Filling In the Missing Middle: FOAK Financing

Part 2: Removing Risk and Boosting Bankability

In Part 1 of TDK Ventures’ analysis of the first-of-a-kind funding dilemma, we looked at how the nature of these projects may drive financial and corporate venture capital investors to look elsewhere for places to put their money. Impelled by the enlightening discussion of the issue generated at the SF Climate Week summit, we highlighted several alternate funding sources founders can court for the first-of-a-kind (FOAK) project financing they need to prove their products’ ability to solve real-world problems at scale.

Now, in Part 2, we delve into the processes, strategies, and resources startups can leverage to overcome the inherent technical and commercial risks FOAK projects present.

To address these concerns while encouraging entrepreneurs to continue dreaming of ways to complete the circular economy, build energy resilience, and clean the atmosphere, stakeholders have developed several derisking initiatives.

● Liftoff Reports — The Department of Energy’s robust framework for capital allocators from both the public and private sectors. These reports guide investment decisions through analytical foundation and critical signposts. By outlining pathways to commercial liftoff, the DOE helps stakeholders understand when and how various technologies can achieve full-scale commercial adoption. This analytical clarity reduces uncertainties, making it easier for traditional lenders to justify investments in breakthrough technologies.

● Commercial Adoption Readiness Assessment Tool — The Office of Technology Transitions’ CARAT methodology evaluates emerging technologies’ readiness levels. It assesses what aspects need to be derisked and highlights key factors that venture capitalists consider when making investment decisions. By providing a structured assessment, this tool helps startups and innovators understand and address potential barriers, thereby improving their attractiveness to traditional lenders.

● Manufacturing Readiness Levels — The Department of Defense uses this metric to assess the maturity and readiness of manufacturing processes. By ensuring that technologies are manufacturable at scale, MRLs help derisk production processes, mitigating concerns about scalability and reliability. This approach builds lender confidence by demonstrating that technology is not only innovative but also producible on a commercial scale.

● Federal-Aid Programs and Special Funding — The Federal Highway Administration’s Office of Infrastructure administers various aid programs and special funding opportunities to support infrastructure projects. These may include grants, loans, and subsidies that reduce the financial burden on startups, making their projects more appealing to traditional lenders. By lowering the initial capital requirements, these federal aids help mitigate perceived risks associated with large-scale infrastructure investments.

● Clean Energy for Native American Communities — The Office of Indian Energy Policy and Programs works to enhance tribal energy sovereignty by investing in localized clean energy projects and providing technical assistance. This helps create stable, long-term markets for innovative technologies. This stability can reassure traditional lenders about the viability and sustainability of these projects.

● Net-Zero 2050 — The Office of Clean Energy Demonstrations focuses on scaling and de-risking technologies essential for achieving net zero emissions mid-century. It funds demonstration projects and provides technical and financial support to showcase the real-world viability of innovative solutions. These demonstrations serve as proof of concept, reducing the perceived risk for traditional lenders.

● Clean Manufacturing — The Office of Manufacturing and Energy Supply Chains manages funding opportunities to bolster clean energy manufacturing and workforce development. By supporting the entire supply chain, from raw materials to finished products, the MESC ensures that technologies can be produced efficiently and cost-effectively. This comprehensive support reduces production risks, making these technologies more attractive to traditional lenders.

● Energy Security — The Office of Cybersecurity, Energy Security, and Emergency Response works to ensure the security and resilience of the energy sector against cyber, physical, and climate threats. By addressing these vulnerabilities, the office ensures technological advances benefit from additional security layers, reassuring lenders about their investments’ long-term viability.

● Leading by Example — The Federal Energy Management Program develops net-zero building, transportation, and procurement projects. These initiatives showcase the innovations’ practical applications and benefits, providing real-world case studies that can inspire confidence among traditional lenders.

● Localized Technical Assistance — The Office of State and Community Energy Programs collaborates with state, tribal, and local governments, non-profits, and community groups to provide technical assistance and invest in location-based clean energy projects. By focusing on community engagement and localized impact, these projects demonstrate grassroots support and potential market adoption, reducing perceived risks for lenders.

● Reliable, Renewable Power — Power Marketing Administrations make federal hydropower facilities available to electric cooperatives, municipal utilities, and other public power entities. By offering assessments and ensuring a reliable energy supply, PMAs play a crucial role in stabilizing the market for new technologies.

● Partnerships and Financing — The Loan Programs Office accelerates high-impact energy and manufacturing investments. By providing patient capital and tailored financial solutions, the LPO helps derisk projects, enabling traditional lenders to participate with greater confidence.

Internal Measures to Elevate Bankability

Climate tech startups also can make organizational and strategic decisions that increase their technologies’ perceived commercialization prospects. None of these are easy, and they all involve tradeoffs. For instance, shifting from selling hardware to an operational service model can ease the upfront burden on investors. Investors finance the project itself, then recoup costs through service fees tied to the project’s output. This requires strong operational expertise and long-term commitment from the company to work.

Securing offtake agreements with established companies demonstrates market demand and future revenue streams, making the project more attractive to investors. Potential customers often insist on proven technologies, creating a chicken-and-egg situation.

