Catalyst with Shayle Kann - Financing first-of-a-kind climate assets

Episode Date: December 21, 2023

There’s a hole in the finance world. Fighting climate change means scaling up lots of new technologies, but financing those first-of-a-kind (FOAK) projects is incredibly difficult. New technologies involving things like sustainable aviation fuel, geothermal, and direct air capture can take a decade or more to scale up. But venture capital is too expensive for FOAK projects, while infrastructure finance is too risk-averse. So what solutions could solve the FOAK financing problem?  In this episode, Shayle talks to longtime climatetech investor David Yeh. David has spent over 20 years in climatetech, including in roles at the Obama White House, Generation Investment Management, and the World Bank. They cover topics like: Different approaches to FOAK, like off-balance sheet, structured finance, catalytic capital, and government programs. Examples of companies that solved the FOAK problem Code switching between venture capitalists and infrastructure financiers. (Try using the word “innovative” with traditional bankers). David’s checklist for FOAK entrepreneurs. Recommended Resources: Bloomberg: Grant From Bill Gates-led Fund Will Make Green Jet Fuel As Cheap As Fossil Fuels CTVC: What the FOAK? If you want more news and analysis like this in your inbox, subscribe to Latitude Media's newsletter and Canary Media's newsletter. Catalyst is a co-production of Latitude Media and Canary Media. Catalyst is brought to you by BayWa r.e., a leading global renewable energy developer, service supplier, and distributor. With over 22GW in their project pipeline, BayWa r.e. is rethinking energy every day and at every level. Committed to being a solid partner for the long run, BayWa r.e. wants to work with you to help shape the future of energy. Learn more at bay.wa-re.com. Catalyst is brought to you by Sungrow. Now in more than 150 countries, Sungrow’s solutions include inverters for utility-scale, commercial, and industrial solar, plus energy storage systems. Learn more at us.sungrowpower.com.

from the studios of Latitude Media and Canary Media. I'm Shail Khan, and this is Catalyst. It's interesting. You could build like a glossary of vocabulary that is like applicable to one financial audience and is banned when you're talking to a different financial audience. I have a cheat cheat, which I give to a lot of these entrepreneurs saying, hey, this is what you can say when you're from the VC.

This is what you can say when you're front of a project. financier. You did it. You designed and engineered a brand new technology that's going to help combat climate change. You're ready to prove it in the field. You've got a real customer. Now comes the fun part. First of a kind financing. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single

platform built for utility scale. Predictive, verifiable, and designed to perform when it counts. Learn more at energy hub.com. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy, and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts.

Catalyst is supported by Fish Tank PR, an award-winning PR firm focused on climate and energy tech, renewables, and sustainability. Fish Tank is known for generating prominent and effective, media coverage for the brands they work with. If you want a PR partner that's thoughtful, shoots straight, and gets results, you'll like Fish Tank PR. To learn more about FishTankPr approach, visit fish tankpr.com. That's FISCH, fish tankpr.com. I'm Shayal Khan. I invest in revolutionary climate technologies and energy impact partners. Welcome. All right. So at this point, I think it's a truism that financing a first-of-a-kind project, a hardware project anyway, sucks. It just does.

It's basically definitionally difficult. You've never built the thing before, at least at that scale, so it's inherently risky, or at least will be viewed as such. And the economics are basically never as good as you expect them to be in the long term because it is a first-of-a-kind thing. And your most readily available form of money, which is venture capital, corporate equity, from people like me, is also basically the most expensive capital out there. But you have some technical proof. Hopefully you have real customers who are proving real demand. And this seems like the kind of thing that the world of finance would have figured out.

We're great at transferring risk and creating esoteric structures. Where there's a finance vacuum, there's usually some intrepid investor class coming along to solve it. And yes, there have been some attempts at solutions here. but I would argue nothing truly scalable yet across technology types that has emerged and is a universal solution. But it is a big problem. If we're going to bring dozens or hundreds of new technologies to market over the next decade to solve the harder problems of climate change, we're going to have to have hundreds or thousands of first-of-a-kind financing bottlenecks to break through. So I have this conversation partially in the hopes that someone cracks the code once and for all. But in the absence of that, there are still actually a bunch of ways to get it done.

