The FOAK Question: Essential Insights for Financing and Planning First-Of-A-Kind plants
Navigating the Landscape of First-Of-A-Kind Plants of Climate Tech Innovations
If you’re a climate tech company just starting out, you might have heard about the term first-of-a-kind or FOAK. FOAKs are a major milestone for climate tech companies. They’re an important step in bridging the gap between ideas and actual, commercial technology. But taking that step can be daunting, especially for new players in the climate tech industry. In this article, we break down everything you need to know about FOAKs — what they are, how to start building one, and why we love them.
What is a FOAK?
As the name implies, a FOAK is the first of its kind, something that shows that your technology is ready to leave the sterilised environment of the laboratory and take on the real world. In engineering economics, the term FOAK can refer to any technology that’s newly created, but when we talk about FOAKs, we usually mean FOAK plants or pilot plants. These are the plants where products or formulas that might only have existed in theory or in very small doses can be scaled up to meet commercial demand.
FOAKs are typically smaller than large-scale plants, but they allow you to go through the manufacturing process of your product on a small scale so that you can look for any issues or inefficiencies and correct them before scaling-up production. FOAKs can fulfil many different purposes, including proving that your process works before you scale up to a commercial plant, producing samples for market testing, or even creating a production unit to produce speciality chemicals that serve smaller market segments. Once you have a FOAK, you’ll use it to make physically and chemically stable versions of your product, review your processing equipment, test and fine-tune production and quality control guidelines, identify critical issues in feedstock and offtake and show your investors that you’re ready for the big leagues.
How big should your FOAK be?
Before you think about how to finance your FOAK, you need to determine how big your plant will be. The size of FOAKs can vary and depends heavily on what your plant will be used for. It might be tempting to go with the smallest size possible because smaller plants are usually cheaper. But you can’t make your plant so small that it doesn’t provide a meaningful test of your future production process.
Many chemical reactions and other reactions that produce energy require reactors of a minimum size to work, which means that you might be bound by a theoretical bottom limit on the size of your plant. And even if the chemistry doesn’t stop you from keeping your plant small, many equipment vendors also make their equipment with a minimum size in mind, and creating custom components to keep your FOAK smaller might end up being more expensive than otherwise, or even impossible. You might even have a contractual agreement, where your customers ask you to produce up to a certain amount to prove that your product is viable.
If your goal is to create something that can be scaled up later, you’ll also need to keep scientific principles in mind. Your plant needs to be equivalent to the larger, scaled-up version you’re planning for the future. That means it needs to have the same challenges, and everything from the geometry of the reactor to the operating principles, to the construction materials, needs to be equivalent to your commercial plant. That way, you can uncover any problems with your design now, rather than at the more complicated commercial stage. It won’t be very useful, for example, to have a FOAK so small that any data you receive from it won’t be equivalent to the larger plant you’re trying to build. This is a problem that’s very familiar to those of us who work in laboratories, where exciting technological results are discovered all the time that are often impossible to scale up without further advancements in technology.
You’ll also need to think about the practical aspects of your plant. You’ll want to make sure that your plant is housed somewhere with enough space to allow you to make modifications to the design, and that you can train your staff in the operation of the plant. All of this will add to your FOAK’s cost, and you’ll need to figure this out before looking for investors.
Long story short, the rule of thumb for the size of a FOAK vs. a full-scale facility is 1:10. With the right design you can further push it. One of our companies managed to go with 1:80.
💡Pro tip: FOAK vs. a full-scale facility is 1:10
Financing your FOAK
Building your FOAK is an important stepping stone on the path towards being ready for market, but if you’re reading this, you might feel a little anxiety at the thought of how much your FOAK will cost. And this anxiety isn’t unwarranted. FOAKs can be expensive. Here at Extantia, we’re often looking at FOAKs that cost between $10M to $30M. That isn’t exactly cheap, but if you’re worried about raising the funding, don’t panic. FOAKs are usually funded through 50% equity and 50% grants, so if you can secure grant funding, you only need to raise the other half of the cost. To help you get started, check out the CAPEX financing guide we put together, which includes a grants overview and best practices. Still, we understand that financing FOAKs is never easy.
While many investors are looking to get into the climate technology market, there is a known funding gap for companies in the mid-stages of production, around the time when you would be looking into building your FOAK. The size of the FOAK funding need has been estimated to be about $150 to $190 billion, while currently, the availability of climate funds for mid-stage companies is hovering at about $10.5 billion. A huge component of this gap is a lack of Series B funding from investors. That’s because the last decade was heavily dominated by software-based companies, for whom Series B funding was a poor entry point. So while there are definitely climate and infrastructure funds that offer billions of dollars in funding opportunities, these funds are focused on more established techniques and processes, preferring to back projects that are a bit closer to market.
