into four main technologies: alkaline, proton exchange membrane (PEM), anion exchange membrane (AEM) and solid oxide. Alkaline and PEM electrolyzers are the most common, produced on a commercial scale (TRL 9). AEMs are catching up in development, at TRL 6, with the development led by German startup Enapter. As for solid oxide, it is still being demonstrated with German startup Sunfire. To learn more about the technical differences, check out the IRENA report here.
Looking at the evolution of patent filings, we can detect trends in the uptake of new technologies to facilitate the implementation of large-scale green hydrogen use. Indeed, the number of water electrolysis-related patent families published worldwide has increased by 18% per year since 2005. In fact, they have surpassed the number of those related to solid, liquid and oil-based hydrogen sources. Five groups of sub-technologies stand out: (i) cell operation conditions and structure, (ii) electrocatalyst material, (iii) separators (diaphragms, membranes), (iv) stackability of electrolyzers (stacks) and (v) photoelectrolysis.
Cell operation
In an effort to improve efficiency, various electrolyzer cell operating parameters, such as higher temperature, higher pressure and zero gap cell unit design, are being explored to make them more cost-effective over a wider range of operating conditions. Danish startup Hymeth (PEM electrolyzer) has developed a high-pressure electrolyzer that operates at higher efficiency than conventional PEM technologies.
Electrocatalyst materials
Scarce materials (yttrium, titanium, iridium, platinum, zirconium) are a major barrier to the cost and scale-up of electrolyzers. Yet, the surge in patents related to non-noble metal electrocatalysts indicates that R&D is moving forward to finding new solutions to mitigate material scarcity. US startups Alchemr (AEM electrolyzers) and H2U Technologies (PEM electrolyzers) have developed electrolyzers that do not require noble metals as catalysts.
Separators (diaphragms, membranes)
Reducing the thickness of membranes increases efficiency, which in turn reduces electricity consumption. Danish startup Hystar has developed an electrolyzer that claims to reduce membrane thickness by up to 90% compared to conventional PEM technologies.
Stackability of electrolyzers (stacks)
Electrodes, bipolar plates and porous transport layers can contribute significantly to the stack cost. Improvements in these components, including scaling up their manufacturing, can lead to lower capital costs.
Photoelectrolysis
Water photoelectrolysis (water splitting using light as the energy source) is a strong, newly emerging technology. In terms of patent filings, it remains a niche technology, accounting for 6.5% of all water electrolysis patents. Yet, 37% are international patent families, which underscores the importance that applicants place on protecting their inventions outside the domestic market. A prototype of photo-assisted electrolyzer has been developed by ENGIE’s R&D laboratory CRIGEN and US startup Nanoptek.
Europe and Japan account for more than 50% of the total number of international patents in these 5 sub-technology areas. Leading players include Toshiba (JP), CEA (FR), Panasonic (JP), Siemens (DE) and Honda (JP). While Europe leads in the stackability of electrolyzers (stacks) (41% of the total patents in this area), electrocatalyst material (34%) and cell operation conditions and structure (32%), Japan ranks first in photoelectrolysis (39%) and separators (diaphragms, membranes) (36%). Chinese international patents account for only about 4% across the five technology areas but China dominates in terms of the number of pure domestic patent filings.
In short, green hydrogen technology has the potential to decarbonize numerous hard-to-abate industries. The upward trend in patent filings signals that more will soon be filed, addressing the urgent need for new solutions to lower the cost of electrolyzers, while increasing technological efficiency and production capacity. Case to be followed…
Market size of $5 billion in 2021
The global electrolyzer market size was estimated at $5.6 billion in 2021 and is expected to reach $69.1 billion by the end of 2030, with a registered CAGR of 32.21% from 2022 to 2030.
85 funded companies
Tracxn
French-based startup founded in 2017 which is a developer of green hydrogen plants. The first was inaugurated in 2021, connected to offshore wind turbines.
Singapore-based startup founded in 2020 which is a manufacturer of new generation components for electrolyser cells, stacks and systems. Products include PEM electrolyzers, AEM electrolyzers and solar-to-hydrogen panels.
US-based startup founded in 2016 which is a manufacturer of a new class of electrloyzers. Claims to operate at temperatures from 100°C to 650°C, in between those of alkaline, PEM and solid oxide electrolyzers.
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