Why fusion is not a VC case
Nuclear fusion is cool or hot — pick your favourite adjective. Credits: NASA on Unsplash.
By Torben Schreiter, Iris ten Have & Eshel Lipman
Here is a dilemma for you. You are a climate-first venture capital fund, tackling the big pieces of the decarbonisation puzzle. Baseload energy is clearly a key part of the mandate; it will have a big climate impact and an even bigger return on investment. Should you invest in fusion?
Recently, the Extantia team has been grappling with this question. After decades of being confined to research in national laboratories, this technology is seeing a new wave of innovation through the startup ecosystem. Entrepreneurs are jumping at the market opportunity to commercialise fusion energy. In parallel, we see recent news of several experiments proving net positive energy output in a scientific setting. Finally, some impressive funding rounds in the space have been announced. You can’t help but feel that momentum is forming.
Undoubtedly, fusion energy is promising and will likely form an important part of the future global energy mix. And it needs to be funded. But is it a venture capital case? Based on our investment criteria and venture-building know-how, we say no. It is not for us at Extantia. This is because the technology is not yet ready to produce energy on a commercial scale and it’s not clear when it will be able to do so.
We came to this conclusion after deep diving into the topic. Hot fusion is a complex and extensive topic, and we were only able to make this important decision after understanding the technology, the market, and the challenges. We’re sharing this deep dive externally so that everyone can form their own opinion on the topic.
We decided to structure this deep dive in a format similar to our CO2 valorisation one. You can read the main article (this one), which provides the bigger picture in three chapters as well as a summary of the topic. If you want to get technical (and nerdy) then each of the chapters has its own sub-article where we go into the depth of the topic.
In the first chapter, we explain why fusion is not a fit for our fund’s investment thesis and probably also not for other venture capital funds with similar investment theses. The second part sheds light on fusion’s potential, explains the science behind it, and outlines the four mainstream approaches to creating confinement in fusion. In the third and last chapter, we discuss the steps and current challenges to building a commercial fusion reactor and go over the term “breakeven” or the Q factor.
After this long introduction, let’s start by looking at our investment principles and how fusion performs against our metrics.
The climate crisis: we need to act now and fusion power is still decades away
One of our six investment principles is time-to-impact. This is extremely relevant to understand our stance on fusion. Just like in the financial world, where a dollar today is worth more than a dollar tomorrow, greenhouse gas emissions cut today are worth more than the cuts promised in the future. This concept is called the “Time Value of Carbon”. This is due to the escalating risks associated with the climate crisis; if we want to avoid catastrophic, irreversible climate disasters, we must act with speed and at scale. That’s why, when we evaluate a particular topic or potential investment, we don’t just look at how much carbon the technology can abate in total, but also at when it will be able to do so at substantial scale.
When looking at nuclear fusion technology, we see a high score on how much carbon it can potentially abate, but it will likely take decades to get the technology out of the lab and deployed at scale. Creating net energy from nuclear fusion was about 30 years away in the 80s. Today, about 40 years later, it could still be 30 years away. We may be wrong by a decade or so if a significant breakthrough is achieved but that’s a big “if”. Such breakthroughs typically require both science and engineering that can take years to happen. The beauty of scientific discoveries often lies in their serendipity, but the downside, at least for the venture capital world, is the unpredictable timeline of such discoveries. This brings us to another important Extantia investment principle that is highly relevant to the fusion case: technology readiness.
As early-stage investors, we look at the technology readiness of the company to assess whether it’s a good fit for us. In climate tech, this is not necessarily easy. Most climate tech investors use the Technology Readiness Level (TRL) method, originally developed by NASA in the 1970s for space, which measures the maturity level of a technology throughout its research, development, and deployment phase progression. TRLs are based on a scale from 1 to 9, with 1–3 being the “research” stage, 4–6 representing “development”, and grades 7–9 being actual “deployment”.