I don't mean to be overly negative here. People do build first-of-a-kind things, and they will continue to, and I think it will continue to get easier as time goes on. But the way that they get built generally are more creative, typically, and more situation-specific than you might like. They do work, though. So let's talk through them. For this one, I brought on David Yey, who's been thinking of basically nonstop about first-of-a-kind

financing for years. He's a climate OG. He's been at the White House, a generation investment management most recently at CIBC, which is on the debt side. And he has a lot of thoughts on how to do and how not to do folk. So with no further ado, here's David. David, welcome. Thank you for having me. I've wanted to do this for a long time.

First time caller, long time listener to the Catalyst podcast. Well, I appreciate it. And I've been wanting to do a conversation on First of a Kind project finance for a long time. People have been asking me to do it, actually, for a long time for good reason, because I think universally everybody appreciates that, like, this is hard, this is a problem. To the extent that capital markets have really emerged in support of climate tech, this is probably the one area that, to me, still feels like the biggest gap, but not unsolvable. So I think our point is to talk about what are the challenges with financing a first of a kind thing,

but also what are some of the emergent solutions. But let's start with why it's hard. Can you just sort of like give an overview of, I think it's probably obvious that it is hard, but not to everybody, exactly why first of a kind has been such a tough nut to crack. Do you mind if we start off like saying,

why is it important? Because I think folk now is increasingly becoming a term, but people don't often speak about why it's important. They just kind of say, oh, it needs to get done. Sure. That's a good point. Also, we should say, you think folk is, I've never heard anybody actually pronounce the acronym, but now I'm going to start using it.

Oh, it's actually even worse. Me and a few other, let's say, folk evangelists or entrepreneurs, have been calling ourselves fokers. Fokers, yeah. Mother foker. Okay. All right. So, briefly, I think it's probably self-explanatory, but you tell me, if not, why is folk important?

Okay. I think the first thing, like the climate. crisis is an existential crisis. And we need to deploy, deploy, deployed to keep ourselves at, you know, let's say two degrees or two and a half degrees Celsius. And right now, a lot of climate tech, hard tech companies do not make their impact till they become infrastructure, until they start, you know, bending steel, laying concrete. And in order for us to have gigatons of carbon abatement, we need to deploy gigawatts, gigap panels, giga everything. And you can't deploy anything at the scale of the billions until you do the first one. And the first one

is by far the hardest. And for me, I've been doing climate for, I would say, 20, 25 years, so I'm really aging myself. And people are talking about, oh, what is the climate solution? And a lot of people just talk about, almost as it's a technology vertical. Is it green hydrogen? Is it green cement? Is it more solar? It's more wind? To me, I think one of the biggest climate solutions is Foke, which is a horizontal finance solution that can essentially be the one financial solution to help catalyze them all. Because most of these climate tech, hard tech companies,

in order for them to start their path to making impact, they have to build their first-of-this-kind factory or a first-a-kind project. And Fouke is a financing approach that's applicable to geothermal, to energy storage, to cement, to getting it done. Yeah, maybe it's like, I'm thinking it's too obvious because this is the world I live in, right? Like, I specifically invest in companies that at some point in the future, generally after I invest, are going to have to build a first of a kind thing.

So I'm deep in it. But I think it's well put the importance of, you know, the point being like we're going to need dozens, hundreds of new technologies to get to the type of infrastructure scale that you're talking about over the next couple of decades. every one of those is going to have to build a first of a kind at some point. Let's get back to why it's hard, though. Their infrastructure finance is very mature. Why has it not solved the folk problem? The reason they haven't solved that problem is because folk is at the intersection between venture capital and infrastructure. And these are two asset classes that, for lack of bare word, are not well suited to doing first of its kind. So for VC is basically too expensive

and likely too large or glute of a check for them to build a first of its kind plant with venture dollars. And I'm saying most first of the kind plants are in the hundreds of millions of dollars. And for the world of project finance and infrastructure, they have a different risk tolerance. So putting on my hat as a debt provider, most debt lenders for project finance,

they're focused on credit and risk management. And their return is getting their debt back plus interest. So if you are investing in the next Tesla, and Tesla is now, you know, what, $700,000 billion company, they don't see any of that upside. It does make a real difference to them. And, you know, did you use that old maximum? You know, you're getting debt level returns for equity level risk.

So that's one of the issues. And also, I think there's a bit of a cultural divide. So I think in order to create this bridge between venture capital and infrastructure, and I like to call it venture infrastructure at times, you have to be able to translate. And if you look at venture capitalists and then look at project financiers, they speak different languages. They have kind of different risk tolerances. And it's hard to kind of get them to translate.

