The opinions expressed here by Trellis expert contributors are their own, not those of Trellis.
One of the most daunting discussions in the climate world today is the valley of death that’s presented by first-of-a-kind (FOAK) manufacturing risk.
This typically surfaces when a company reaches a B or C funding round and needs $100-plus million to build its first production-scale plant that proves the full economic model. This is a tough task in generous markets, but seems near impossible during slower ones.
Yet if we’re serious about industrial decarbonization, this challenge cannot be avoided. There’s no pathway to materially reduce emissions from steel, cement, chemicals, fuels and materials without changing how they’re physically produced. The question isn’t whether to build — it’s how to structure the build intelligently.
From my and my team’s experience in manufacturing, technology deployment and plant design and construction, the FOAK framing sets up the industry for failure. It suggests that these types of builds should happen in large equity rounds, massively limiting the number of firms that could plausibly support such an effort. The investments that we need are wider than the aperture of growth-stage climate capital, and taking on a FOAK project is not a great way to get equity-level returns.
So what to do instead? Plenty. Let’s dig in.
Alternatives to FOAK
The fundamental tenet of investing is that equity should fund equity-level returns; debt should fund debt-level returns.
This is simple enough to say, but a look at the use of proceeds for the few FOAK mega-rounds suggests that climate venture capitalists aren’t savvy at meeting this mantra. We saw this happen in CleanTech 1.0. There’s no reason we can’t just move past this type of error.
You might be saying: The return profile might be debt-like, but we have to use venture dollars because the risk profile is more venture-like. That’s not an investment that makes sense for any investor, and we can address this through what we call the 3 Shells approach.
Instead of thinking of a facility as a monolithic FOAK facility, break up the function of the facility into three encapsulating shells:
- The envelope
- The MEP (mechanical, electrical, plumbing)
- The secret sauce
Each shell carries distinct risk and financing characteristics.
The envelope
The envelope’s main function is to keep the rain and wind off you, maintain a clean environment, provide offices or quality control labs, secure access, and keep the temperature and humidity right if it’s a climate-controlled facility. That’s all the outer shell needs to do.
Across industrial regions, there’s significant inventory of underutilized industrial space. Moving into an existing envelope can eliminate lengthy permitting cycles and reduce construction risk. For corporate sustainability teams piloting new production assets, adaptive reuse can compress timelines by more than a year and materially lower capital expenditures.
Cities and counties with excess underutilized envelopes are often open to tax or other incentives to move businesses into those buildings. This means that on top of saving the time and cost of building yourself, you may even be actively rewarded. This decision can easily take one-third out of FOAK costs and shorten delivery timelines by 18 months.
The MEP layer
Short for mechanical, electrical, plumbing, this refers to the building infrastructure that helps you move power, materials, working liquids (like steam or hydraulic oil) and materials used in your manufacturing process, like piping
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