For early-stage companies in climate tech and clean energy, the Valley of Death is not only a problem with access to finance — it’s also an experience and logistics problem.
After completing demonstration and pilot projects, startups building first-of-a-kind technologies are confronted with a commercial hurdle: how to develop a project that will make money, despite a startup-sized staff and no peer examples to look to for reference.
According to Rushad Nanavatty, head of RMI’s climate tech accelerator known as Third Derivative, roughly one-third of emission reductions in the coming decades will need to come from technologies that have not yet achieved any significant market penetration, such as enhanced geothermal or green steel. But the gap for a company moving from venture capital to infrastructure financing, he said, is more like a “chasm, an abyss, more than a Valley of Death.”
Nanavatty and his team already have 226 early-stage companies under their wing, all of which he characterizes as having “gigaton-scale abatement potential,” and some of which have reached the commercialization stage already. In Nanavatty’s conversations with these companies, he has heard one consistent message: that they didn’t want more consulting support. No more advisors, no more training and education and workshops and webinars — and they “sure as freaking hell” didn’t want another panel discussion on the FOAK challenge.
“What they really wanted was people in the trenches doing the work with them and for them,” he said. “They’re like, ‘Don’t tell me how to do the front-end engineering design,’ or ‘Don’t give me the theory on what a good offtake agreement looks like. Just help me write the damn thing. Help me create the thing.”
So over a year ago, Nanavatty’s team at Third Derivative connected with the incubator Deep Science Ventures and began shopping around the idea of a “developer-as-a-service” company. The two formed a joint venture to fill this hole in the market, which came to fruition last month with the launch of Mark1.
The developer will work hand-in-hand with companies to clear the bridge to commercialization — and ultimately bring more experienced project management talent into the space to help them do so. Today, he said, the sector tends to be “scattershot” in its approach. Mark1, though, is “an attempt to get more organized” and to “get more project development professionals working on the best potential projects.”
A development solution to a finance problem?
The Valley of Death is typically discussed in terms of dollars.
Damian Beauchamp, president of carbon capture technology and project developer 8 Rivers, agreed that there is a “dearth” of project development expertise for FOAK projects, but argued that the financing element is most complicated.
“Being a first mover in this space means that there might be a risk that the technology you’re using will not produce the energy commodity at the level predicted in the financial model,” he said. “Banks and institutional investors rarely have the appetite to take on that risk.”
Nanavatty’s back-of-the-envelope math suggests that the market is currently meeting between 1% and 17% of the need for FOAK financing.
The typical way around the problem — an approach taken by 8 Rivers — is to establish a joint venture or take on a strategic investor. This allows the startup to utilize a larger company’s supply chain and project developer resources, as enhanced geothermal company Fervo Energy is doing with Google as it looks to commercialize.
“Companies must understand that if they want to be a big player in the energy transition space, they have to go beyond commitments and instead pursue direct investments and partnerships to help take innovative tech into the mainstream,” Beauchamp said.
What [early-stage companies really wanted was people in the trenches doing the work with them and for them. They’re like, ‘Don’t tell me how to do the front-end engineering design,’ or ‘Don’t give me the theory on what a good offtake agreement looks like. Just help me write the damn thing. Help me create the thing.
In the absence of wider corporate support, Mark1 is looking to help not by offering millions in financing, but simply by making projects easier to finance.
As Nanavatty said, “When you describe it as a financing problem, that implies that investors need to change their investment criteria, or you need more billionaires throwing cash at the problem. And if that’s what you’re waiting for, then you’re going to be waiting for a long time.”
Instead, he said, Mark1 is casting it as a problem of hiring. Most startups — especially those in highly technical or scientific fields — invest first in the talent required for the laboratory stage. But when they approach a commercial deployment, they suddenly have to hire dozens more people: engineering, design, siting, drafting the offtake agreement, navigating the regulation, et cetera. The paperwork alone requires experience and a skillsets that most founders have never needed before.
“For their first project that’s a massive, massive investment,” Nanavatty said. “It feels unnecessary. You’re going to be fighting for those people in a super competitive job market.”
Mark1, led by CEO Julian Ryba-White, wants to help startups skip those expensive hires — which come with the timing question of whether to make them before or after signing the first contract timing — and rely instead on the combined experience of Third Derivative, which has all of RMI at its disposal, and DSV.
“We want to give them a chance to work with high-quality project development professionals without having to hope that they hired the right ones themselves,” Ryba-White said. “We’re not trying to be their project developer; we’re trying to be a co-developer of their first project with them.”
And if that first project is a success, Ryba-White said, it will unlock the money, as capital gets more comfortable with the returns they can expect.
A surge of demand already
While Mark1 has been in the world for just a month, the reaction has been swift.
The plan at launch was to welcome a first cohort of three to five companies, and usher them through the project development process before accepting more applicants. But already 60 “really promising startups” have expressed interest, Nanavatty said, and he anticipates they could end up with more applicants than that.
One VC with portfolio companies at precisely the Mark1 stage, he added, described it as “a godsend at precisely the right moment.” And they’ve also heard from “the few” development capital funds that are interested in funding and financing these projects.
The team also has strong interest from the Department of Energy, and from engineering, procurement, and construction companies that “will benefit from the derisked deal flow.”
Given the interest and the need, Nanavatty said, “there’s absolutely no need to confine it to the scale that we aimed to start at.”
It’s not yet clear if the members of the first cohort will all come from a particular sector. Ryba-White said Mark1 is initially looking for U.S. companies with a $25-million to $100-million capex and a positive climate impact.
The vetting process will be stringent, in part because that is what philanthropic capital — and especially players who are new to investing in climate tech — is looking for.
“We are leveraging the deep benches at both RMI and Deep Science Ventures to help us with that validation exercise,” Ryba-White said, “so that by the time we go partner with these companies, people can feel like there’s been as much vetting there as anybody’s done to try to figure out which projects have the best chance to succeed.”
This vetting process is central to how Mark1 will make money. While the company is currently relying on philanthropic accelerant capital, it will ultimately rely on a few streams of revenue. Mark1 will take small fees from the companies they are partnering with, to guarantee there’s “skin in the game” on their part; a larger fee when projects reach key milestones, negotiated company-by-company; and ultimately a minority piece of the special purpose vehicle itself, to make sure the developers are aligned with the project’s ultimate success.
Also, Mark1 will let corporations like EPCs pay to participate in the program. That buy-in gives them early access to the pre-vetted companies, and a chance to build a project that could potentially unlock scale for a technology — and profit along with it.
Mark1’s focus for now, though, is on the first project. Commercializing a new technology means being first to offer insights into what works and doesn’t — which, Ryba-White argued, is “part of the reason why catalytic capital should be excited about this approach.”
“If this revenue model doesn’t work, we need to find one that does,” he said. “And I think the more information the market has, the more likely we are going to get it done.”