So I've never, this is one else still at the White House. there was a friend who was launching a new kind of groundbreaking geothermal company with a disruptive new technology. So I reached out to a friend of mine who worked at one of the most prominent energy infrastructure firms and gave him the pitch saying, oh, you should really talk to him. And my friend at the infrastructure firm says, if I see the word disruptive, innovative, I automatically can't invest in it. That's funny.

That definitely reflects the different language, right? Like in VC world, that's all you want to hear in infrastructure and debt world. That's the last thing you want to hear. Yeah. I think it's, again, they have different but equally valuable risk reward profiles. I thought one of the smartest things I've heard about the difference between venture capital and private equity and infrastructure is that I think if you're a great venture capital firm, you know, you're providing 20 plus percent returns for 10 years. If you're a great infrastructure firm, you're providing. 15% or mid-teens returns for 20 years.

Both pretty compelling, but how they make their money is different. Yeah. The way that I've described, because I think there also have been a bunch of attempts to, like, create vehicles for first-of-a-kind, and some of them are still ongoing and may work. But I feel like the two places where everybody runs into a brick wall, generally, are, one, the sort of the risk-reward on that first-of-a-kind, and the challenge there often, it's not like the first of a kind project is the most lucrative project either generally. There are exceptions to this, but oftentimes the first of a kind is at the beginning of the cost curve, right? Whatever the thing is is going to get only cheaper as you build more of it, but the first one

is going to be the most expensive one you ever build. And it's not like you always have a customer who's ready to pay five times the ultimate price for the thing. And so it's not like the returns are so, so much better, but the risk is inherently higher because it is a first of a kind. And you can talk about how you can buy down that risk and so on. But like just fundamentally, if you look at it purely as a financially moated infrastructure investor of one kind or another, that's a tough risk return equation for you to wrap your head around. And then the second problem, I think, is the sort of scale opportunity of it, which is that, you know, infrastructure capital, generally bigger pools of capital than you see in venture capital. They wanted to play a lot of money

repeatedly into something that it doesn't need to be underwritten individually every single time. But almost by definition, first of a kind is a unique snowflake. And so you have an opportunity, you do a lot of work because you have to figure out how to underwrite it and understand the risk profile and so on. So you do all this work. And your prize for doing all the work is you get to invest in one of them, at least at the start. And so those two things, I think, in combination, have made it really difficult to exactly as you said, like find that bridge between the world of private equity venture capital on one side

and the world of infrastructure on the other side. So I think you just hit the nail on the head. I think for most venture capitalists, first of this kind is probably the only of this kind project that they will be investing in. And for then, again, the risk reward does not make sense. Their capital is too expensive. A lot of this is kind of going outside their expertise. And then when you're trying to find that bridge to infrastructure investors,

and project financiers, first-est-kind looks too risky. And this is something I kind of learned from my kind of good friends at Lanzatech. In order to do first-of-its-kind to be an investor that's an anchor or a Catholic investor, you have to be long-term greedy.

And I think that's understanding that the first-as-kind project you're doing is not the only project you're doing. You're doing the first-est-kind so you can then do the second, third, and fourth. I think the common analogy of metaphor that I use to describe is that you're trying to invest into the next solar or invest in the next Tesla. And if you can get your first-of-kind right, you're on that path to do that.

Right. Okay, so let's talk about, so obviously, we're describing why it's hard, and it is hard, and everybody knows it's hard. That said, lots of first-of-a-kind things have gotten done. So it's not like it's impossible. So I think we should talk through this sort of categories. like if you're if you're a company who needs to build a first of a kind thing what are the what is the suite of options that is generally available to you today and let's talk about the tradeoffs amongst those so the first option and and perhaps the one that actually i think has been the was the predominant option for sure in you know up through 2021 in the in the period of zero interest rate policy and money flowing freely was you know to just take continue to use the source of capital that you've been using to fund the company, which is generally venture capital dollars, corporate equity, to fund your first of a kind. So talk a little bit about the sort of trade-offs there, whether you see that continuing to be a viable option, and yeah, like how that, the availability and costs there is changing.

