The SAF Podcast
The SAF Podcast is the only podcast on the internet that exclusively covers sustainable aviation fuel (SAF). So if you want to find out the real issues and challenges are for commercialising and scaling SAF production, look no further.
Every week we will be hearing from senior industry leaders who are actively shaping the future of SAF and aviation.
The SAF Podcast
The SAF Podcast: Unstacking the climate investment stack
This week on The SAF Podcast, Oscar is delighted to be joined by Oliver Booth from Sightline Climate. The conversation reveals the layers of complexity in defining climate tech and exploring the nature of the climate capital stack, and how it relates to Sustainable Aviation Fuel.
The episode begins with Oliver giving a great summary of the findings of their 2023 end of year report for private investments and what this means for SAF producers trying to find investment. As the discussion continues , we draw critical connections between the past clean tech boom and today's investor discernment, which now favours high-impact and sensibly-valued companies. Plus, Oliver spotlights the unique strategies and partnerships crucial to scaling renewable hydrogen production—a key component in the quest for eco-friendly skies.
Our discussion takes a global turn as we evaluate energy market trends from Asia's HEFA advancements to Africa's potential for technological leaps, similar to its rapid adoption of mobile technology. Oliver's expertise provides a hopeful outlook for the resilience of private investments in green tech, despite market unpredictability. By the end of our conversation, it's clear: the fusion of financial acumen and environmental responsibility is the roadmap for fuelling a sustainable future in the skies and beyond.
You can find the Sightline Climate End of Year report here: https://www.ctvc.co/32bn-and-30-drop-as-market-hits-pause-in-2023/
If you enjoyed this discussion, check out our previous episode with Jim Lockheed, JetBlue Ventures here: https://www.buzzsprout.com/2202964/14019163
Host: Oscar Henderson, SAF Investor
Hi and welcome to the latest episode of the SAF podcast. We're delighted this week to be joined by Oliver Booth from Sightline Climate, who's going to be taking us through their recent Climate Tech investment trends report from 2023 and his general thoughts on the financing landscape in terms of climate tech and, more specifically, in terms of sustainable aviation fuel. Oliver, how are you? I'm doing well, thanks for having me. Absolute pleasure. Before we get started, do you just want to take us briefly through your background, sort of your career and everything up till now?
Speaker 2:Absolutely. I joined Sightline Climate about a year ago. I was the first hire as we were putting together the initial research team, and have been here building out the research processes across all climate tech verticals and sectors and have been starting to deep dive into low carbon fuels, decarbonization of chemicals, all things molecules, so also covering hydrogen and things like that. Prior to that, I was doing a brief stint in consulting, working largely with the Department of Energy in the United States, focusing on grant programs, loan guarantees, basically looking through all of the companies that were applying to these programs, encouraging new applicants and figuring out how do we scale up early state startups. Prior to that, I was in academia. I did an undergraduate degree in philosophy, politics, economics at Oxford and then a master's degree in energy and sustainability at Northwestern. So I've been in and around this space for a while, focusing predominantly on early stage climate tech innovation and all about sort of accelerating some of these companies and solutions.
Speaker 1:Perfect. I mean, it sounds like perfect fit. Do you just want to give us a bit more? You touched on it briefly. Do you just want to give us a bit more about Sightline climate, specifically what you guys are doing, what you're trying to achieve, how you're trying to sort of go about your business?
Speaker 2:Yeah, absolutely so. Sightline is a market intelligence research platform, so it's a lot of buzzwords put together. Basically, we look into all things climate tech, particularly focused on companies that are hitting that inflection point of scale, so early stage companies who are raising venture capital, financing all the way through to growth, to private equity, to project finance. It was originally born out of the Climate Tech VC or CTVC newsletter, which was a great resource for years, still is a great resource that covers public information on funding announcements, big news articles, and then, about a year ago, as I mentioned, I joined and we started to build out the platform side, and that offers clients much more deep information into the individual companies, into their investors, into the investments that are being made, and also information on the individual projects that are being constructed and what kind of technologies are gaining traction.
Speaker 2:I focus on our research side, which means building out explainer documents we call them sector compasses that explain this is how this sector works. This is who's involved in it. These are the kinds of things that investors might want to be paying attention to and the kind of inflection points that we might be able to see, and part of that process is collecting and aggregating a lot of data on a kind of annual basis. We're tracking out, tracking every new deal that comes out, focusing on who's making the deal, what sector is it in, et cetera, et cetera.
Speaker 2:And a big piece that underpins that is our taxonomy, which goes really deep. So, rather than just tagging companies to energy or to carbon management or something like that, it goes to a pretty high level of detail. It's not just energy, it's not just transportation, it's sustainable aviation fuels, it's specifically biosafs or ESafs, which I'm sure we'll get into in a bit, and specifically HEFA derived biosafs. It's specifically fisher tropes related ESafs, things like that. And that allows us to make some pretty interesting insights on the overall funding trends that are happening in private capital markets, figuring out who's actually making these investments, what kind of technologies are gaining traction, which ones have moved past the early private venture capital seed equity type financing, and who are now starting to think about project finance, building out larger amounts of capital to start building out first facilities and, first of a kind, production pathways Perfect.
