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With Natalie Volpe

Financing FOAK climate projects

Raising financing for a first-of-a-kind (FOAK) climate tech project is no easy task. You’ll need to stack different types of capital and attempt to create a predictable outcome for investors in a highly unpredictable environment - and of all this with no track record to point to. But securing capital for groundbreaking new climate technologies is critical for their success - so how can founders convince investors to get onboard?

Natalie Volpe is an Investment Director at Wollemi Capital, an Australian-based investment firm that invests in innovative climate startups and projects. We sat down with her to discuss what funding structures are emerging for FOAK projects, where to look for investors, and when you should start raising this type of capital.

Defining FOAK 

In most cases, when climate investors talk about FOAK, they are referring to the financing of the first commercial scale facility for a given climate technology, often following the success of a small pilot outside of the lab. 

Because a FOAK project by definition has never been done before, the risk is effectively on par with corporate equity risk - but the return has the profile of an infrastructure project. As a result of this mismatch between risk and reward, FOAK projects can be incredibly challenging to finance, especially off-balance sheet. They generally aren’t able to secure project debt, so they require a blend of corporate and project equity, sometimes with grant funding (or other catalytic capital) mixed in.

Why not raise on your balance sheet?

Due to the limited amount of FOAK financing available in the market, most startups will look to corporate equity to finance their FOAK projects. It’s true, VC $ are more available and accessible, but the cost of this financing is astronomic in the context of FOAK, the capital is highly dilutive, the quantum of dollars is likely insufficient to support your FOAK needs. 

Beyond that, raising FOAK financing from a reputable infrastructure investor might not only reduce your cost of capital in comparison to VC, but it will enable you to demonstrate your ability to finance a commercial project with an off-balance sheet structure, and therefore change your future capacity to raise off-balance sheet capital for facilities #2, #3, and beyond. 

So, while FOAK financing is hard, and may even come at a comparable cost to corporate equity on an IRR basis in the early days, it’s worth the effort.  Keep this in mind while you’re negotiating, as cost of capital shouldn’t be your only consideration. 

Where can founders go for FOAK financing?

The current FOAK landscape is somewhat limited, but starting to expand. The DOE’s Office of Clean Energy Demonstrations (OCED) is worth looking into for FOAK projects in the Energy sector, in the $<100M range. Firms that understand corporate equity risk as well as project risk are also leaning into this space - founders can look at players like Wollemi Capital, Spring Lane, and Keyframe. Another option is catalytic philanthropic capital, which is even more risk tolerant, from programs such as Breakthrough Energy Catalyst.  Last but not least, some accelerator programs like Elemental and Clean Fight have project tracks that offer highly catalytic FOAK financing (generally <$1M).

Making investors comfortable with FOAK-level risk

Most FOAK investors will want some kind of downside (risk) protection, so securing first loss or other catalytic capital will be key, whether it’s private, philanthropic, or government funding. Generally, successful FOAK projects have 10-20% of the financing through first-loss, or have a guarantee that covers at least 20% of losses. Failing that, you’ll need to put in your own capital from your balance sheet to provide the same risk mitigation. 

Collateral can provide another form of downside risk protection for FOAK investors. Keep in mind that the math looks very different in sectors such as battery recycling, where equipment is relatively standard and commercial and generally retains some value even if the project itself falls apart - as opposed to, for example, sustainable aviation fuel (SAF) projects which utilize custom-built reactors that can’t be easily resold in a default scenario.

Many FOAK investors will also want rights of first refusal (ROFR) on future projects, and maybe even corporate equity financings.  This will, to some degree, allow them to blend their returns against multiple projects with declining risk profiles.

Ultimately, the key question when you’re chasing FOAK funding is whether investors will be willing to back your first project. With today’s limited options in the market, there’s a good chance that you won’t be able to find an investor who’s comfortable with FOAK, and you’ll need to raise equity capital on your corporate balance sheet for your first project. 

