Clearvision Ventures’ Thomas Englis: Bringing Innovation to Scale with Value-Add Sustainable Infrastructure

ABSTRACT

KEY POINTS FROM THOMAS ENGLIS'S POV:

Why is value-add sustainable infrastructure such an important category moving forward? 

• The push towards sustainable infrastructure remains significantly bolstered by government incentives and regulatory support, including the IRA in the U.S. “Government subsidies and regulations are a major tailwind. Specifically, the Inflation Reduction Act (IRA) in the U.S. provides tax credits and incentives for the development of new clean energy or low carbon projects,” says Englis. “The E.U. has generally trended towards mandates while the U.S. favors subsidies. E.U. mandates include energy efficiency standards in the case of data centers or fuel blending standards in the case of sustainable aviation fuel.” There are numerous indicators that this momentum is accelerating. Clean investments in the U.S. were $239B in 2023, an increase of 38% from 2022. These investments are often in Republican leaning states which should lead to bi-partisan staying power. Sustainable Aviation Fuel (SAF) project announcements have increased rapidly. There are now over 130 projects in development, up from a handful a few years ago. 
• The macro-trend of de-globalization and onshoring of supply chains is creating further regulatory support for domestic infrastructure development. “This trend has been significantly influenced by global events such as the COVID-19 pandemic and ongoing political tensions with China, which dominated the last wave of clean energy technology to the detriment of domestic U.S. and European production,” adds Englis. This shift away from globalized supply chains has prompted a strategic realignment towards enhancing domestic production capacities. These policies aim to reduce dependencies on international supply disruptions while dovetailing energy independence and sustainability.
• Gen Z and Millennials are more likely to care about sustainability than older generations, and to choose low-carbon substitutes if costs are equivalent. “Companies who can produce substitute goods with a lowered carbon footprint and the same or lower cost as the traditional product will be favored by a majority of younger consumers.” 

What are the business models or use cases that might be attached to this category?

• In order to scale new low-carbon technologies, many startups must transition from hardware tech companies to infrastructure development companies. “This is a multi-trillion dollar opportunity that will play out over decades. It's about rebuilding all of our physical infrastructure, all of our manufacturing, all of our materials in a way that produces less carbon dioxide and most importantly, doesn't cost more. If it costs more, no one's going to use it,” says Englis. “For all of these companies, the objective of the first production facility is to prove the unit economics. They can have all kinds of data and financial models to show how the technology can lower costs, but they don’t truly know until they build.”

• To finance this transition, startups leverage a combination of offtake agreements, government subsidies and tax credits for revenue. “This thesis is fundamentally about the infrastructure development business model. This means that before companies even start construction, they should already have offtake agreements where customers agree to buy what a facility produces for 10 or more years into the future. Offtake agreements can range from millions of dollars to multi-billion dollar contracts. It will be almost impossible for these companies to raise debt without de-risking their revenue. In addition to these traditional revenue streams, many sustainable infrastructure companies also generate cash through the sale of tax credits.” 
• Infrastructure development startups are pioneering sustainable low-carbon substitutes that achieve cost parity in categories including battery recycling, geothermal energy, electric transportation, sustainable aviation fuel, and synthetic bioengineering. “While technological breakthroughs are an overarching theme across these many categories, there isn’t one particular underlying technology catalyst. I wouldn't say AI is having an outsized impact either; many of these breakthroughs have been in physical and chemical sciences.” 
  • Battery recycling: New chemical advancements in hydrometallurgy are enabling used lithium-ion batteries to be recycled into new raw materials with greater profitability. “One of our portfolio companies that operates in this space, Ascend Elements, has already achieved cost parity.” 
  • Geothermal energy: Recent advancements in the O&G space have led to the development of Enhanced Geothermal Systems (EGS), new techniques for accessing geothermal heat that are expanding potential sites for energy generation. Additionally, the 24/7 nature of geothermal energy complements intermittent renewables like solar and wind, thus increasing their marginal value. An example in this space is Zanskar, a Clearvision Ventures' portfolio company that employs artificial intelligence and big data to enhance the discovery and development of geothermal resources.
  • Electric transportation: Zum, a student transportation company, manages electric school buses through long-term contracts with public school districts. “Zum has an innovative model for achieving cost parity through both AI-enabled route optimization as well as energy arbitrage as the school buses are plugged into the grid after each school day. They are able to use government subsidies for EV’s, but this is an example of a model that would continue to endure without subsidies.” Another differentiator to the traditional school bus: Zum’s technology allows parents and school administration to keep track of bus delays. 
  • Water filtration: Gradiant develops filtration technology that efficiently cleans industrial wastewater, recycling the decontaminated water back into the factory. This technology allows Gradiant to offer water infrastructure solutions that save money for businesses like semiconductor fabs and pharmaceutical companies while handling all capex and maintenance off-balance sheet. Gradiant’s business model requires no upfront payment from clients; instead, they charge a fixed dollar per gallon that includes all new technology installation and operational costs. This approach not only reduces water usage but also lowers operating costs for clients, demonstrating immediate economic benefits.
  • Sustainable aviation fuel (SAF): Catalysts include new material science methods for creating jet fuel. Hydroprocessed Esters and Fatty Acids (HEFA) fuel is the primary mode of making SAF today, but there are a number of other approaches currently being commercialized. These include Alcohol to Jet, Gasification, and Power to Liquid. Regardless of the methodology, all of the approaches aim to produce Jet A fuel that is indistinguishable from fossil fuels. In general, the feedstocks in these processes are not energy dense, and so different production methodologies will thrive where different feedstocks are available. For example, Alcohol to Jet is optimal in places where corn is plentiful, such as Iowa. 
  • Synthetic biology: Many advancements are predicated on the CRISPR Cas9 DNA editing technology. Startups in the space include Solugen, a company creating industrial chemicals using bacteria and yeast instead of fossil fuels; and Galy, which is developing processes to create cotton using stem cells as a substitute to growing the plant. “It's exactly the same as the cotton you or I are wearing right now, except it uses 99% less water, no fertilizer, and it's grown inside using stem cells and sugar,” adds Englis. 