At Extantia, we typically invest in companies that have already achieved TRL 4 at the minimum with a preference for TRL 5–7. We want to be able to respond to the climate crisis with urgency and quickly scale game-changing solutions. When we look at fusion technologies, we see that many are still at the research stage and not in the sweet spot we are looking for. Venture capital as an industry exists to accelerate technology commercialisation and support the commercial growth of a portfolio company, not to fund basic research. After all, an investment that goes almost entirely into basic research is an incalculable risk for an investor. We on the other hand take calculated risks. To properly calculate risks, we need to be able to measure performance and results. In the case of fusion, specific progress in terms of measurable business traction is not yet expected.
This is a perfect segue to explore another challenge VCs face when considering a fusion investment: return on investment. What kind of financial return can we expect from a fusion investment over the lifetime of the fund? Typically, a company’s valuation rises as commercial developments take place. Commercial traction can mean contracted revenues, booked revenues, pre-order agreements, advance market commitments, and LOIs, for example. For fusion, however, there’s no actual commercial performance to be expected anytime soon. So, as an investor, you’re betting on scientific breakthroughs or future R&D milestones with no clear conclusion date, which needs to happen prior to commercialisation. Yes, we recognise how far fusion has come. It doesn’t mean that fusion startups don’t have huge technological barriers to overcome. The additional research and associated engineering effort needed for fusion technology to be commercialised is orders of magnitude less predictable than the normal scale-up challenges of other deep tech innovations face.
This is why, in our point of view, fusion is still mainly a task for governments, backed by strategic investors, rather than the VC sector. The valuations of fusion companies may very well rise and VCs may sell their stakes in secondaries, but based on our conversations with both fusion scientists and fusion entrepreneurs, this is closer to a pass-the-monkey strategy than to classic VC work. The financial returns for current VC vintages invested in the fusion industry and generated by future valuation uplifts will be unrelated to commercial performance indicators. Therefore, the chances to get VC-like returns (at least 10x) may be jeopardised by further diluting the cap table, with larger and larger rounds of hundreds of millions in valuations, which won’t be easy to raise. Moreover, it will require the willingness of possibly several generations of funds to continue to recapitalise the company with significant amounts of capital until they can eventually commercialise their technologies.
To support our statements about fusion and its relevance for venture capitalists, we ask you to stay put for a more science-based overview. This is necessary to understand what the hot fusion hype is all about, the science behind it and the major challenges we face that keep commercial fusion a 30-year endeavour, plus or minus a decade.
Understanding the hype: fusion 101
For more in-depth information on the basics of hot fusion, go to our first sub-article of this series.
There are many reasons why people get excited about nuclear fusion. To us, it boils down to four:
- Carbon-free
- Baseload energy qualities
- Fusion fuel is abundant and accessible
- Energy density
So what is fusion? Let’s start with a simple explanation as most of us aren’t experts in plasma physics. Fusion is the process of combining two atoms into one while releasing a great amount of energy. Deuterium and tritium, essentially heavier forms of hydrogen, are the most common fusion fuels. While hydrogen consists of a positively charged proton surrounded by a negatively charged electron, deuterium’s core contains one additional neutron (neutrally charged particle) and tritium’s core has two neutrons. When these two fuse, helium and a neutron are formed and a huge amount of energy is released. To better understand why fusion releases so much energy, check out our first sub-article of this series.
Although the fusion concept may sound straightforward, enabling nuclear fusion reactions in practice requires a monumental effort. Plasma physicists aim to achieve this through a combination of three parameters: density, temperature and confinement time. Generally, as a benchmark of progress, the triple product value or the “fusion product” is used. This parameter combines the values of plasma density, temperature, and plasma confinement time. At a certain value of the fusion product, called ignition, the reaction becomes self-sustaining: the heat generated by the reaction is enough to keep the plasma hot so that the external heating systems can be turned off. These three parameters will help us get to the overarching holy grail in fusion: getting more energy out than what we have put in.
Harnessing the power of the stars: four mainstream approaches to creating confinement in fusion
So why does nuclear fusion occur spontaneously in the sun, but not on Earth? The sun is roughly 330,000 times as big as the Earth and thus a lot heavier. This results in very strong gravitational forces that naturally induce fusion. As the Earth is a lot lighter than the sun, we don’t have these gravitational forces. Therefore, to compensate for that lack of gravity when creating self-sustaining nuclear fusion on earth, we need extremely high temperatures (>100 million degrees celsius), a long confinement time, and a certain density in order to increase the probability of fusion to happen. In fact, the temperatures needed on Earth to create conditions for nuclear fusion need to be about 7x higher than those at the centre of our sun.