Speaker 1:I mean you said it earlier, there are a lot of buzzwords in finance and in sustainability in general. So before we get into the report, could you just explain what climate tech is specifically?
Speaker 2:Yeah, absolutely.
Speaker 2:Climate tech is interesting, is an interesting term because it describes a set of solutions that touches basically every sector and every aspect of the economy.
Speaker 2:As we're thinking about energy transition type things, we're realizing that well, everything uses energy in some form or another, and so climate tech is a pretty broad term. We define it in two main categories. We have six verticals that we look at. So the very high level sectors, things like energy, transportation, carbon management, so carbon removal, things like that, industrial built environment, and food and agriculture, and within those there are a lot of different solution areas to do what we do now, but either more efficiently or with less carbon emissions, or use some version of that. Generally, it involves using less carbon emissions or actively pulling CO2 out of the atmosphere. So for a company or a solution to be classified as climate tech in our book, it needs to check one box in each of those two areas. It needs to fall into one of those sectors and it needs to be either reducing carbon emissions, monitoring carbon emissions, or doing what we do today, but with fewer.
Speaker 1:Perfect. And before we get into the report, there's one more buzzword that I think we should probably define, because it's kind of the linchpin of the whole report. Could you just go take us through what the climate capital stack is, sort of what that means, and what that means for everyone who might not necessarily actually have such a good understanding of the finance specifically.
Speaker 2:Absolutely. It's another powerful buzzword in the list. The climate capital stack is a way of organizing how companies are raised and financing throughout their life cycle. So at the earliest stages you're looking at companies who are raising money from friends and family, from private investors, individual angels, and that's sort of the pre-seed side of things. As companies start to scale and they need more and more capital, they start to raise larger and larger amounts from more and more institutional investors. So that's when you start to get into the seed series, a traditional venture capital rounds that we see from the usual suspects people like Breakthrough Energy, impact and Impact Partners and lots of people like that.
Speaker 2:As the companies continue to mature, they need to start thinking about what's the next step here, and venture capital often isn't the right solution for them as they're thinking about building huge capital intensive facilities, production equipment, things like that. When they start to hit that point, they start to look at private equity investors, large infrastructure investors and areas like that, with government funding filling in a lot of those gaps. So government funding appears at the early stages at grant level, but it also appears with loan program office money from the US Department of Energy. Here's from Innovate UK over here in London focusing on all sorts of different stages there, and once a company is hitting its full commercial scale, that's when it should start thinking about debt figuring out when it's going to be able to raise money and take on debt in order to build out these facilities without sacrificing the equity of that.
Speaker 2:If you are making an equity investment, you're expecting a much higher return than you are if you're making out a loan. So we build out the climate capital stack as we're organizing what we call the kind of bridge to boring. The best case scenario here, if you're building a bunch of facilities, if you're a staff producer, is you end up at a state where you're boring, where you're able to take on a bunch of debt, take out loans and build facilities without having to raise huge equity rounds, sacrificing large portions of your company, and so that's kind of the way we think about graduating through those sections, with the end goal being either an IPO becoming public or potentially just getting acquired and exiting that way. But in either case, you're thinking about getting more and more capital to engage in different types of activities.
Speaker 1:Amazing so before. So we'll get into the report now, but I would recommend it to anyone. I'm going to put it in the podcast description, so I'd recommend anyone who wants to go and check out the actual specific details to go and read it themselves. It's really, really interesting stuff. So, Ovid, do you just want to give us the overview the one, two, three, as it were of the cliff notes of what the report says for the trends in 2023, and potentially looking forward in sort of what 2024 is going to look like?
Speaker 2:Yeah, absolutely so. We count 2020 as the big inflection point for climate tech, as the year in which it kind of broke out into its own, and so we base a lot of our analysis on the funding that occurred in 2020, 2021, and through the years, the 2023 year we tracked $32 billion of investment across a lot of different companies. The big takeaway here is it was not very good for climate tech companies who were looking to raise money. That $32 billion is around a 30% decline from what it had been in 2022. Now it's worth highlighting, particularly someone who works in climate tech, that that is actually a lower decline than we saw in the macro level market for venture capital, but it's still a pretty significant decline. One interesting note on that is we found that's not due to fewer deals, it's due to smaller deals. So, despite a 30% overall level of decline, there's only 3% fewer deals happening. Instead, what we're seeing is more smaller deals and fewer larger deals. So growth investments, which are kind of the top end of the venture capital stack, was 41% down from the previous year and Series C was down 35%. Early deals, the kind of very earliest stage or one of the earliest stages of venture capital, went up 12%. So, all in all, what you're generally seeing is a lot of smaller deals happening and those larger deals just not getting penned. Overall, we looked at 2600 companies that raised $142 billion since 2020, and we've been kind of tracking that and the report goes into a lot more detail than I can up top of my head, with some cliff notes, but I definitely recommend taking a look at it.