I would say right now, there are financing versus kind. It's a menu of options. And I think the simplest option is financing it off your balance sheet. That's kind of the brute force method. I would kind of say it's almost like the Climb Works method, where they raise a $600 million plus round in their Series F to go build Orca and then build Mammoth, which is there to, I say, near utility scale or commercial scale DAC facilities.

And I think the key issue behind that is, one, not every company can raise a $600 million round. Two, if you raise a $600 million round, it's a bit of a double-edged sword. Because when you're raising $600 million, no matter what the valuation is, you're going to be diluting your company, the existing investors, and especially the founders and the team greatly. And to me, I think that's a big risk. And right now we're also now in a much more expensive kind of capital-constrained environment.

So to me, that's one of the big issue. about doing on a balance sheet. It can be done, but it's very expensive and it's difficult, right? And there's now more and more sources of non-delutive kind of off-balance sheet financing that people need to explore and be honest, be more creative about how they do first of its kind. And I think, you know, most of my background, I came from the world of venture capital and growth equity, where financing is pretty simple, right? It's preferred equity. You may put some bells whistles on it, but typically you don't spend too much time thinking about credit or thinking about structured finance or all found sheet items. It's just simply not part of the menu. And when I think

about folk financing, it's not like this fixed pathway or concrete recipe. I wish I could give to all the founders and new CFOs out there saying like these are the 10 steps to get your folk financing done. It's really a new approach, right? It's blended capital. It's using growth equity, it's using government finance, it's using catalytic capital, it's using infrastructure finance. It's a lot of new thinking, and it's a lot of creativity. And I think for me, one of the key things to understand about folk financing is that you need to embrace government as a strategic partner and be able to look for new non-delutive capital sources, including a lot of this catalytic capital there, like, you know, breakthroughs catalyst program.

Yeah, let's talk about some of those others, right? So, you know, just to reframe it again, financing on your balance sheet is an option. If you have that option available to you, some companies do, some companies don't. Even if it is available to you, it may be suboptimal because of the cost of that capital, the dilution that it delivers to you, the post-money valuation that you're going to have to earn your way into in the next round and so on. And so if you can avoid it, and the other options are tenable, you may go for the other options. So let's talk about what some of the other options are. you, I think, breathed through a few of them.

I want to spend a little bit more time on a couple. Let's talk about the government side of it. You mentioned that. That's obviously one that has been pretty ripe for the past couple of years, thanks in part to the infrastructure bill, which deployed a lot of money, and then the IRA, which deployed a lot of money as well. So in the U.S., and in Europe to some extent, too,

the world of sort of like non-delutive, or mostly non-dilutive government funding is richer than it was, but also kind of idiosyncratic and sort of depends what you're doing. So what have you seen as successful mechanisms to use government funding to deliver first of a kind? So I would say right now what I think the big game changer is that government now has literally hundreds of billions dollars available for first this kind, both through the DOE's LPO program, which I helped run back in the day, as well as now new programs from, from, you know, for DAC hub funding or hydrogen hub funding, which is measured in the tens of billions of dollars. And I think the key thing is that government is now really just,

is viewed a strategic ally. And not only is government willing to, you know, partner with the private sector, the private sector is willing to kind of partner with government. And I think the two ways that you can really leverage government as your partner for folk is, one, working with OSED and other parts of the DOE to do your pilot slash versus Kahn funding, as well as applying to the LPO. I think the LPO now with IRA money has about $400 billion in resources. And I think they've become, for lack of a word, must-see TV or the key stuff for any company that's doing

an ambitious climate tech hard tech startup, whether it's, you know, changing mobility, changing green hydrogen, or even green cement. Okay, so there's government funding. Obviously, if you could tap into that, that's generally attractive. You also mention other sort of catalytic capital sources like Breakthrough Catalyst and there are a few others out there. How do you think about them as fitting into the mix here?

I think they're very important because I think for building these new blended capital stacks, we're going to be looking at it's going to be a portion of growth equity. It's going to be a portion of strategic equity. it's going to be a portion of maybe some debt and kind of credit or structured finance. But there needs to be this what I call flexible capital. That can be equity, it can be debt, it can be something in between, it can be a loan loss reserve, that can get these deals done. I think one of the best examples is Breakthrough Catalyst's program that put in $50 million of grant money to build Lanzajet's Freedom Pines facility, which I think is, you know, the biggest in...

first kind of sustainable aviation fuel facility being built out in the U.S. And we need kind of more of that. And I give kudos to Gates and Mario, who's running a catalyst program for running what I think is probably the one of the most important platforms to gain first-of-kind facilities done. There are a number of other kind of entities jumping in. I think just climate, which came from generation, my old kind of place I used to love working at, was they're doing, you know, catalyzing transformational solutions. They're taking, trying to back early, high-impact climate solutions.