There are a number of approaches to creating these conditions artificially. The four most common approaches to facilitate nuclear fusion are tokamak, stellarator, Z-pinch, and lasers. We go into detail about these approaches here. The first three are based on the concept of magnetic confinement, essentially using magnetism to confine the plasma. The tokamak is the most common magnetic confinement device:
The fourth approach uses high-energy lasers. An example of this is NIF’s recent accomplishment. Laser-based fusion reactors essentially hold the fuel in place while it’s getting blasted to achieve fusion.
What does it take to build a commercial fusion reactor?
For a more detailed explanation of the challenges of creating a commercial fusion reactor, go to our second sub-article of this series.
The stepwise plan to commercialise fusion energy isn’t much different from other hardware-based climate tech solutions:
- The research phase. It all starts with understanding the fundamentals that are essential in plasma physics. This is the experimental phase, where a startup should be looking into heating systems, confinement topology, reactor design, and working on successfully creating plasma.
- The optimisation phase. In this phase, the relevant parameters identified in the research phase will be optimised. Optimisation should enable testing materials, such as high-temperature superconductors (HTS) if needed, other magnets, a lithium blanket on the reactor wall, the confinement topology, etc.
- The self-sustained plasma phase. Here is where it gets a bit more specific for commercialising fusion energy. This phase should be focused on achieving a self-sustained plasma leveraging the right topology as identified in the optimisation phase.
- The net energy demonstration phase. This phase might be the most challenging. So far, getting more energy out of fusion than was put in has only been recently demonstrated for a few seconds in academic research facilities.
- The commercialisation phase. This is the phase where an actual device to obtain energy from nuclear fusion commercially is put on the market.
To sum it up, here is a graphic that visualises the approaches of getting to commercial nuclear fusion — tokamak, stellarator, inertial confinement and alternative approaches — as well as a map of selected academic institutions and companies that are tackling the matter:
In order to understand the state of hot fusion technologies in relation to the five stages, we need to talk about the Q-factor.
“Q” — the key to gaining net energy from fusion
How much energy goes into a fusion reactor and how much comes out of the reactor?
Typically you will hear about the term “breakeven” or the Q factor. Q is the ratio between the input power and the output power: i.e. Q=1 means that the system is giving exactly the same amount of energy as it has absorbed from the outside. However, aiming for Q>1 is not straightforward as there is more than one Q. This is very relevant, but mostly neglected in mainstream coverage. Let’s go over them:
Q_scientific refers to the ratio of energy (heat) produced by a fusion reaction to the energy consumed by the fusion reaction. When you read about “Q” in mainstream media, in almost all cases, it will be Q_scientific. Thinking back to TRLs, any experiments that manage to demonstrate Q_scientific>1 would be comparable to reaching TRL 3, the final stages of the research phase.
Q_engineering considers real-world constraints such as materials limitations, geometry, and operating conditions. This factor provides a more realistic assessment of achievable performance levels or in simple words: energy in versus energy out on the complete system level. Q_engineering=1 would be comparable to TRL 4, a technology demonstrated in a controlled environment.
Q_commercial is probably the most relevant Q for investors. Reaching a Q_commercial=1 would be comparable to TRL 5, a technology validated in a relevant environment. Since no fusion company is close to this stage, any discussion about the viability of such a project is purely hypothetical at this point in time.
Perhaps even more essential to understand the commercial viability of fusion is the fact that the relationship between the three different Qs is not linear. See the graphic below.
With mainstream media covering the last NIF’s Lawrence Livermore National Laboratory successful experiment extensively, it is easy to see that great progress is made in fusion research all the time. And while that has certainly allowed us to move past Q_scientific>1 and somewhat closer to Q_engineering=1, we are actually still two orders of magnitude away from it. That is a lot. Needless to say, we are still very far from the ultimate goal: Q_commercial>1.
In order to understand why that is, we discuss the biggest hurdles fusion researchers and entrepreneurs are facing along their journey.