Speaker 2:But from there we start to delve into the individual verticals and sectors. So what's happening across the energy space, across the transportation space, as well as what different types of investors are doing, whether you're a private equity investor or a venture capital investor or an infrastructure investor and sustainable aviation fuel was a big part of the analysis on our side because it sat across the two largest bricoles that we analyzed, which was energy and transportation. Those continue to dominate. Those have dominated for a long time and continue to be really important in the space. However, transportation money goes overwhelmingly toward batteries. That's the big space that people are interested in and that is generally for private automobiles. People are realizing that the Teslas of the world and all the other major car manufacturers who have followed suit are going to be consuming a lot of batteries over the next few years. So batteries, lithium extraction, things like that are a big part of that. Sustainable aviation fuels also falls into this bucket of biofuels generally and the majority of companies that we tracked who were involved in sustainable aviation fuels were companies that were doing a little bit of everything within the kind of biofuels. They are biodiesel producers, renewable diesel producers, who were kind of dipping their toes into the saff, the saffwaters in order to think about what their long term prospects were going to be for maintaining a lot of product output as we transition away potentially from certain types of liquid fuels, especially gasoline, which has been a really interesting piece of analysis. I'm happy to kind of delve into that part of it further.
Speaker 2:But the other kind of quick, heavy hits on the kind of macro level of the report was we're looking at graduation rates. So at what rate do companies actually get to the next level? How are they able to get from their series A to their series B? A lot fewer are doing that, which is an important kind of piece of the puzzle of putting together. Why were there so many? Why was the total funding down so much?
Speaker 2:And lastly, that capital intensive kind of physical assets made up the bulk of the funding, which was interesting as well. The ones that were focused just doing hardware and without a significant software component made up like half the deals. The ones who were just doing software made up about a quarter, and then the other quarter of companies doing a little bit of both, which is it's hard to tell whether that is a function of just the fact those companies need more money and so are raising more rounds, or if it's a function of investor appetite toward capital intensive sectors. Traditionally, software has been pretty desirable from a venture capital standpoint. It's a great thing to invest in which can make a lot of make a lot of money with relatively low risk and low without putting too much capital on the table. But climate tech is dominated generally by hardware and capital intensive projects because most of the stuff that we need for the energy transition is our physical assets. It's building out renewables, it's building out batteries, it's building SAF production facilities, all that kind of thing.
Speaker 1:So you said a couple of things that I thought were really interesting, the first being the 30% decline in investment in 2023, when we're looking at climate tech and seeing as there's a lot of urgency around, we need to be addressing the climate tech problem now, as opposed to a few years down the line. Do you see that as potentially being something worrying about the level of investment, or is that just a product of the market and eventually investment this year will come up To compensate for the dip of 30%? Do you think it's worrying that we're seeing that level of dip? It's almost a third. The investment is.
Speaker 2:Yeah, it's significant. I think it depends a lot on your rationale for why. There are a few different explanations for why. Option one is this whole climate tech thing was a fad and we're moving along from it. That I would describe as probably the worst case scenario as far as the sector and, arguably, the environment is concerned. I also think that's pretty unlikely based on the fact that a lot of deals are still happening and the fact that a lot of companies who are hitting their inflection point are moving, graduating away from venture capital and into early stage private markets for raising money for building facilities, debts, loans, private equity, infrastructure investors. That's one possible explanation is that a lot of the companies who had raised a lot of money are moving out of the early stage financing piece and into later stages. Another explanation was that this was just a bad year.
Speaker 2:There are a lot of reasons why investors did not feel comfortable making large investments this year. The macroeconomics on this was not, for this year was not great. There's a lot of reasons why the economy was doing poorly. A lot of investors were raising a huge amount of capital but just sitting on it we're raising what we call dry powder, which is money that they haven't deployed from their funds there might be doing that to solve one of two problems. They're either doing that because they're just going to wait and see and they're going to invest in a lot of companies this year and next year, or they're doing that because they feel really confident that the bets they've already made in the previous years, which were incredibly hot in the previous years a lot of investments that were happening in 2022 and 2021. If, also, they're looking at those and going well, we'd rather just hold on to this capital and help these companies, our existing portfolio companies, weather the storm. We are seeing an uptick in follow-on rounds, investments that are made back into the same company again in order to keep it afloat and to continue on through rougher economic waters. There's an explanation here that is a lot more positive. That is, investors were caught in a little bit of a hype train for some of these investments in the last few years and we're heading back into an area of rationality that valuations are getting a lot more reasonable, which is a good thing for the market. Overall, you want these investments to be made with sensible economics in mind as much as you can. Fentacabral is always a little bit of a punt, but trying to be as sensible as possible, and you also want these companies who are raising money to be the best of the bunch. You don't want necessarily just money being thrown at the problem willy-nilly, you want it to be focused on where it's going to have the highest impact and where it's going to generate returns for the investors. So there's a lot of reasons to be optimistic, in my opinion, and I think we're going to see a lot of movement over the next year. That's going to help bring some clarity to some of those questions as to the state of those.