And then I'm noticing that a lot of family offices who are leaning into this as well. So Creo, which is a syndicate of family offices leaning into climate, as well as other family officers saying, please show us the deals that need flexible capital to get deals done and given to our resources, we're willing to do that. And returns, for lack of a very word, are secondary. Right. I mean, that's the fundamental characteristic of this category of catalytic capital,

which is that it is often semi-concessionary, right? Like, it's generally return-seeking, but it is not expecting above-market returns. It is not promising to its LPs or its investors that this is going to be the best return on the planet. There is an additional consideration that is at the forefront, which is impact. and this is an area where I think the impact is, or at least can be quite large. And so it's somewhere in between, I think, of the sort of pure private sector,

like return-seeking money, the government, which is generally not return-seeking, you know, like put an asterisk on stuff like the LPO, which does expect to get returns. But somewhere in between there is this sort of like private, catalytic capital world. There's one other category, though, I don't want to talk about, too,

which is the emergency. of strategics or customers, for that matter, who are willing to bear some of that first of a kind risk because they are so hungry to get new products into the market. I've seen some of that that's actually been pretty powerful with some of our portfolio companies where, like, historically, the first of a kind, they would have had to finance it themselves and they would have gone through this whole rigmarole. But instead, if they have sufficient evidence and the customer has sufficient need, they're able to basically say, look, you pay for it to the customer. How much of that do you see out there?

So I think when we're trying to look at the history of folk, the first few folk deals that were done were done with strategics. So to me, I think one of the best kind of climate OGs is Lansitech. They've been doing carbon of value before carbon of value was even a term. And they built their first three to four plants by working with strategics, by licensing their technologies with steel companies. in China to build real, real projects at scale. And then I think a second example is strategists can also be, I would say, kind of the integrated

partner. One example that I've used a lot in the past is LNG. So LNG now is a very mature project infrastructure market. But, you know, say 10 plus years ago, it was not that. Strategics came in and where they're both the sponsor, the developer, the off-taker, and sometimes even providing the supply. And this is something, you know, what I've been kind of talking with a lot of these, you know, climate tech startups is that strategist can be that powerful for you. We've been using this LNG example a lot when we talk about kind of green hydrogen and blue hydrogen. Can you find strategic can do all those things for you?

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data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. Are you tired of overpaying for big-name PR firms, but not really knowing what they're delivering? Is your comms team wasting time reviewing lengthy messaging briefs and decks, instead of engaging journalists or producing content?

Are you wondering why your competitors are getting press and you aren't? Fish Tank PR is an award-winning climate and energy tech, renewables, and sustainability-focused PR firm dedicated to elevating the work of both early stage and established companies. Whether you need to position yourself as a thought leader in between project announcements or translate complex ideas and technologies into tangible, compelling stories that resonate with the media, fish tank can help. Check out fish tankpr.com. That's f-i-s-c-h-h-fish-tankpr.com. Okay, so these are various flavors that you can sort of mix and match and try to combine. In some ways, it depends on the scale of your first of a kind, like how complicated it needs. needs to be, I think. There are companies for whom first of a kind is a few million dollars or

10 or 20 million dollars or something like that. Very different equation if that's true versus if you're building a steel plant or a cement plant or something that is going to cost hundreds of millions of dollars. It's obviously more complex, more capital, and you probably need to tap into more of these sources. But I think there are some semi-universal lessons from all of this that earlier stage companies can probably employ as to how they should be preparing for first of a kind and what you're going to need to have in place. There's a checklist that is pretty universal about the things that make a thing financeable, regardless of the source of financing. So kind of walk me through at the high level, like if you're advising a series A technology company,

they haven't built a first of a kind yet, they know they're going to need to in the next few years, like what are the things they need to be thinking about immediately? Okay, well, I think for the last few years, I've been doing a lot of what I call folk or project finance 101 with this generation of climate tech startups. And it's kind of been refined to this short checklist. I think the first thing, you need to start thinking about your folk project at the Series A.

