Climate tech’s lemons-to-lemonade moment: how the private sector can ensure a durable, clean American industrial renaissance

In January, President Trump could very well shut down the Department of Energy’s Loan Programs Office and will probably unwind elements of the CHIPS Act and Inflation Reduction Act, the major contri­bu­tions of the Biden Admin­is­tra­tion towards advancing U.S. clean tech and manufacturing. 

While that probability is unwelcome for many, it nonetheless amounts to an opportunity: to develop a market-driven financial framework that will build the next generation of industrial powerhouses irre­spec­tive of which party inhabits the White House. Done swiftly and surely, creating durable economic incentives to grow American cleantech companies would change the course of climate change. And I believe this is doable.

Let’s start with the most important relevant fact: the U.S. still develops disruptive tech­nolo­gies better than anyone else — and in a world where technical innovations can be found nearly everywhere. America’s public markets are itching to invest in the expansion of production facilities across the country — some doing climate tech, others not — for the simple reason that investors can make money when there is a clear path to prof­itability. What the U.S. lacks is a standard, repeatable financial framework to capitalize our most promising technology companies as they scale from demon­stra­tion facility to full-scale production. This proverbial ​“missing middle” was what the current domestic industrial policy support was meant to help fill for climate companies. We now need to fill it in another way.

The good news is that the blood of our industrial heart is pumping, and fast: the United States is on the cusp of the next great industrial trans­for­ma­tion. Snapping back from its COVID breakdown, the global supply chain is reshoring and, at the same time, a generation that grew up with mobile devices, deep learning, robotics, and CRISPR is launching a new era of advanced technology companies that will rebuild America’s industrial backbone. 

The energy of this American industrial renaissance surpasses everything I have seen in my twenty years in the industry — from my early career launching first-in-category tech­nolo­gies at Tesla, to my current role as an investor in the companies developing our next break­throughs. Over the past five years, new factory construc­tion in the advanced manu­fac­turing and electronics sector has increased 10x. With over 800 facilities set to start production in the next few years, 140 of them commer­cial­izing completely new tech­nolo­gies, it’s an exciting time filled with oppor­tu­ni­ties not seen in more than a century — but we will only realize its promise if we devise a method to fund these companies through industrialization.

The possi­bil­i­ties are large. The next-generation industrial facilities coming online in the U.S. today don’t look like their overseas prede­ces­sors. They are small, regional, and adaptable. Thanks to new materials and processes developed using advanced computation, they can operate as efficiently as big complexes, but at a much smaller scale. By building modular systems, companies can locate production near regional demand and produce only what is needed. Leading American industrial companies are imple­menting clean processes because they are more efficient, more profitable, and more swiftly permit-ready in the communities they’re building in.

These companies use AI to drive multi-front economic advantages. They are modeling their facilities and sub-systems in AI-mediated, ​“digital twins” of the real world, simulating every possibility that could increase costs or cause failures, and preventing those costs and failure modes before a single shovelful of dirt is turned. Their facilities are often operated by AI algorithms that contin­u­ously optimize production at a micro-level to be so stable and continuous, they outperform the legacy mega-factories by orders of magnitude. AI can drive mass customiza­tion, enabling a single small-footprint factory to produce a wide variety of products on demand without using the space, energy, or resources of legacy factories.

Consider the following examples of new energy and industrial leaders, all DCVC portfolio companies. Radiant will produce micro-reactors that can be installed to support remote communities or close gaps in power supplies for data centers. Unspun​’s automated apparel weaving machine is designed to be regionally located, and can produce clothing for retail customers on-demand with near-zero waste, while adjusting the production of apparel size and style in real time based on individual store demand signals. Fervo Energy used sophis­ti­cated geophysics modeling to understand how to swiftly and cost-effectively ​“frack for heat,” delivering clean, reliable, 24×7 baseload energy at disruptive speed and cost through its advanced geothermal systems — and delivering power to the grid today. 

These energy and industrial facilities are not like the old power plants and factories that require massive scale and brute force to maximize profits: they use data and computation as their profit engine.

You might ask why the federal government was funding the indus­tri­al­iza­tion of these advanced tech­nolo­gies in the first place. Since the 1980s, when we tran­si­tioned to a globally centralized supply chain and relocated much of our domestic manu­fac­turing overseas, U.S. industrial muscle has atrophied. We haven’t built new factories for decades. No surprise, then, that we got dangerously rusty on the skills and financial instruments for indus­tri­al­izing new technologies.

Today’s investors rely on narrow financial instruments and approaches better suited to funding software, business innovations, and biotech than businesses that require significant CapEx to scale up production. Fortunately, the federal government of recent Admin­is­tra­tions stepped in with the first industrial policy since the 1980s, largely funded through the Department of Energy because many of today’s advanced tech­nolo­gies rely on electrons. The DOE support has been very beneficial to climate tech, but given America’s political realities, it is now time to create a capitalist-driven, returns-focused financial framework to fund the indus­tri­al­iza­tion of advanced technologies. 

And no wonder. Every industrial revolution has been accompanied by a period of intense financial innovation. The creation of asset-backed securities during the post-WWII indus­tri­al­iza­tion movement enabled companies to access larger pools of capital to build factories and finance inventory by converting previously illiquid assets like loans and receivables into liquid securities sold to investors. More recently, the power purchase agreement drove the adoption of grid-scale renewable energy by giving creditors the promise of a guaranteed power customer. Over the next few decades, humanity must fund the largest industrial trans­for­ma­tion in history. But the financial innovations of this revolution have yet to emerge. 

American industry needs a new financial framework, a risk-adjusted way to provide emerging companies the money they need to build new industrial facilities commer­cial­izing decar­boniza­tion tech­nolo­gies. These could include a new class of equity or credit dependent on stan­dard­ized milestones (like those of clinical drug trials, which allow biotech investors to raise billions upon billions of dollars), or perhaps the apparel industry’s revenue-based financing to fund next season’s clothing purchases. More radical ideas could include insurance of advanced customer POs unlocking industrial construc­tion loans. Likely, the next industrial revolution will require multiple new financial products. Whatever they are, these new tools for U.S. industry will require a massive effort of collab­o­ra­tion across the key stake­holders, investors, industrial leaders, creditors, financial insti­tu­tions, and established corporate customers. If they can pool their collective knowledge to create and implement a new financial framework that ushers in the next generation of American industry, they can help secure a sustainable, resilient, and prosperous future for all.