Speaker 2:One last piece I want to highlight is in what we affectionately call clean tech 1.0, which was the big renewables boom in the 2000s and 2008,. A lot of companies got burned on. A lot of people lost a lot of money in particularly biofuels and certain renewables and spaces like that. What we saw in those areas was a lot of overinvestment that occurred into big biofuels companies, into certain renewable companies, but that overinvestment resulted in a huge amount of really big winners. You're seeing companies like Tesla that came out of that. You're seeing a lot of their big renewables developers in the United States and Europe who received funding in that period of time and who are now past that stage and are now looking at project finance, building huge facilities, building gigafactories, installing giant renewable farms. So we may also be hitting this inflection point with climate tech 2.0 and thinking about companies that were real winners, who have raised their money and are now thinking about getting to boring and starting to build out facilities beyond the private markets or beyond private equity markets and into more kind of debt oriented facilities.
Speaker 1:In terms of SAF specifically, you mentioned that it crosses the energy and transportation sort of verticals that you're working with. Do you see that as being potentially an issue when it comes to them? Raising finance in terms of someone who's looking to invest in energy might go this is a transportation problem, or someone that does transportation go this is an energy problem? Because anecdotally you've got people like lessors who lots of people think should be much more active in sort of pushing the investment in SAF going. That's not our issue, we're not going to get involved in that Whereas some people, some lessors, are getting more involved, some are saying it's not our problem. Do you see that as a potential problem compared with wind or solar, where the verticals are a bit more well defined than it belongs in?
Speaker 2:Yeah, I think one thing to highlight for SAFs is that companies that produce them are treated very differently, whether they are a biofuels company, who are driving this from large scale biomass, who are using waste cooking oil, who are using waste agricultural cellulosic biomass, things like that. Compared to companies who are doing power to liquids we call them e-fuels, electric fuels, anything like that where you're taking clean hydrogen and captured CO2 and producing aviation fuel out of that, Out of those two buckets those two sets of companies are treated very differently and are being financed at very different levels. As it stands, the companies that are doing biofuels a lot of those projects are being financed by large oil companies because they're able to take waste cooking oil, run it through an HEFA process at an existing refinery or at a new refinery, with basically the same skill set that they already have and large amounts of capital that were already invested to refine oil. They've seen this way of extending the lives of existing assets, of repurposing them, of lowering their carbon footprint all good things. There are problems with HEFA as a sustainable solution in the long run, but it's a really interesting way of repurposing those assets.
Speaker 2:Those kinds of solutions are seeing a lot of traction in terms of being able to get built out relatively efficiently. Some of the more cutting-edge biomass-based solutions are, I think are caught in the middle because, I think I mentioned before, the first round of biofuels was not hugely successful. A lot of companies faced a lot of challenges. The example that always comes to my mind is the algae-based biofuel big push back in the day, Every single oil major basically put some money into an algae based fuel. I think the last one was Exxon that just pulled out, or Chevron maybe bought their share in that last project, but that was the last pillar to fall in terms of that version of things.
Speaker 2:I think, some investors are looking at biofuels and going. We've been down this road before. We don't want to do it again. Electrofuels, on the other hand, are the cool new thing on the market. They check all of the climate tech investors' favorite boxes. They're hydrogen, they're captured carbon, it's all powered liquid, it's all renewable. You're building them out in conjunction with renewables. You check a lot of the right boxes, but at the same time, you face a huge amount of technology risk, because this is not something that we do very often.
Speaker 2:This is a new kind of process. This is a new way of doing things. There's even more cutting-edge ways of doing things that are the direct conversion as opposed to the fisher tropes method of producing saps, but not getting bogged down at the technical details. The point is that that stuff's really exciting, which is great if you are raising venture capital and bad if you are raising debt. So if you want to start building your facilities, the last thing you want to do is tell your bank that this thing's really exciting and no one's ever done it before. The thing you tell your bank is everyone's done it before. We know exactly how it's done. There's no risk, everything's going to be fine.
Speaker 2:Exactly. It's a very different conversation. You need to have two decks. You need to have the deck that tells the venture capitalist that everything's cool, exciting, no one's done it before, and the deck that tells your bank that everything's easy.
Speaker 1:It's interesting you mentioned ESAPs. It is undoubtedly one of the more exciting new developed technologies that's undoubtedly going to have important roles to play in sustainable aviation fuel going forward. But it requires a lot more capital. It's so much more capital intensive to actually get an ESAP plan running, even to find the venture to get the technology functioning up to scale, than a lot of the biofuel technologies. And, as we've already gone over, venture is down this year. There seems to be a mismatch between the two, where lots of companies are going we need a lot more money but there's a lot less accessible for them. I mean, how do you see that as a trend going forward? Is that something that can be solved? Is that something we're just going to have to keep working through, because lots and lots of producers are very frustrated at the time it's taking to actually acquire finance, get policy, all these different parts, but is there something that you think can actually speed that up in the near term? Or is it something they're just going to have to wait out and play the longer games?