These projects take years to get ready and then take years to build and finance. So you want to start this early. This needs to be part of your business plan. It needs to be part of your regular board discussions. And one of the things that I'm really encouraged by is that this generation of climate unicorns are starting to do that. So, like, my friends at Arbor Energy, who are bringing kind of SpaceX technology to biomass, they've already embraced this and made this part of their strategic plan.

As well as, you know, Antora, who's doing really smart industrial decarmonization through heat batteries, is also kind of embracing this type of approach. So I think that's the first thing, is make this part of your business plan. I think the second thing is that you need to actually get project finance and project development DNA into your firm. Like I think that old analogy that people talk about, venture capital, it's like,

where are the top three things you pick for venture capital startup? It's team, team, team. This applies also to folk. You need the people who have project finance and project development experience in your company in order to do first-of-kind projects. And I think a good example is a friend of mine at Sublime. So Sublime is doing true zero green cement.

They hired my friend Becky, who was a veteran from Sunpower and a veteran from a bond grid. So she's an expert on how to do solar and wind. And now she's applying to how can you apply those best practices and project development solar or wind, to a totally new sector, which is green cement. And, like, I think there's this really good analogy from the world of Chinese art.

For many Chinese artists, in order for them to start doing abstracting, do their own thing, they first have to be experts and be able to reproduce what their master's done down to the stroke. And then you can start kind of innovating and disrupting off that. And I think that's kind of important, too.

Like, you need to first really understand the fundamentals of project finance and project development, and then from there you can move on and say, how can we imply these things to new sectors like hydrogen or to green cement or thermal batteries? So start planning it early, get project finance DNA into your company early. I agree with both of these things, by the way.

I think all the best companies, you know, sort of either inherently knew this or figured it out pretty quickly. Then there's the actual, what do you need to, like what do you need to show with regard to your technology? before you do the first of a kind such that you can do the first of a kind,

such that you can finance the first of a kind. Like, how do you think about that? I think there are many things to do, but there are two main things I would focus first. You at first have to de-stress your technology with pilots. And I'm emphasizing the word plural. Maybe projects that I'm looking at are trying to go straight from lab scale to utility scale.

So they're trying to scale 30x, 100x. That is very hard to be seen as bankable in the project finance and infrastructure markets. So I think a good example of someone who's done a good job of being a measured approach to growth is Climbworks. You know, like in 2012, they build demo. A few years later, they did a bigger demo. 2017, they did their first commercial scale.

And now, like a few years ago, they did Orca, and now they're going to be doing Mammoth. So they took multiple steps to get to commercial scale. while a lot of the startups now they're trying to go straight past go and go from, let's say, use the analogy, a few thousand tons to a million tons. And that's just hard.

This is an interesting one. It's very situation-specific, I think, but I've sort of mixed feelings about this one. On one hand, you know, obviously the sort of like incremental, the traditional incremental scale up, which is basically like every next step is one order of magnitude bigger than the previous step. that is like a tried and true way to scale up technologies.

And if you can do it and everything else works out, it makes a lot of sense to me. And Climbworks is a good example of that. On the other hand, that timeline that you just described for ClimWorks was extremely long. And I think a lot of companies right now would look at that and say, oh, my investors are not going to sit around and wait for me to scale up for a decade. And so they're trying to figure out how to short circuit that process. and though going from lab scale to full commercial scale almost never makes sense, I do think that some entrepreneurs that I've seen take as gospel this notion of the order of magnitude to scale up that isn't necessarily true to their technology, right?

The real question should be, what is the next scale that I need to do to prove out my technology, to prove it works, to prove the cost down, whatever are the big open questions. And that may indeed be one order of magnitude each time you build a new thing. It may be that you can scale up faster than that. But you need to ask it from that context, not just sort of start from the perspective of like, okay, this is how it works. I go from, you know, tenth of a ton to a ton to 10 tons to 100 tons, to 100 tons, to 1,000 tons, to a million tons.