Climate tech investors prioritize a clear path to profitability. Demonstrating future revenue potential assures them the technology can be commercially viable, not just environmentally impactful. Startups need to develop internal processes that translate their innovative solutions into financially attractive propositions. This could involve creating strong cost models, identifying revenue streams, and exploring alternative financing options like grants or project-based capital. By showcasing a data-driven focus on bankability, startups can increase their chances of securing funding to bring their groundbreaking ideas to life.

Startups can insure against some risks that come with FOAK projects, such as representations and warranties that shield investors from potential financial losses if the technology fails to meet guaranteed performance metrics. Key person insurance safeguards the project against financial losses due to the death or disability of a critical team member. Contingent liability coverage mitigates potential legal or environmental liabilities that may arise during construction or operation. Given the enterprise risk, specialized insurance policies may be unavailable or cost-prohibitive.

Climate tech startups can engender community buy-in and acceptance of their tech’s viability through engagement and testing. Proactive engagement with local communities throughout the project lifecycle can build trust, address concerns, and secure necessary permits. Conducting a front-end loading study demonstrates a thorough technical evaluation of the project and its engineering processes, increasing investor confidence by showcasing a well-defined project plan that mitigates technical risk perception.

Engagements with channel partners leverage outside expertise, resources, and networks to accelerate project development and reduce costs. Environmentally focused startups can benefit from working with distributors to gain access to existing markets and established sales channels, suppliers to ensure a steady flow of materials and components critical for project execution, and manufacturers to lock in efficient product construction and reduce technical risks.

Financing FOAK climate tech projects requires a multi-pronged approach that addresses high capital requirements, risk perception, insurance needs, community concerns, and strategic partnerships. While challenges remain, innovative solutions like hardware-as-a-service, government grants, and specialized insurance are emerging to bridge the funding gap and unlock the immense potential of climate tech solutions.

Often, founders struggle to justify the cost of hiring a dedicated consultant for their FOAK needs. In these situations, it is helpful for management to compare the investment and expected return of engaging with a consultant vs. those of other funding initiatives. For example, many startups focus on potential revenue drivers like trade shows or events that may generate a few leads and potential sales. Conversely, the right consultant can bring specialized expertise tailored to startups’ specific needs. Trade shows and similar events tend to be more generalized and may not effectively target the appropriate audience or convey the climate tech solution’s unique value proposition. A consultant can provide strategic guidance on identifying the most promising target markets, developing a compelling value proposition, and crafting an effective go-to-market strategy. They can also assist in creating high-quality marketing materials, researching and recruiting potential customers and investors, and optimizing operations and financials.

To find the right consultant, startups should research firms or individuals with relevant industry experience, a proven history, and a deep understanding of the climate tech space. They should also look for consultants who align with their values and share a genuine interest in their mission. Additionally, startups should have a clear plan and budget that outlines their objectives, timelines, and desired outcomes from the consultancy engagement.

Startups should apply best practices to ensure they put their FOAK projects in the best light and position themselves to succeed in implementing their mission. While government grants and similar opportunities can be tempting, startups should not contort their project or business roadmap to fit a specific funding source. Instead, they should focus on developing a solution with a clear path to commercial viability:

● Narrow Scope: Minimize risk by clearly defining the project’s core functionalities. Prove its effectiveness within a well-defined scope before scaling.

● Financial Transparency: Maintain meticulous financial records. Prepare disciplined and intuitive monthly reports and audited quarterly/annual financial statements to demonstrate responsible fiscal management and build trust with potential investors.

● Accurate Budgeting: Develop a comprehensive budget that accurately reflects all project costs. Regularly review and update it to ensure financial discipline and avoid surprises down the line.

● Dedicated Expertise: Consider partnering with a consultant specializing in FOAK climate tech funding. Their experience can guide businesses through proposal writing, investor relations, and negotiation strategies, increasing their chances of success.

Conclusion

While investor reticence towards FOAK climate tech projects is understandable given the elevated risks, startups can take concrete steps to increase the bankability of their solutions. By diversifying funding sources, implementing rigorous risk management processes, and demonstrating a compelling value proposition, founders can begin to break down barriers to investment.

Investigating a diverse pool of funding sources is critical. This could include government grants, corporate partnerships, crowdfunding, venture debt, and strategic investors with a stake in the climate tech space. A blend of funding types can help validate the technology, share risk across multiple stakeholders, and provide a runway to achieve key technical and commercial milestones.

In parallel, startups must implement robust risk management frameworks from the outset. This includes detailed technical risk assessments, rigorous testing and validation protocols, conservative budgeting and schedule buffers, and comprehensive analysis of regulatory, market, and execution risks. Engaging external experts, be they consultants or advisory boards, can further strengthen risk mitigation strategies.

Investors will seek clear evidence that the fundamental value proposition is sound. Startups must compellingly articulate how their FOAK solution can deliver outsized climate impact, commercial viability at scale, a protected competitive advantage, and a viable path to exit or sustainable growth.

While securing investment for FOAK projects may be an uphill battle, founders can overcome investor reticence through diligent planning, calculated risk mitigation, and an unwavering belief in their ability to create positive global impact. The road is difficult, but the prize — a sustainable future for all — is worth the struggle.