Speaker 2:Yeah, I mean the vast majority of companies that are raising venture capital rounds. In the later half of last year and to the first half of this year were ESAP companies, much more so than the Biosaf ones. Right at the beginning of the year, an Airtek raised $129 million. Those are the kinds of big deals that you would expect to see in a space that's really taking off. It is an interesting question of how are you going to start building facilities. I mean, $120 million is going to help, certainly, but there's a lot of other players who are having a lot less success.
Speaker 2:One lesson I think that's interesting, that can be taken from the hydrogen space is a lot of large renewable developers, especially in the States, started to realize why are we providing electricity to someone else's hydrogen production? If we think this is a valuable commodity, if we think this is a valuable space, we should just build the whole thing ourselves. The hardest part to build is the renewables. So if we're a renewables developer, if I'm next era, I can build out the renewables capacity, buy an electrolyzer from somebody else and then I get to play in both markets. I have both the electrical markets I'm playing in, as well as the hydrogen space. One thing that I would expect to see or at least would hope to see if you want the space to take off is some of those large renewables developers, particularly in Europe where ESAF is being regulated into existence under refuel EU, we expect to see those renewables developers starting to build out this whole stack themselves. They build up the renewables themselves, they build out the hydrogen production and then they build out the actual SAF production facility. In those cases you start to get to a lot more favorable numbers on the output side as well.
Speaker 2:The economics of ESAF are not great if you're going to be buying energy off the grid. I don't think there's any world in which you buy energy off the grid and produce any SAF. It's just going to be so expensive. But if you've built renewables that are behind the meter and they're feeding directly into your production facility, suddenly you're looking at one, two, three cents a kilowatt hour. These are good numbers and you're able to start producing SAF at a price that's not competitive necessarily with traditional fossil-based solutions, but you might start to get to cost competitiveness with biofuels and that, alongside the regulation, is a pretty favorable spot. So it's been a long, kind of roundabout way of answering the question, but it'll be interesting to see how e-fuels companies start to address that problem. You just need a lot of renewables and you need them to be really cheap, and there's not an easy way to solve that problem Without throwing a huge amount of upfront capital at it.
Speaker 1:So I mean you're kind of touching on sort of the licensing model as where you've know, you've got a renewable company going, I've got access to all this green hydrogen and there's this source of CO2 is down the road, I'm gonna, I don't know, go to a, go to a topso or a Johnson, matthew or KBR or whoever and just say, look, you've got this technology, we've got all the feedstocks.
Speaker 1:We just you know that's former joint venture or create a partnership and then you know, take off this way, this is the way we'll sort of go about doing it, because it sort of saves all those sort of technology risk perspectives. Because I Mean they will say fish etrops is a very old technology just used in a new way. So the risk is the new application of the fish etrops as opposed to the technology itself. So do you see that having a short term sort of being the accelerator of Saft development, that sort of model, as opposed to getting, you know, all these sort of startups going through venture, going through all these rounds and then eventually getting to size and then Getting lost in the middle bit and then eventually looking for debt, do you think that's a bit more of a sort of a quicker model to actually get more saff available, whether it be bar fuels or or ESaf.
Speaker 2:Yeah, I mean depends on your timeline, right? I completely agree that if you wanted to start building this stuff out today, you should just basically go to topsoar one of them and and license it out. The tech the interesting question for a lot of these E-fuels companies that are raising rounds is can you actually do this thing more efficiently? Because at the end of the day, the output is Not exactly you would, basically a commodity. It doesn't really matter how you made it in terms of how you're able to blend it in the fuel, especially if you're talking about two different ESafs like it's these. These are the same thing. So when companies like in our attack and and Oxy see you and similar companies like that start to raise these large rounds, the the question for them is Can I bring down the overall cost of production? Can I bring up the efficiency relative to what topso is doing? And some of that is a technology question. Some of that is just a sort of design question. Some of the some interesting solution areas are focused on just improving the way that that Fisher-Trupp's interacts with ESaf. Infinium raised a big round recently that was kind of in that kind of ballpark, and there are a few others who are operating that kind of area where they're focused on just improving the efficiency there.
Speaker 2:So again, I kind of thought you ran about answer, but the the I think the takeaway there is if you want to build it out today, go with what you know, but in the longer term, the companies that are raising rounds have the potential to win the market based purely off efficiency. You there's no brand loyalty here. We're not dealing with a Pepsi versus Coke situation. We're dealing with a kerosene versus kerosene question, which, which makes things a lot easier in terms of seeing your path path to victory, and the blending requirements to the that refill you have put in are so high, specifically for for ESaf, that it is unlikely that any one player wins the market anyway, and so being a little bit late but being able to Be significantly more efficient, be significantly cheaper than the alternative, is a pretty good path to victory, I think so I want to sort of flip to the sort of the dip, the sort of middle ground, as you mentioned, where everyone's sort of Struggling, finding it hard.