I totally agree. But I think, again, has to be specific to that 10th of 10. technology, right? And sometimes you can rush through. But for me, I'm trying to take the perspective of the person on the other side of the table that, who isn't a venture capitalist? It's someone who is a project financier, who is an independent engineer, or a debt provider. They're going to be having these same exact questions saying, like, you can't do a 30x scale up. And then the burden of proof is on the startup to say how they can do that. And what I think for me, I'm trying to say is that you don't have to have four or five steps to get to

commercial scale, but it's hard to go from lab to commercial scale in one go. Yeah, I think that's right. So then there's the element of what do you have to prove with the technology. And obviously, there's way more detail to that. Just like having a pilot in and of itself, or having multiple pilots, as you said, is insufficient, right? It's the question of performance of those pilots and uptime and cost and all these things. But set that aside, the other category.

here that I think is important to talk about is customers because the other thing that like your your future project finance provider, infrastructure investor whoever it is, cares about is like how firm is the off take for the things that you're building and what's a willingness

to pay, what is it creditworthiness of the off taker, etc. So how do you think of offtake for a first of a kind? Like what is required there? I think the first thing you have to understand what your commercial model is for your your first-vest-kind plant.

You need to go out and get agreements, as you said, no, off-take. And, you know, I think everyone is looking for the equivalent of a 20-year PPA because that is very bankable. So people are looking for that for, you know, direct air capture and their carbon credits. They're looking at that for various green molecules. So that is fantastic. But I think this is where kind of the rub lies. many markets that need to be carbonized don't work on long-term contracts.

They're spot. They're merchant. How do you figure out that solution? And this is where it's great about having entrepreneurs and their animal spirits. They're crave and persistent on trying to figure out how to hack this part of the problem. How can we turn a commodity market that is spot? merchant into long-term agreements. And this is like some of my friends at some of these green cement companies, they're realizing

what they're producing for green cement is a premium product where buyers, especially, you know, a lot of large tech companies are willing to create, change the commercial model of offtake, spot, merchant, to long-term contracts. There's also interesting hybrids there, too, right? I think sustainable aviation fuel is one of the more interesting categories with this right now, where you're starting to see these trilateral agreements where there was actually one announced just recently with Infinium. And I can't remember who was American Airlines and Citigroup or something like that. Basically, you have a customer who ultimately wants to reduce their scope through emissions and is willing to pay to do that,

wants to buy the credits from the sustainable aviation fuel. You have an airline sitting in the middle who's responsible for buying jet fuel. That jet fuel obviously is generally on spot, and those prices move. And then you have a producer who needs to finance a facility of one kind or another. And I don't know what that specific contract structure was, but you could imagine either the end customer, Citigroup, in this case, says, I'll pay a fixed price for a long time, or they could say I'll pay a fixed premium for a long time or something like that.

Either way, providing some measure of visibility into the asset that is building the, or developing the sustainable aviation fuel such that you can finance the thing. But as you're saying sort of like, and we see this in other sectors too, right? Like fertilizers another one. People are trying to produce green ammonia.

Amonia also a category that is generally not long-term contracted. And so you have to figure out how to how to like get around that. So I think this is where you kind of bring in the world of like Wall Street, where people are used to slicing and dicing financial products. And this is what we're starting. And they're bringing this world to climate tech, where I'm seeing, you know, green, again,

this is just a green cement example, where they're selling the green cement at a price, but they're then slicing off the carbon neutral attributes and selling that to another customer at a different price. price. And this is one way I think you need to be creative and be persistent. These are new models, and this allows you to buy the time to buy down the cream premium as you scale up your facilities. Yeah, I'm a big fan of the idea of book and claim for some of these novel technologies, right? Find the buyer who's willing to pay. That may not be the immediate customer of the first-of-a-kind thing,

you know, use financial engineering to sort of solve for that. And as long as everything is above board and well counted and measured and verified and so on, I think it's actually a pretty good mechanism to get this stuff built. So you've got some various flavors of like customer demand, offtake, whatever. I think a big part of the message, by the way, so far across the board, whether it's like how you're going to finance the thing, how you're going to find the customers, et cetera, is a fair amount of creativity.

And that's one of the, I mean, it's a good thing. It's also probably a challenge, right? To what extent, I guess stepping back, do you see there as being like a repeatable playbook versus to what extent is every first of a kind thing for a different thing going to be a unique snowflake that's going to require a bunch of time and effort and expertise to sort of figure out.

Going back to my biology roots, I think there's a good analogy from that. There's this kind of concept when you look at biology, when they say it's unity-to-form diversity of pattern. And I think this applies to folk where there are going to be certain guidelines that go across all sectors and all verticals,

but how it's actually implement for each specific folk, where it's a green hydrogen folk or green cement folk or green steel folk, it's going to be specific to that sector and specific to that company. And I think the second thing is that what we're trying to do now is build a folk asset class. And as you get more and more dedicated investors than folk, it'll become easier and easier because they will have their own pattern recognition of what they're looking for.

