By Ben Cader-Beutel

At New Energy Risk, we advise, evaluate, and insure projects being developed by climate tech innovators. And as the sector approaches a pivotal moment, with enhanced geothermal, third-generation biofuels and electrolytic hydrogen nearing project readiness, climate tech appears to be close to putting its awkward teenage years in the rear-view mirror.

There is a well weathered acronym that has taken on a new lease of life of late and is fast becoming lexicalized in innovation circles: “FOAK” (for “first-of-a-kind”). In vogue though it is, I believe the term is standing in its own way. Rather than fostering the deployment of novel technology into much needed infrastructure projects, FOAK has become the proverbial caution tape to project investors and lenders.

The Adoption of FOAK

We’ve seen a recent surge in sophisticated and well-funded climate hard-tech companies emerging from the low-interest rate COVID period. These firms are now transitioning from scrappy startups to fully-fledged developers, licensors, and equipment manufacturers (or a combination of all three). They are entering their deployment phase and encountering an underdeveloped ecosystem in comparison to their R&D and demonstration phases, which were supported by accelerators, a vast VC network, and government grant programs.

A key issue is the finance world’s inability to keep up with technology innovation, especially at the intersection of development and project finance. Early project returns do not match the significant capital outlay and perceived risk – at least in the eyes of conventional growth capital. And the industry has learned, through Clean Tech 1.0 that venture capital and SPACs are not good at building successful hardware companies alone.

“FOAK” is used by innovators and early-stage VCs to describe the project that takes the technology across the ‘valley of death’, through the ‘missing middle’. Much like catching the golden snitch, financing for such a project is unpredictable and elusive. While building the first commercial project is an important milestone in a hard tech startup’s journey and the beginning of sustainable returns for shareholders, it seems to me that the FOAK label has become more of a red flag to project investors than it is a signal for imminent growth.

FOAK’s Dilemma

I recently participated in an industry roundtable for a group of “FOAK EPCs”, “FOAK investors”, and “FOAK insurers”. The first agenda item was to define the term. Is it based on a bill of materials? The sponsor’s balance sheet? Feedstock source? As expected, everyone in the room had a different answer. This lack of consensus complicates the conversation; we can’t even agree on the pronunciation, for FOAK’s sake.

By my personal definition, a FOAK meets two criteria:

1. The project includes any new technology or new integration of technology (even if the unit operations are all TRL-9 individually).
2. The project generates enough cash to offer a positive return on investment.

But others in the ecosystem choose to include new geography, a new tax incentive, or a new offtake structure. Once you get broad enough, every project becomes a FOAK.

Reality is much more nuanced than any definition could capture. Projects are evaluated by investors and lenders individually and according to a robust set of criteria. Highlighting an aspect of project’s novelty limits its ability to attract such funding, even if it has proper mitigations in place for each of its risks.

FOAK is a large bucket, which tends to obfuscate important differences in technology and associated risk, calling out the ‘hair’ rather than the value. For example, flow batteries and cellulosic ethanol are fundamentally different projects, yet both are categorized similarly when seeking project capital. This alienates investors who may specialize in specific technologies or market segments and may in fact be able to understand the risk.

Beyond FOAK

Today’s terminology around project deployment calls out shiny novelty rather than value. The entire innovation ecosystem – startups, capital, and government – has a role to play in deploying new technologies, and the future of climate tech (and our planet) depends on making projects appeal to investors motivated by reliable returns.

So, what’s the solution? Shifting away from the FOAK terminology towards a more nuanced presentation of the spectrum of risk and respective mitigations could position projects to access broader pools of capital. With the proper tools in place, such as hybrid equity enabling investors to tap into future upside (see Twelve and Infinium’s recent raises), or project-centered risk mitigation tools such as NER’s performance insurance solutions, projects can abandon today’s unhelpful platitudes in favor of a carefully constructed scaleup strategy.