Speaker 1:I mean, anecdotally, we we've heard that from producers that the third, the venture, bits. Okay, it's not impossible to find, it's quite easy the middle bit before you get to the final investment decision and the product project finance. Getting to that final investment decision is the hardest Bit to crack, the hardest not to crack. So I'm just curious about your thoughts on how we go about encouraging those with the capital to actually get involved, the sort of private equity companies, the pension funds or those other those, those people with the capital, to actually invest in this. What needs to happen for them to look at SAF and go this is a look at projects and go this is what we need to invest in. We're going to invest in this.
Speaker 2:Yeah, the, that gap between the venture capital side and the and the kind of project finance, late-sage private equity side we affectionately refer to as the, as the valley of death it's. It is brutal to get between those, the. Some of that the onus lies on kind of three groups of people. There is the stuff that the startup has to do, there's the stuff that the government that they're operating under has to do, and then there's the stuff that the investor has to do, so the startup has to make themselves bankable. That means building out the professional forecast. That means kind of doing all of the grunt work that involve involved with making a pitch to a professional firm who's probably more accustomed to hearing pitches from exxon than they are hearing pitches from A early stage startup. So some of that is just a is just a style thing. It's a matter of building out believable forecast, not just on how your production is going to look, but how the general market is going to look, what you're out, what your offtake price is going to look like, what your input costs are going to look like, and building out input and offtake agreements is probably the number one way to do that. So knowing where you're going to get your supply for 10 or more years, and knowing where you're going to be able to sell your product for 10 or more years is more or less mandatory for getting late stage financing, which is why you're seeing a lot of big commitments from airlines and things like that people who are saying we're going to be built by this much staff over the next, you know, five, ten years. That's because They've been told by everybody that the only way that these production facilities get built is if there's some guaranteed offtake there, and so, from the startup, your job is to just try and secure those, those on board and offtake agreements.
Speaker 2:Government's a big role there too. The prime example of that is the department of energy is loan programs office. It's sort of the poster child for this sort of thing, but there are other programs like it, either grant programs or loan guarantees. The eu is somewhat infamous for for being More stick than carrot when it comes to regulating in new technologies. It tends to have mandates rather than Helping, helping some of these companies secure financing. But the but? You don't even need to necessarily Put up grant money. We're talking about loan guarantees and Loan offers. You need to take on a certain level of risk that a private investor might not, but that can unlock a significant About more capital than than you initially put in. So that's one area that I think the EU probably needs to do a better job of exploring as far as Unlocking some of that capital in a way that doesn't necessarily going to cost them anymore, because in theory, if you're doing your job right, you're able to get that money back, and the LPO is so far seen pretty significant success in the US, so there's no reason to think that that the EU would be unable to to do it with pretty minimal costs.
Speaker 2:And then the last book of that is kind of the direct question that you asked, which was well, what about the actual investors? And from their perspective, it's a little, it's a little hard to have that conversation, simply because they're more risk averse than their predecessors, and With good reason. That's their mandate, their their objective here is to is to secure a solid return with, with minimal risk. One piece of that is you need to find the right investors.
Speaker 2:Certain investors are more amenable to either a just taking on more risk for, for the option of a higher return, or be being more open to I wouldn't call it concessionary returns, but being not being more open to Focusing on certain verticals that they think of high impact. That's where certain high impact and high net worth individuals start to play a role. People with A an idea of the impact they want their capital to have in mind when they're making those investments. That's very different from what you're going to get from from a pension fund, necessarily, but it's worth noting that some larger government pension funds already are thinking about impact of their capital because they've had a lot of weight to throw around. So it it's a matter of segmenting the market in terms of what kind of target investors that you want to go after and having the conversation On their grounds, on their turf, as it were, because they're probably not going to come to you.
Speaker 1:Do you think they, the investors, actually understand the scope, potential of saff and that it's it's I mean we say it's sort of A short fire guaranteed commodity for the next 20, 30 years, like it's going to have to be around, people are going to have to use it. People keep flying, they're people are flying more, so there is going to be demand for it for the next 20, 30 years. Do you think they actually understand it or is it something they just sort of know vaguely from a distance and do you think they're there's appetite for them to know it more? Do you think there actually needs to be a bit more sort of Legwork from the producer side of things educating them about? You know the potential of saff and what's going on? How do you see that balance?
Speaker 2:I think that people make the mistake, or investors make the mistake, of viewing saff as a Sustainability play and not a financial one. It's viewed as an impact investment, which isn't a bad thing. It is impactful, it's a good. It's a good thing as far as emissions are concerned. But when, when I'm approaching this research and we're approaching this research, we're approaching it from a from a financial question. We We've we've referred to the the mr Burns test.
