Climate technology and innovation starts with First of a Kind ideas. Yair Reem, partner at Extantia, explains more about the theory of FOAK.
If you’re a climate tech company just starting out, you might have heard about the term first-of-a-kind or FOAK. FOAKs are a major milestone for climate tech companies. They’re an important step in bridging the gap between ideas and actual, commercial technology.
But taking that step can be daunting, especially for new players in the climate tech industry. In this article, we break down everything you need to know about FOAKs — what they are, how to start building one, and why we love them.
As the name implies, a FOAK is the first of its kind, something that shows that your technology is ready to leave the sterilised environment of the laboratory and take on the real world. In engineering economics, the term FOAK can refer to any technology that’s newly created, but when we talk about FOAKs, we usually mean FOAK plants or pilot plants. These are the plants where products or formulas that might only have existed in theory or in very small doses can be scaled up to meet commercial demand.
FOAKs are typically smaller than large-scale plants, but they allow you to go through the manufacturing process of your product on a small scale so that you can look for any issues or inefficiencies and correct them before scaling-up production.
FOAKs can fulfil many different purposes, including proving that your process works before you scale up to a commercial plant, producing samples for market testing, or even creating a production unit to produce speciality chemicals that serve smaller market segments.
Once you have a FOAK, you’ll use it to make physically and chemically stable versions of your product, review your processing equipment, test and fine-tune production and quality control guidelines, identify critical issues in feedstock and offtake and show your investors that you’re ready for the big leagues.
Many chemical reactions and other reactions that produce energy require reactors of a minimum size to work, which means that you might be bound by a theoretical bottom limit on the size of your plant. And even if the chemistry doesn’t stop you from keeping your plant small, many equipment vendors also make their equipment with a minimum size in mind, and creating custom components to keep your FOAK smaller might end up being more expensive than otherwise, or even impossible. You might even have a contractual agreement, where your customers ask you to produce up to a certain amount to prove that your product is viable.
If your goal is to create something that can be scaled up later, you’ll also need to keep scientific principles in mind. Your plant needs to be equivalent to the larger, scaled-up version you’re planning for the future. That means it needs to have the same challenges, and everything from the geometry of the reactor to the operating principles, to the construction materials, needs to be equivalent to your commercial plant. That way, you can uncover any problems with your design now, rather than at the more complicated commercial stage.
You’ll also need to think about the practical aspects of your plant. You’ll want to make sure that your plant is housed somewhere with enough space to allow you to make modifications to the design, and that you can train your staff in the operation of the plant. All of this will add to your FOAK’s cost, and you’ll need to figure this out before looking for investors.
Long story short, the rule of thumb for the size of a FOAK vs. a full-scale facility is 1:10. With the right design you can further push it. One of our companies managed to go with 1:80.
*Pro tip: FOAK vs. a full-scale facility is 1:10
Building your FOAK is an important stepping stone on the path towards being ready for market, but if you’re reading this, you might feel a little anxiety at the thought of how much your FOAK will cost. And this anxiety isn’t unwarranted. FOAKs can be expensive. Here at Extantia, we’re often looking at FOAKs that cost between $10M to $30M. That isn’t exactly cheap, but if you’re worried about raising the funding, don’t panic. FOAKs are usually funded through 50% equity and 50% grants, so if you can secure grant funding, you only need to raise the other half of the cost.
It seems like an impossible task because in order to prove that your technology is ready for market, you must first build your FOAK. At this stage, most FOAKs are funded directly from the company’s balance sheet (HoldCo), rather than through any sort of special purpose vehicle (OpCo).
Many climate companies have found their way across the gap by searching for opportunities in the venture debt market, essentially getting funding through loans that leverage equity raised by the start-up. This would help reduce the amount of capital needed to fund your FOAK.
If you have offtake agreements with your customers, essentially promising to sell your future goods to them, you’ll have a much easier time getting debt financing for your project. About 30–50% offtake agreements should allow you to get even up to 30% of debt financing.
*Pro tip: FOAK capital structure 50% equity, 50% grant. And with offtakes, up to 30% in debt.
What to have before you apply
If you’re planning to raise Series A/B for constructing a first-of-a-kind (FOAK) facility, you’ll face some hard-to-convince VCs. To give yourself the best chance at success, you’ll need to do your due diligence to convince investors your idea is ready for the big time.
You should have the following items ready to go:
- Techno-economic Analysis (TEA): Validate the plant’s economic feasibility.
- Financing: Explore alternatives beyond Series A/B funding.
- Feedstock: Ensure raw material supply for full-scale operation.
- Offtake Agreements: Lock in customers and pricing.
- Staff: Hire a leading FOAK engineer to inspire investor confidence.
- Location: Determine your FOAK’s site.
- Permitting: Secure all required regulatory approvals.
- LCA/ESG: Analyse facility and product impacts.
- Risks: Identify and plan for potential project hazards.
- Rendering: Present an eye-catching 3D facility blueprint.
Here at Extantia, we love FOAKs. As climate tech investors, we understand that the climate crisis is a physical problem, requiring physical solutions.
That means that most of the companies that we back have significant hardware components, and require FOAKs to make sure that they get things right. Unfortunately, many VCs shy away from financing the 50% equity needed to build a FOAK. But we believe that FOAKs are vital to helping startups prove:
- That their technology can be scaled up, from kilograms to tons and from kilowatts to megawatts. FOAKs are often an order of magnitude, sometimes two orders of magnitude, smaller than the commercial plant. Properly executed, a FOAK shows that the processes that underpin the technology can be performed safely, efficiently, and profitably.
- That the team is capable of meeting demand, and rising to the challenges of producing on a commercial level. A team that can produce a working FOAK is a team that has already worked through the challenges of project management, supply chains, and internal bureaucracy and is more likely to succeed in the business world.
Although building a FOAK is challenging, we find that companies that succeed often see a substantial jump in their valuation after building the FOAK plant, because they’ve proven that the technology is ready for action and there is a huge market demand for net-zero technologies.
That means that when we take bets on pre-FOAK companies, we often see fantastic venture returns on our investments. FOAKs can be risky, but for us, it’s a risk worth taking.
Images: lilartsy (Top) / Kvalifik (Middle) / Christin Hume (Bottom)