First-of-a-kind (FOAK) projects are pivotal in transitioning to a sustainable future. They often represent the first deployment of a new technology at a commercial scale. These projects carry unique risks and challenges, making their financing complex and requiring specialized approaches.
In a dynamic and insightful panel discussion, experts from various climate finance organizations discussed the challenges and opportunities in funding first-of-a-kind (FOAK) climate infrastructure projects. The panel featured Christian Okoye from Generate Capital, Emily Lewis O’Brien from Trellis Climate, and Josh Kaufman from Nexus Development Capital. This article encapsulates the main points from the discussion, providing valuable guidance for startups looking to scale and deploy their climate technologies.
Types of Capital and Their Roles
Before diving in, there are nuances between different types of capital—project equity, project debt, and corporate equity. Project equity involves direct investments in a project, sharing the risks and the upside with developers. Project debt typically comes with fixed returns and covenants, offering less flexibility but more security for the investor. Meanwhile, corporate equity is an investment in the business entity.
In a startup’s early stages, corporate equity aligns more with the founders and the company’s growth. The thought is that corporate equity gives the investor an upside for taking on risk. As a business matures, it is better for the startup and the investor to invest at the project level. This avoids founder dilution while separating business risk from project risk.
When to Engage with FOAK Capital
Generate Capital looks for projects where “binary risk is off the table.” This means having substantial operational data from demonstration plants, securing feedstock and offtake agreements, and ensuring the project site is identified and permitted. Generate Capital typically writes checks of $25 million or more and seeks projects that are at least at Technology Readiness Level (TRL) 9.
Unlike traditional infrastructure investors, Nexus Development Capital is willing to take on more binary risk. They focus on projects at TRL 7 and above and have investments ranging from $5 to $10 million. They help prepare projects for infrastructure investors such as Generate Capital, which means they focus on the project development phase and work to advance assets up to what the DOE calls Adoption Readiness Level.
Trellis Climate is a catalytic capital provider, meaning that it can come in earlier and take on more risk. Its three key criteria for investment are significant climate mitigation potential, a clear path to scale, and a demonstrated need for catalytic capital. Trellis Climate’s goal is to use catalytic capital to crowd in more traditional investors into FOAK projects and bridge the gap between venture capital and traditional infrastructure financing.
Common Misconceptions and Advice for Founders
One of the recurring themes in the discussion was the importance of founder education. Many founders are familiar only with venture capital and may need help understanding the requirements and expectations of project financiers. One of the most essential pieces to underwriting a project is the detailed project planning and understanding of the different types/stages of capital.
Stemming from this, companies must iterate and test to ensure scalability and reliability. This helps prevent a company from skipping the demonstration stage, minimize introducing new, unproven components, and focus on integrating well-tested technologies to reduce overall project risk.
Conclusion
The FOAK project finance panel highlighted the critical steps and considerations for startups aiming to scale their climate technologies. By understanding the different types of capital, the specific criteria investors look for, and the common pitfalls to avoid, founders can better navigate the complex landscape of climate finance. With the right approach and thorough preparation, FOAK projects can successfully bridge the gap from innovation to impactful, large-scale deployment, driving us closer to a sustainable future.