The challenges that are delaying fusion energy’s commercialisation
For a more detailed explanation of the steps and current challenges to building a commercial fusion reactor, go to our second sub-article of this series.
Below we will discuss 6 key challenges that need to be overcome by researchers, engineers and policymakers if fusion is to become a controllable, viable energy source.
Technology & engineering challenges
1. Physical prototyping costs and duration are high. In fusion but also in other companies with a substantial hardware footprint, every iteration of the prototype is time- and resource-consuming. Confinement of the plasma requires very specific reactor configurations that are extremely complex to fine-tune. Therefore, timeframes may be way long and can accumulate to anything from a few months to years per device.
2. The initial energy required to kickstart nuclear fusion is high. The issue with kickstarting nuclear fusion is that it requires very high temperatures and densities as well as long confinement times. Therefore, fusion reactors will require a significant amount of energy to start up the process.
3. Plasma instabilities stop the nuclear fusion reaction. The magnets’ physical configuration must be extremely precise to successfully sustain the plasma (in Wendelstein the precision tolerance is 1 millimetre!). Plasma magnetic hydrodynamic instabilities are a type of instability occurring when the magnetic field is not uniform. This can happen if the plasma is moving or if there is a tiny change in the magnetic field, causing a positive feedback loop, which will completely destabilise the plasma.
Commercialisation & scaling challenges
4. There are supply chain issues. The supply chain of fusion fuels, such as deuterium and tritium (the latter being a rare and volatile radioactive element with a half-life of only 12 years), should be developed further. In addition, the supply chains related to high-temperature superconductors (HTS) as well as other rare earth metals and hard-to-source materials that are required both for building the prototypes as well as during ongoing operations should be strengthened.
5. The world needs more nuclear physicists, mathematicians and plasma physics researchers. To create a well-established industry around it, we need to build the next generation of innovators in the space.
6. There is no regulatory framework for operating nuclear fusion power plants. Fusion reactors will be deployed first in countries with a regulatory framework that allows deployment while ensuring safety. If we learned anything from the 70-year-old fission industry, it won’t be an easy ride and will face a lot of NIMBY resistance. To speed up the process of scaling fusion (if and when this happens), regulators need to start creating standards and regulations now.
Some of the startups like Commonwealth Fusion Systems and Tokamak Energy have already made progress in some of the areas mentioned above, particularly in creating a stable plasma, with some optimisation already completed. Most startups, however, are focusing solely on progressing towards a Q_scientific>1 as a first milestone, while kicking some other substantial problems down the road, which will obviously take a lot of time and a lot of funding.
So, will we see a “microsun” on Earth in the near future?
If you look at the decades of funding of governmental research and hundreds of billions of dollars spent on previous attempts to investigate nuclear fusion in mega-projects like ITER or JET, one cannot ignore that the undebatable large fundraising rounds announced over the last years — $1.8B for CWS, $250M for TAE, $2.2B for Helion Energy and more — make a lot of sense. These companies are aiming to achieve commercial fusion sometime after 2030. To do so, they need money. A lot of money.
To some extent, the idea that a private fusion company can succeed where the government has failed has been boosted by the success stories of SpaceX and Virgin Galactic, which have developed reusable engines within relatively short timeframes. They significantly reduced the cost of space launches. What must be said though is that SpaceX and Virgin Galactic have been solving an engineering problem — not a scientific or technical problem like fusion is doing (alongside a lot of engineering challenges).
That said, we believe that fusion companies have a role to play in shaping the future of energy on this planet (and even the future of space — see fusion propulsion). We would like to end this article with a brief summary and a call to action. Although we are generally fascinated by nuclear fusion, we don’t invest in it for the following reasons: (1) the time-to-impact is too long and/or unknown and fusion startups won’t be able to show a return in the lifetime of our fund (2) the technology readiness levels (TRLs) of fusion systems are too low (at best around TRL 3). Now, at the same time, we have a high appreciation for all the women and men working on fusion. Your work is amazing and will lead one day to the future energy source of the planet. In the meantime, we will be cheering from the sidelines.
Many thanks to Dr. Angie Qarry for helping us understand the science and technology of hot fusion, and to the Wendelstein 7-X team for opening the doors for a visit.