Speaker 2:You heard of it. If you met you mr Burns from the Simpsons, famous for being greedy, self-centered, the sort of ultimate capitalist in in certain views, and If the the idea is, if mr Burns would invest in it, it's a really good idea. If you put aside all of the climate aspects of it and instead focus on is this a good financial decision? And If you clear that that hurdle, that's when you're hitting a really promising point as an investment. So I think that investors should be aware of the fact that, as you kind of pointed out, this is a really big market. Aviation fuel is expensive and people buy a lot of it and people are traveling more and more every year. The aviation industry if you ignore COVID, which has, I'm sorry, a margin of negative effects.
Speaker 1:They move their office all the way back.
Speaker 2:Yeah exactly Pretty rough time there. But that aside, the overall implications of the market, people are getting richer, people are flying more all over the world and if that market is going to continue to improve and depending on whether or not you believe some of the claims around alternative fuels, hydrogen and batteries generally speaking longer distances, medium distances you're almost certainly going to need some version of kerosene. And if you believe that and you believe the fact that the market's going up, it seems clear then that if countries are issuing mandates, if the world is moving toward decarbonization and energy transition, this is a pretty huge market that you can take a pretty sizable chunk of. It's just a question of who's going to win it.
Speaker 2:The vast majority of biofuel of ESAF or sustainable aviation fuel in general today is made using used cooking oil through the HFA process. You're going to run out of used cooking oil pretty quickly. There was a report out recently that Europe imports 80% of the used cooking oil. Uk specifically imports 80% of the used cooking oil that it uses for HFA. That's obviously unsustainable. 60% of those imports are coming from China. There's no world in which you are buying a bunch of used cooking oil from China, putting it on a boat that's almost certainly burning diesel and bringing it halfway around the world to be refined in the UK. Obviously, that's not sustainable from a financial standpoint or an environmental one. It's just not a good idea. So some of the interesting solutions that are coming out are on treating different kinds of biomass around, using hydrogen around different solution areas that are going to allow countries to start to onshore some of this production or have the potential to tap into a really big market.
Speaker 2:So I think there is a temptation to focus on staff from a sustainability angle and that's a mistake of investors, but it's a mistake of the industry. Sometimes it's a mistake of the startup. Sometimes, if you're going to get to boring, you need to understand that you're a financial investment, no more and no less. So you need to risk yourself. You need to focus on that aspect of the business and make that pitch, and some companies do. Some companies do a great job of focusing on this and some investors do. There are a lot of investors, particularly investors that we work with regularly that are looking at this space, frothing at the mouth going this is fantastic. This is a huge industry that's going to be really moved by this space and excited to see where that goes.
Speaker 1:I mean it's interesting. You say it's you need to look at it from a financial sort of build yourself up as an investment, as opposed to sort of a sustainability play, which I think you're absolutely right on. But on the flip side, there are a lot of impact funds being built out. At the moment. There's been a lot of rise of capital going into impact funds that, as you say, could potentially just be sitting around waiting to deploy. So there's finding a balance between ticking the sustainability box and ticking the financial box, and often it's quite hard to tick both at the same time in order, because that capital is just lying there waiting to go somewhere. So it's often quite hard to do both at the same time.
Speaker 2:Yeah, no, it is. It's not easy and it depends on how you put yourself out to the world. It's tough to check both boxes, but I think it's important. It's a branding question to some extent. The solution areas are kind of the same regardless and the business models are similar regardless of which one you're focusing on, and branding problems are easier to solve than technical ones in general. So it's more of a directional shift.
Speaker 2:And when you see certain asset managers pulling out of Climate Action 100 just last week, it's easy to look at.
Speaker 2:Particularly when you're in this space. You need to look at companies entering with big sustainability funds, with big impact-focused funds, and think that that's a really significant portion of the market and it's a growing portion of the market. But if you want to win over the JPMorgan's of the world, the Black Rocks of the world, these companies that are pulling out of Climate Action 100 for a variety of reasons, but one of the reasons they're citing is fiduciary duty we're just not allowed to focus on impact too much. We're not allowed to pressure companies in the way that Climate Action 101 of us do, and maybe there's a regulatory shift that allows that, but I think that's unlikely. What's far more likely is you, as a company, bend over backwards to make yourself look like a solid financial play and at the early stages, when you're high risk, when you're dealing with venture capitalists, yeah, you're an impact play all the way, but that's not going to necessarily secure you the scale of capital that you need to build out a billion dollar production facility.
Speaker 1:And what do you think? We focus a lot on the US and Europe but more generally, globally, do you think there's regional differences in terms of requirements for investment and what investors are looking for? Or do you think it's pretty plain across the globe, or and sort of obviously within the scope of e-fuels, biofuels, those requirements? Do you think it's a pretty even playing field or are some regions slightly different to look at them than the others?
Speaker 2:Yeah, I mean we focus a lot on US and Europe, mainly because that's the best place to de-risk some of this stuff. There's the most capital is here, particularly in the US, but even in Europe, and so if you're looking at building up first of a kind facilities, those the kinds of places that you're going to be able to secure the financing to do that. That being said, Brazil has done a really interesting job of focusing on this ethanol to jet solution area, and that'll be interesting to see how that develops. If you're in Asia, there's a lot of focus on improving the HEFA performance. Singapore recently built out a huge it was retrofitting a huge HEFA facility with Nestay. Japan is focusing a lot on importing clean hydrogen and I think they're going to start to probably focus more and more on eSafs. So it's a matter of knowing your market, knowing what natural resources they have available to them, what they're predisposed to, what they're interested in focusing on.
