Insurance solution provides performance coverage for the output of Fulcrum’s garbage-to-fuels plant

By Dr. Brentan Alexander, Chief Science Officer, New Energy Risk

At New Energy Risk, we see many companies struggle to balance the competing needs of technology development and deployment. As with any industry, it’s a tug-of-war between the commercial imperative of demonstrating that all aspects of a technology are proven and the financial necessity of delivering product and building a revenue stream. By going to market too early, a company is likely to fail to find capital or customers. Going too late means having expended more time and money than necessary, and it’s possible the opportunity may have passed by.

Most companies have vastly different ideas for what they need to demonstrate, from a technology perspective, to reach their market. For hardware and industrial technology companies, there is little room for error because deploying at commercial scale requires raising significant capital to cover the large capex costs associated with the construction of manufacturing, processing, and energy facilities. Companies looking to self-develop projects generally need access to lower cost capital markets, primarily debt markets, to ensure project viability. Startups that sell their hardware need to scale beyond first-adopters and find big buyers with deep pockets. These markets are by definition risk-averse, with strict guidelines to ensure loans don’t go bad and capital expenditures aren’t squandered. So how much validation do new-to-the-world technologies need to convince hyper-skeptical banks and customers to lend or buy?

We’ve seen many entrepreneurs latch on to examples of irrational exuberance: with a good story and slick marketing, willing customers and investors can be found with little to no technology validation. In fact, our experience performing diligence on hundreds of capitally intensive technology companies shows the opposite: a business plan predicated on mythmaking and vaporware is a plan to fail. Technology should never appear to be a black box — financiers and customers do not want to bet on magic, despite the occasional counterexample. Rather, the path to capital involves leveraging technology testing in real-world conditions to demonstrate to others that the science and engineering are thoroughly understood and vetted.

In short: show it works in the real world and don’t fall for the Theranos trap!

Here are some of the most common mistakes in demonstrating a technology that we’ve seen erode the chances of securing financing or closing a sale:

Companies try to jump from the lab to commercial scale

Breakthrough technology companies make a mistake when they do not build pilot demonstration facilities or hardware with similar scale, features, and equipment as their end product. These companies will have a hard time convincing skeptical financiers that what they’re selling is going to work as described. In general, a per-unit scale-up of over 10x for key components of the technology will raise eyebrows and dampen enthusiasm. Exceptions can be made for proven kit from third parties, such as pumps and valving or standard operations like heat exchange. The expected duration of a test campaign is dependent on the technology and expected maintenance cycle: once-through systems or systems with independent unit operations will need less time on test than systems with recirculation loops or highly integrated systems. In general, anything less than a 100-hour test campaign is disqualifying, and more complex systems will need many times that to satisfactory demonstrate system reliability. The longer the anticipated system life or time between overhauls, the longer the test campaign to validate projected life.

Companies don’t test under real-world conditions

We also regularly see companies test their devices or facilities shielded from the real-world conditions that could significantly undercut performance of the technology. Using super-refined, ultra-pure feedstock for a new kind of biomass energy facility does not demonstrate a technology will work on the dirtier and less consistent biomass available for a commercial plant. Validating a predictive algorithm on the very data that was used to train the system, even if only a subset of the validation dataset was used in training, provides little guidance on whether the algorithm will perform on the wide variety of datasets likely to be encountered in the field. Running controlled charge/discharge tests on a battery in a specially conditioned laboratory does not validate that the battery will perform under variable loading conditions in the desert sun.

Controlled testing is useful to validate science, but real-world testing is a requirement to validate an engineered system. Take the kid gloves off, because no customer wants to be a guinea pig!

Companies declare victory too early

At any company, there is a lot of pressure to get a product out the door, into the field, and selling. The biggest believers in a new technology are also generally part of the company. This combination leads many entrepreneurs to optimistic conclusions about the status of their technology progression. In the world of breakthrough technology, this typically ends poorly. Premature declarations that an innovation is commercial-ready inevitably leads to fits and starts and brand damage that hurts long-term growth and threatens overall success. Early production units and field installs will experience unexpected troubles and failures, and companies that fail to message appropriately and do not prepare potential investors, partners, and customers for these growing pains will find their reputation damaged and expertise questioned. Moreover, large potential partners, including EPC contractors like AECOM, technology packagers like Siemens, manufacturers like Pegatron, and strategic partners like BASF, will see through the hype and avoid working with companies that do this in order to maintain their trusted status in the industry. Brand matters.

Companies skip 3rd party verification

Another unforced error in moving from testing to real-world deployment is a failure to utilize a reputable third-party expert, such as an independent engineer (IE) like Fluor, Black and Veatch, or Leidos, to validate technology readiness. Many startups attempt to skip this key step and instead rely solely on their internal work or cut-rate third-party reports from unknown sources to get to market faster, reduce consulting fees, and start generating revenue. When I see this strategy, it is an immediate red flag and dampens my enthusiasm to work with a client company. I have found that companies which lack reputable third-party validation generally are also lacking in key technology development milestones, including a lack of testing data, unreasonable scale-up expectations, poor QA/QC processes, or erroneous capex and opex assumptions. Our partners in industry have reported similar experiences. A company lacking an IE report from a reputable vendor is actually signaling to the market that it is not serious, thorough, or ready for primetime. Worse, a company sharing a poorly written report from a relatively obscure third-party will project a ruinous lack of expertise and know-how.

Trusted reports do cost real dollars, but they more than pay for themselves by cutting initial diligence time with new customers or financiers and validating technology readiness for potential partners through a recognized seal-of-approval. Most companies even learn a thing or two because the IEs have seen many failures and can identify and help mitigate potential faults and problems that could become expensive headaches later.

While it’s hard to determine the exact right time to move from technology development to deployment, avoiding the common pitfalls above will set any company apart from many competitors in the field. Although it may be appealing to take shortcuts around the time and capital needed to properly validate a breakthrough technology, most customers and investors are savvy enough to see through the charade.

After all, nobody is looking to work with the next Theranos.

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