Pitfalls Along the Way

Financing FOAK is a massive lift. However, securing funds alone does not guarantee success. The terms secured are equally important. Last capital in typically has the most power, and in FOAK this is particularly true given the quantities of capital required.

Prior to bankruptcy in 2011, Solyndra undertook a massive refinancing that subordinated all previous debt and equity[xiv] [xv]. Even had the company turned around at that point, the stack of debt and preferred equity crushed the founder and early investors’ equity.

Solyndra is the extreme downside case. However, even when a FOAK company is successful there can come a time when the value of fresh capital trumps past efforts or investment. In this case, founders and early investors can face extreme dilution, or be forced to accept aggressive hurdle rates at the projectco level. Corporate structure, joint topco and projectco investments, and pre-agreed staged investments can protect founders and early investors. However, when FOAK companies slip, terms can become punitive[xvi].

Learning Curves and the Fast Follower

Another consideration – collective knowledge. While we hold Tesla up as an argument for FOAK, note that in 1996 General Motors was already producing the EV1. EV1 was a true FOAK electric vehicle, however strategic decisions led to commercial disaster[xvii]. Engineering lessons from the EV1 may have contributed to Tesla’s success as a Fast Follower.

Another FOAK success story highlighted previously was Ørsted. However, the FOAK deployment, Horns Rev 1, was not competitive with other technologies on a levelised cost of electricity basis. Learning curves, supply chains and technology improvements over multiple iterations were required before offshore wind became the UK’s cheapest source of energy[xviii] [xix].

Ultimately, leverage is gained or lost through performance, and that starts with five things: supply, demand, technology, team and money.

So, Why Take the Risk (and the dilution track)?

FOAK can unlock unfair advantages such as superior unit economics, new demand, pricing power and deep moats and defensibility. Successful FOAK also delivers returns. True North Institute looked retroactively at eight successful climatetech FOAK financing rounds from top-tier investors. They found that a single round with these companies delivered on average 2.4x MOIC and 41% IRR post-dilution[xx].  This is for companies where the average prior valuation was c. USD 300m. Very few established companies of that size return 41% IRR. Earlier stage investors expect even better returns.

Massive outcomes are possible. It requires strong partnerships, diverse and multi-disciplinary skills, and sometimes creative approaches to sourcing, building and financing. Ultimately it requires mission-driven founders, undeterred by the long road and deep valleys on the way to first of a kind.