It seems like an impossible task because in order to prove that your technology is ready for market, you must first build your FOAK. At this stage, most FOAKs are funded directly from the company’s balance sheet (HoldCo), rather than through any sort of special purpose vehicle (OpCo). Many climate companies have found their way across the gap by searching for opportunities in the venture debt market, essentially getting funding through loans that leverage equity raised by the start-up. This would help reduce the amount of capital needed to fund your FOAK. If you have offtake agreements with your customers, essentially promising to sell your future goods to them, you’ll have a much easier time getting debt financing for your project. About 30–50% offtake agreements should allow you to get even up to 30% of debt financing.
💡Pro tip: FOAK capital structure 50% equity, 50% grant. And with offtakes, up to 30% in debt.
What to have before you apply
If you’re planning to raise Series A/B for constructing a first-of-a-kind (FOAK) facility, you’ll face some hard-to-convince VCs. To give yourself the best chance at success, you’ll need to do your due diligence to convince investors your idea is ready for the big time.
You should have the following items ready to go:
- Techno-economic analysis (TEA) — Is your plant economically viable? If you can’t prove that your plant is economically viable, it is not ready for funding.
- Other financing options — How else will you fund this plant? As we’ve previously mentioned, Series A/B funding won’t cover everything you need to start a FOAK. Beyond this equity investment, how are you planning to fund this plant? Showing investors that you’ve considered this will make you a less risky investment.
- Feedstock security — Have you secured the raw materials you need for full-scale operation? Doing so can show investors that your plant will be ready to go as soon as you can get it built.
- Offtake agreements — Have you secured customers for your products? And if so, at what price point? You should make this information clear to potential funders.
- Staff — Have you recruited a FOAK engineer? If you yourself aren’t a top-tier engineer (on top of being a climate tech founder with strong scientific skills, which we recognise is a tall order), you’ll need to recruit one well before your next funding round. Having their expertise on your side will improve investors’ confidence in your company. At Extantia, we’ve put together a sample job description that you can use to find this individual. Feel free to take a look at the document in the link and alter it to fit your needs.
💡Pro tip: Download here your sample job description for a FOAK Engineer
- Location — Do you have a concrete plan for where you will build the FOAK? Is it a greenfield (an area of agricultural or forest land slated for development that has not been developed before) or a brownfield (an unused commercial development that may still have hazardous chemicals present)? How does the choice of your location affect your plant’s proposed activities? If your location is a brownfield, have you factored in the costs of cleaning the area?
- Permitting — Have you obtained all necessary regulatory approvals? This process can take a while so make sure that you do it before you apply for funding.
- LCA / ESG — Have you conducted a comprehensive analysis of the facility and its products? What type of waste will you produce, and how can you deal with it safely? What are the resources that you will need, and can you source them sustainably? (Consider where you can use recycled materials, reuse waste products, or how you can play a part in the circular economy). What Health and Safety measures should be in place for your staff?
- Risks — Have you thoroughly assessed the risks inherent in your project? What could go wrong, and what are your possible mitigation measures? All projects have risks, but funders will want to know that you are aware of those risks and that if things go wrong, you have a plan for mitigating the damage.
- Rendering — Do you have a 3D rendering of your planned facility? This last might sound silly but remember that funding is all about emotions. In a crowded playing field, you will want to stand out to investors. A good 3D rendering of your planned facility will help them remember you and will show investors that you know what you are doing.
Why FOAKs matter
Here at Extantia, we love FOAKs. As climate tech investors, we understand that the climate crisis is a physical problem, requiring physical solutions. That means that most of the companies that we back have significant hardware components, and require FOAKs to make sure that they get things right.
Unfortunately, many VCs shy away from financing the 50% equity needed to build a FOAK. But we believe that FOAKs are vital to helping startups prove:
- That their technology can be scaled up, from kilograms to tons and from kilowatts to megawatts. FOAKs are often an order of magnitude, sometimes two orders of magnitude, smaller than the commercial plant. Properly executed, a FOAK shows that the processes that underpin the technology can be performed safely, efficiently, and profitably.
- That the team is capable of meeting demand, rising to the challenges of producing on a commercial level. A team that can produce a working FOAK is a team that has already worked through the challenges of project management, supply chains, and internal bureaucracy and is more likely to succeed in the business world.
Although building a FOAK is challenging, we find that companies that succeed often see a substantial jump in their valuation after building the FOAK plant, because they’ve proven that the technology is ready for action and there is a huge market demand for net-zero technologies. That means that when we take bets on pre-FOAK companies, we often see fantastic venture returns on our investments.
FOAKs can be risky, but for us, it’s a risk worth taking.