What are some of the potential roadblocks?

• Startups transitioning to an infrastructure development model must survive the “funding gap”; the space between risk-averse, traditional infrastructure investors and traditional VC investors who lack understanding of this business model. “Many new low-carbon tech companies receive grants to start their research, followed by funding from venture capitalists. To scale the business, these companies need to enter the infrastructure development space. However, traditional infrastructure investors are risk averse, and traditional venture capitalists often lack an understanding of infrastructure investment models. This creates a gap in the market we refer to as the ‘Valley of Death’, where many innovations die before they can scale up,” says Englis. “A sustainable infrastructure founder can have a PhD in their field, but if they have no understanding of the infrastructure language, they cannot raise the millions of dollars needed to execute these projects. It’s vitally important that startups build their teams to be both technologically sound and financially savvy, so they can understand how to position themselves to the infrastructure community.”
  • An example of this is Infinium, a sustainable aviation fuel (SAF) company founded by experts in gas to liquid chemistry. After working on related projects for a decade, Infinium hired project finance experts who had experience doing infrastructure deals at large banks like Bank of America and Merrill Lynch. “Only once Infinium had both areas of expertise on the team did they begin to raise a substantial amount of project finance,” says Englis.

• Higher interest rates have a large impact on infrastructure development businesses, given the significant debt associated with facility construction. “With any infrastructure project, increasing interest rates can pose a major risk,” says Englis. “Typically infrastructure projects use significant debt to pay for construction and development. Debt is usually structured as a floating rate above some risk free rate. As that rate increases it reduces the margin of error and may even make the project uneconomic, which has happened recently with a number of offshore wind projects.”
  • Certain low-carbon categories are more exposed to higher interest rates than others: “Carbon capture and sequestration is one of the most exposed sectors to interest rate fluctuation; while there are tax credits provided by the government for every ton of carbon sequestered, there's not a clear market beyond that. Therefore, revenue is essentially capped based on the available revenue from tax credits. As interest expenses increase, these projects can become uneconomical. On the other hand, industries that have more revenue upside, like batteries and sustainable aviation fuel (SAF), have more of a buffer. We’ve also seen that some airlines are willing to pay more of a premium for SAF to help producers maintain positive unit economics.
• Labor shortages can impact development, both at a company level and for the category as a whole. In order to scale these technologies require hundreds of thousands of electricians, construction workers and mechanical engineers. Labor shortages in these fields can result in longer timelines, higher costs and lack of skilled professionals to bring these projects to fruition.

IN THE INVESTOR’S OWN WORDS

Almost by accident, I've spent the majority of my career in the sustainable infrastructure space, starting at GE and now with Clearvision Ventures. I’m passionate about trying to help these companies scale up. While innovative breakthroughs in the lab can be exciting and get media buzz, real impact only comes from deploying these technologies at scale, which ultimately means raising billions and becoming an infrastructure developer. 

Many companies struggle with cost parity and proving unit economics, especially with their first production facilities, making it challenging to raise funds. Venture capitalists often lack knowledge around energy transition projects, as it is a newer area, and may try to apply the wrong mental frameworks to them, slowing their progress. 

As a result, it can be difficult to get energy transition projects off the ground. At Clearvision, we focus on scaling technologies, leveraging our extensive background in sustainable infrastructure to deeply understand and support the unique value of each company

MORE Q&A

Q: What do other market participants or observers misunderstand about sustainable infrastructure? 

A: "One is the size. Decarbonizing the economy will require tens of trillions of dollars in capital investment. Most of these technologies already exist, but the vast majority of capital facilitating these projects will be deployed in infrastructure and project finance. 

Another is valuations. These companies are often valued far too richly at the early stages. Many venture investors entering the space misapply investment frameworks from consumer or enterprise software, which can scale rapidly with minimal capital. This results in a mismatch between investment expectations and the realities of funding these technologies.

As these companies mature their business models become more obvious. Due to the long term offtake agreements, revenues and profitability are predictable once an asset is operating. Therefore, these companies are simply valued at a discount to future cash flows, not with a high flying revenue multiple."

STARTUPS MENTIONED IN THIS BRIEF

Ascend Elements*, Galy, Gradiant*, Infinium, Solugen, Zanskar*, Zum*

Editor’s Note: Clearvision Ventures' portfolio companies denoted by (*).

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