How to Fund an Atomic Startup
Within the course of two weeks, three nuclear power startups said they received funding from venture investors—a remarkable occurrence given the prevailing wisdom that capital-intensive energy companies are not a good fit for venture capital.
Nuclear power startups Helion Energy and UPower Technologies said they received backing from Bay Area incubator Y Combinator, which funded seven energy and biotech startups as part of a program best known for hatching mobile apps and Web companies such as Airbnb and Dropbox. Separately, Cambridge, MA-based Transatomic Power earlier this month said it raised $2 million from FF Science, a portion of venture firm Founders Fund’s investment pool.
Does this mean that the VC crowd is warming again to the slumping category of cleantech? Probably not. But it does reflect how some investors are developing structures to fund high-risk companies that take many years to commercialize. That’s good news if they can make it work: often businesses with the biggest economic and social impact tackle hard technical problems and stay at them for many years, whether it’s semiconductors, global-scale e-commerce platforms, or life-saving medical treatments.
Putting money into a company that aspires to reinvent nuclear power is not for the faint of heart. These types of companies take years and millions of dollars just to demonstrate their novel reactor designs could work. Then it would take even bigger sums—potentially tens or hundreds of millions of dollars—to build full-scale power plants to generate income. There’s also substantial risk that regulators will delay progress, or halt the operation altogether.
“If everything works exactly as we hope it will, we’re talking about taking six years before we’re generating electricity and earning revenue,” says David Kirtley, the CEO of Redmond, WA-based nuclear fusion company Helion Energy, which received $1.5 million in Series A funding from Y Combinator and Mithril Capital Management. “For fusion, that’s awfully fast. For an investment, that’s still pretty slow.”
Nuclear fusion, which creates bursts of energy by smashing two atoms together to make another element, has eluded scientists for decades and could well take decades to master. Mithril, though, decided to take a chance on Helion Energy because the startup has already demonstrated a number of the key components of its fusion reactor and the company’s management has a commercial, rather than research, mindset, says Ajay Royan, who runs the growth-stage fund with co-founder Peter Thiel.
In one way, the investment isn’t so unusual: Helion Energy has to hit spelled-out technical milestones before it raises a planned Series B in about a year. The big difference is that it will then take tens of millions of dollars and three to five years to get to what would be considered a beta product in tech, Royan says. But Mithril was structured specifically so it could stay invested in companies for as long as 10 years, he says.
“Many people these days can show you growth, especially in Silicon Valley. With enterprise software and consumer tech, there are these adoption curves—number of users, daily users, that sort of thing,” Royan says. “But there are categories of companies where there are state shifts: nothing, nothing, nothing happens and then, boom, it’s working.”
In the case of Helion Energy, it needs to achieve net gain, or put out more energy from fusion than the amount of energy that’s put into it. This kind of “state shift” also happens in other product categories, such as medical devices and even software, Royan says. Mithril previously backed data analytics company Palantir—a situation where it wasn’t clear how the technology would be used, so investors needed to be prepared for a longer investment cycle than a typical enterprise software startup.
Similarly, Transatomic Power, which has designed a reactor that generates electricity from nuclear waste, received venture funding to meet specific targets around materials testing, says CEO Leslie Dewan. Founders Fund was comfortable with the time scale to commercialization—roughly a decade—and the hefty capital requirements, because the venture firm successfully invested in SpaceX, which developed reusable rockets for space missions, under similar conditions, she says.
Some venture firms, such as Khosla Ventures and Lux Capital, focus on high-risk, high-reward startups in a range of industries. But in general, the trend in venture capital has been toward quicker payouts for software-based companies. Software startups can build a product for very little money, and massive payouts on the scale of Instagram and WhatsApp motivate people to earn returns fast.
When it comes to energy, entrepreneurs and investors can learn from the mistakes of cleantech investors who in the 2000s underestimated the amount of time and capital energy startups can take, particularly those related to materials science like developing new solar cells. Since then, many venture capital firms have exited cleantech or shifted focus to “capital-light” startups working on more incremental technical improvements.
There’s a similar funding shift in biotech. A number of venture capital firms have closed up shop or pulled out of life sciences, balking at the notion of locking up money for many years on unproven science. As in cleantech, many investors have chosen to focus on less-risky companies seeking incremental improvements, rather than potential breakthroughs. (See my colleague Alex Lash’s column on this.)
One important difference between biotech and energy is that promising medical treatments will find a willing buyer, says Krishna Gupta, general partner in early-stage venture firm Romulus Capital. Energy and materials companies, on the other hand, often have market risk in addition to the technical risk common to most startups.
With his background in materials science at MIT, Gupta says he would like to fund more science-based companies, but he’s gravitated toward software because the funding requirements are relatively low and the returns quicker. Still, one company in his portfolio, medical device maker Allurion Technologies, has been efficient with capital by outsourcing and relying on grants.
“I believe some of these science-based companies will find a way to be more capital-efficient, just like hardware companies have,” he says. “There are a lot of big problems to be solved that software has no role in solving, so there’s a ton of opportunity for science-driven companies.”
Entrepreneurs in energy are looking for alternatives to venture capitalists, either by choice or necessity. Helion Energy’s Kirtley notes that funders, such as family-run foundations, are structured to make long-term bets on potentially transformative technologies. For instance, Bill Gates has been funding yet another nuclear startup called TerraPower.
Funding can also come from government grants, angel investors, and the venture capital arms of large companies, such as General Electric. In the case of UPower Technologies, which is making a small nuclear reactor for remote and off-grid locations, some of its seed funding came from business plan competitions, CEO Jacob DeWitte told me earlier this year.
Kirtley is hopeful that the pool of investors interested in funding startups taking on ambitious technology problems such as nuclear power will grow. “There’s definitely hesitance to go out and fund science experiments,” he says. “But we are seeing a sea change in clean energy and biotech where investors are looking for things that can make a really big impact either in society, in industry, or financially.”