And to me, like one of the things that I'd like to add as an important part of the checklist for being, making your projects folk bankable, is that a lot of these CFOs and CEOs of these new climate tech startups have to learn the language of infrastructure and project finance. And specifically, they have to be able to code switch from speaking VC language

as disruptive innovation, home runs, you know, power log, to saying, this is proven off-the-shelf technology. There is no binary technology risk. Oh, we're totally investment grade. We'll pay back the loan and have a debt service cover ratio that's approaching too.

I think those are the things that you need to be able to do as one of the key parts of being able to build your folk project. It's interesting. You could build like a glossary of vocabulary that is like applicable to one financial audience and is banned when you're talking to a different financial audience. I have a cheat cheat, which I give to a lot of these entrepreneurs saying, like, hey, this is what you can say when you're from a VC.

this is what you can say when you're in front of a project financier. That's funny. I guess final question for you. I mean, we've been talking about folk. You know, obviously the journey doesn't end at first of a kind. Then you have to build second, third, fourth, fifth, up to nth of a kind. And I think we should spend just a minute talking about that because I think for good reason, there is a lot of focus on first of a kind.

But it's not like you go from first of a kind to now you're an infrastructure asset class like solar and wind are today that's like extraordinarily mature and change. cheap cost of capital and so on. There's an entire journey to go on after that. So how do you think about that next phase? You've built the first of a kind now. You succeeded and it's operating and it works. Like what does the next phase, getting from first of a kind to boring mature asset class, which is where you ultimately want to be? What does that journey look like? It's a journey, right? So first of this kind is important because it's the first step. And once you get your folk plant successfully built, then you can go to the next step,

which is Soak, which is second of kind, and third of its kind. And at each step, the universe Thoke. Thoke. Thoke. Thoke. Yeah. Thoke. Are getting larger and larger. Like for me, what I kind of talk with a lot of these climate tech entrepreneurs is that you want to move from the world of private equity and venture capital to the world of sovereign wealth funds and infrastructure investors. Investors that literally write $500 million, billion dollar checks.

And to me, this transition is about, you know, thinking about creating, for lack of a word, development companies where once you prove out your project, and it's not necessarily the first kind to prove it, for many of these mainstream project finance

years, infrastructure investors, they may not look at this stuff until Project 3. But then at Project 3, they can lean in. And these firms can write $500 million, billion commitments to go build your fourth, fifth, and sixth plant. To me, like, a lot of this future is kind of like systematic change. Like, we need to have folk-driven strategies within global asset managers. We need to have folk allocation within infrastructure and private equity investors. and ultimately what you're playing for

is some of these big mainstream exits. So I think when a lot of venture capitalists and climate tech entrepreneurs think about an exit, it's simply binary, right? It's either it's an IPO or a strategic sale. But there is this world of Devcos and the world of infrastructure that is also very attractive

where you start building these development companies that are developing gigawatts and gigawatts of clean energy. And as these projects mature, they then sell them to sovereign wealth funds, pension funds. And these types of the dollars around this is incredible. Like, I think I was fortunate to be kind of involved with the $3 billion blackstone investment in energy, which is one of the largest kind of IPPs and development companies. And they put $3 billion in just to own part of this, what I call this development machine. And I kind of think about a lot of these companies that are now coming up,

these kind of next great climate tech leaders like Fervo, which is doing next generation geothermal. I think their future is being a development company for geothermal and producing gigawatts of power. Clean 24-7 power. All right, David. Always much more to talk about in first-of-kind, or I'm sorry, folkland.

I'm going to get used to using the acronym. But this was a great start. We'll dig in deeper later. And in the meantime, thank you so much for joining. Thank you for having me. David Yeh is, in his own words, a climate OG.

He's been organizations from CIBC to the White House to generation to many, other places. This show is a co-production of Latitude Media and Canary Media. You can head over at Canarymedia.com for links to today's topics. Latitude, as always, is supported by Prelute Ventures. Prelute Backs Visionaries, accelerating climate innovation that will reshape the global economy for the betterment of people and planet. You can learn more at Preluteventures.com. This episode is produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquan. The theme song by Sean Marquan. I'm Shale Khan, and this is Catalyst.