Questions to ask yourself before you start raising funds

1. How proven is your technology - and at what scale? 
From a FOAK investor perspective, your technology is only proven once you’ve put steel in the ground and operated something for a meaningful duration of time. If you’ve only run your tech in the lab before, you’ll be asking an investor to take technical risk, not engineering scale-up risk, and that’s a much harder sell. If you’re not there yet, leverage grant and VC capital to build a pilot plant in the real world first, then approach FOAK investors for the next stage of your commercialization journey.

2. What’s the unlevered IRR?
For any kind of commercial financing, there are IRR thresholds that investors need to meet.  In the context of FOAK, investors are targeting unlevered project returns above 15%, although ultimately the amount they’re willing to accept will vary based on the level of technology and engineering risk. In any case, when approaching investors, you should have a clear proforma that paints an accurate picture of your project cash flows, with your assumptions laid out in a clear way, and that includes sensitivity analysis across all key assumptions.

3. What is the commercial offtake?
In project finance, investors require revenue to be contracted before they write you a check. FOAK investors will be even more sensitive to this requirement, as frontier tech has more “merchant” risk than traditional counterparts.  Investors will be looking closely at what those contracts entail, including whether they’re fixed price or fixed volume, so come prepared.

4. Are you sufficiently capitalized?
If you’re going to attempt to raise FOAK funding, make sure you’re sufficiently capitalized at the corporate entity level.  Not only will FOAK investors look to you to put in first-loss capital, but they may want to have some recourse to the parent entity if the project falls apart.  A solid balance sheet will give investors greater comfort that, should things go wrong, you’ll be in a position to recover.

Advice for finding FOAK financing 

1. Start early
Start working out how you’ll finance your FOAK project as early as possible; in most cases, a good time to start is just after your seed round. Thinking about the bigger picture as early as possible will keep you on the right track when it comes to sizing your pilot - otherwise you risk it being either oversized and too expensive, or that it fails to provide sufficient operational data that would allow someone to take your technology to a commercial level. You’ll also likely need to bring on talent (see next section) to really flesh out these ideas, so make sure you budget for that in your fundraising plan.

2. Hire project developers ASAP
Aside from the technology risk, the biggest risk investors will see when looking at your project is the operator risk. Your company might be filled with exceptionally smart technologists and PhDs, but if none of them have ever built a project before, there’s an incredibly steep learning curve ahead and any mistakes could spur huge setbacks. When you’re starting to put your commercial facility in motion, hire people with project development experience who’ve worked on similar projects (scale, scope, offtakers, etc). Their expertise will help assure investors that the project will get built on time and on budget.

3. Expect everything to take longer than you think
Project development can go sideways very easily - it will generally take far longer and cost more than you expect. Plan for the worst, and make sure your models, analysis, and offtake agreements all accommodate this worst case scenario. 

4. Bring on investors who can add value
Most VCs lack understanding around how project finance works or the situations in which it’s needed. This runs the risk that they’ll get in the way of the process or be adverse to signing a term sheet with a project finance investor. Ask your VCs how well-versed they are in this area of financing, and prioritize those that have relevant experience and those who can add value. 

5. Build the right relationships
Regardless of how well you think you understand project finance, or how good your first hire is, this is an emerging area and there will undoubtedly be a lot of unknown unknowns that can trip you up. The only way you’ll bridge the gap is by building a community of people who’ve been through the process before, and who you can reach out to for advice.  This could include other founders in similar, but not competitive, spaces; investors at various stages/scales of project finance; regulators in key markets; service providers across tax, IP, supply chain, etc; and many more.

Natalie is an Investment Director at Wollemi Capital focused on bridging the gap between venture and infrastructure by investing across the capital stack in innovative climate companies and projects. She previously ran a capital advisory firm raising corporate equity and non-dilutive capital for climate startups. Prior to that, she was an infrastructure investor at Generate Capital and worked in project finance and development at SunEdison.


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