Speaker 2:The African market is a complicated one and I'm not going to kind of opine too much on it, but it'll be interesting to see how they react to this. I think what they've done a very good job of historically is taking advantage of technical innovation that's occurred elsewhere. There's a kind of go-to example for that of cell phones. They didn't need to build that massive cell phone towers and landlines everywhere. Instead they skipped those and went straight to cell phones, which is great, and that's the kind of model that I think that they should continue to apply in a lot of those spaces. But Africa is huge and it's very different economic circumstances in South Africa compared to Nigeria, compared to Ethiopia. So I won't necessarily that one is when is that market still developing?
Speaker 1:in a lot of cases You're not going to pin your mask to any particular region, then, or are you sticking it firmly in the US?
Speaker 2:I think if you want to do biofuels, probably the US, if you want to do efuels, probably Europe, maybe Japan. That's probably where I would guess in the earlier stages and then, as you start to build out more and more facilities, you're going to see more and more uptake. It's just a question of which kind of market has the best appetite for risk for the kind of thing that you're doing. And the US is famous for taking out risk. Europe likes to follow that model to some extent a little bit less risk friendly, and certain Southeast Asian countries are doing that. And the kind of elephant in the room is China, whose markets are significantly more regulated and significantly more complicated than some of the US and European markets.
Speaker 2:What China has been doing so far has been building out HGFA facilities as well as processing waste oils. What China is fantastic at is deploying large amounts of capital. They're really good at taking a big chunk of change and building a facility and making that decision quickly, particularly if they have the support of the government. So as the technologies get de-risked, as HGFA already has and certain types of fishertrops already has, I would describe China as not necessarily the first place you build a facility, but probably you should start looking at it around your second or third, because they're more likely to be able to have that capital and a significant amount of capital to be able to deploy.
Speaker 1:Do you think everyone's sleeping on China a little bit, just sort of, because it's so isolated globally in terms of economics and Just so isolated, do you think people aren't necessarily paying as much attention to it as they probably should do I?
Speaker 2:Think we're going to see with China what kind of what happened with electrolyzers, which was you. You had the electrolyzer market kind of developed early stages and the technology developed Predominantly in Europe, in the US, and then China brought the cost down. They made, they started making these things really cheap and People have complained about quality issues, people complained about lifecycle, performance issues, but the reality is, if it's 20% less efficient but cost half as much, you're still going to buy it. So that's one thing that I think we're going to start seeing with this and I think investors are generally aware of that. It's more that there aren't necessarily always favorable conditions to being an outside investor in China. They are very, very good at handling their own handling that those investments internally.
Speaker 1:I've just got one more. One more question for you before we, before we wrap up. Your report says, is sort of says there's a mixture of bullish and bearishness about 2024 in terms of the investment Landscape. What's your opinion? Are you on the on the bullish side or on the the bearish side of side of the argument?
Speaker 2:I think overall, I'm on the bullish side. I think that the fact that the decline was less than the overall market for private preventive capital is a very good sign. It shows that that this has some staying power and that this wasn't just flight at the first sign of disaster, and I also think that a lot of the solution areas that are here are real solutions to real problems, rather than Praying for government. Regulation isn't going to come, and that was kind of the problem the first go around, and that was kind of the problem the first go around. So generally, I'm pretty optimistic.
Speaker 2:That being said, if you are Trying to come up with a solution in an area that's already mature, I think it's gonna be more and more difficult to do.
Speaker 2:You're less likely to be able to really innovate in those areas, and so you know, certain companies are still coming up with really interesting innovations in solar panels and wind turbine technologies, but I'd be less optimistic about some of those areas, simply because, if you're a venture capital investor Looking at making risky puns, your objective is to take a pretty big chunk out of a big market, rather than taking a tiny chunk out of a big market, which is what you're gonna see from a lot of fully developed markets for Saffs. Generally I'm pretty bullish. I think Saffs, as you kind of pointed out before, I think it's unlikely that any other solution area decarbonizes aviation. I think aviation, the aviation industry, has been pretty good about focusing on decarbonization, setting goals and being forward-looking and, as a result, if you expect the aviation industry is going to decarbonize and you expect that Saff is the best way to do that, those two things you know, a plus b equals yeah, that's probably going to be a pretty good market. So so, overall I'm pretty optimistic.
Speaker 1:I'm glad I was gonna accuse you of fence sitting, but then you brought it. You brought it back. Thanks so much. I mean we come back to you. Oh, but thanks so much. I mean we covered so much ground there. But it was, um, it was really interesting stuff and, as I said at the beginning, I'll put the I'll put the report in the In the podcast description so everyone can go check it out.
Speaker 2:Yeah, it was a pleasure. Thanks so much for having me.