🚀 How Should I Scale This Tech? 🚀
How to Assess ClimateTech P.4
Welcome to My Essays
Hi! I’m Ahmed. I’m an analyst with a deep curiosity about the world.
I explore ideas. I break them down. I share what I learn in essays like this.
I hope you find them interesting.
What I’m Sharing Today
I am continuing to share what I learned about evaluating climate technologies.
The goal is to figure out the best way to stop climate change.
What’s in This Essay?
This framework answers four questions:
Should I spend time on this technology?
Will it get cheap enough?
If it’s cheap, will it scale?
If it can scale, how should I scale it?
If you missed my thoughts on the first question, check out this essay.
If you missed my thoughts on the second question, check out this essay.
If you missed my thoughts on the third question, check out this essay.
Today, I’m focusing on the fourth question.
If a technology can get cheap and can scale, how should you scale it?
This essay will answer that question.
Preface
When you make a product, there are two main types of costs: operational and capital.
Operational cost is an expense for every unit you produce. This includes things like energy, materials, and labor.
Capital cost is the one-time expense for building a factory, buying machines, or setting up equipment.
When you’re just starting out, you usually rely on suppliers for your machines and tools.
Making this equipment yourself is too expensive in the beginning.
As a result, your capital cost depends on the price suppliers charge.
This creates the project finance problem.
The Project Finance Problem
The cost of machines depends on how many you buy.
When you buy more machines, the cost per machine goes down.
This happens because suppliers give discounts for buying in bulk.
The machines do not get cheaper. You pay less because you bought more.
New companies do not have billions of dollars to buy in bulk.
Without bulk discounts, your machines cost more per unit.
This means your product will cost more.
If your product costs more than the competition, most people will not buy it.
Some startups try to solve this problem by building mega plants from day one.
A mega plant is a facility that produces enough units to reach a low unit cost.
A typical mega plant produces about 1 million tonnes per year. It costs around $500 million to build.
For a startup to build a mega plant, there are three main options:
Option 1: License the technology to large companies
Large companies move slowly. They may not act fast enough to help the climate in time.
Option 2: Raise $600M–$1B from venture capital
You need $500M for the plant and more for research and operations.
To raise this much money from day one, investors expect a track record of success.
Most climate founders are scientists or engineers without this history.
Even if you raise the money, big competitors can undercut your prices.
They can sell at a loss to force your startup into bankruptcy or acquisition.
Option 3: Get project financing from banks
Banks do not fund risky or unproven technologies.
Conclusion
All three options for funding a mega plant are not good.
You have a low chance of succeeding. You need a different approach.
How Do You Solve the Project Finance Problem?
You are not likely to get billions from venture capital or banks.
This means you need to fund most factories yourself.
If you don’t have $500 million for a mega plant, what should you do?
Don’t start with a mega plant. That is the wrong goal.
Your goal should be to make speed of construction your limiting factor, not money.
Imagine you raise money to build one factory.
This factory makes enough profit to pay for a new factory in one year.
Now you have two factories. Those two factories make enough profit to build two more factories.
This keeps going every year. After 20 years, you could have 1,048,576 factories.
You won’t build them that fast, but that’s not the point.
The point is money would stop being the problem.
The speed of construction becomes your biggest limit.
This is good because speed is something you can control.
Not having enough money is harder to fix.
This shows the key to solving the project finance problem. It’s called the payback period.
The payback period is how long it takes for one factory to fund the next one.
A short payback period leads to fast growth.
Fast growth allows you to start with a small facility and eventually build a mega plant.
How to Achieve a Short Payback Period
The payback period is calculated like this:
Payback period = Cost of factory ÷ Profit per year
For example, if a factory costs $200M and makes $100M in profit per year:
$200M ÷ $100M per year = 2-year payback period.
How to Reduce the Cost of a Factory
Make New Technology
You can design new machines that do the same job as the old ones.
If the new machines cost less, you save money.
Vertical Integration
Vertical integration means making your own equipment and materials.
You don’t need to invent anything new. You just copy what suppliers do and make it yourself.
This saves money because suppliers charge extra to make a profit.
Here’s an example. If something costs $100 to make, suppliers might add a 5% markup.
If 20 suppliers are involved, the price grows to $265.33. That’s a 2.6x increase from the original cost.
By making more of the supply chain yourself, you keep that extra money.
Your cost depends only on the energy and materials required, not on supplier markups.
This saved money can help you scale faster.
How to Increase Profit Per Year
Profit has two parts: cost and revenue. To increase profit, you can lower costs, raise revenue, or do both.
How to Decrease Cost
Find ways to use less energy or fewer materials than your competitors.
This makes your product cheaper to produce.
How to Increase Revenue
Sell your product in a different market. For example, you can make a shirt for $5.
If you sell it to regular customers, you might charge $10. But luxury buyers could pay $200 for the same shirt.
My Ideal Approach
If I wanted to build a car company, I wouldn’t make the whole car at first.
Making the whole car from the start costs too much money.
Instead, I would focus on making just one car part.
Here is my step-by-step plan:
Make a list of all the parts needed to build a car.
Study how each part is made.
Choose the part with the best payback period.
Raise money to build a small factory for that part.
At first, I would sell the part to expensive markets.
These markets pay more because they buy in small amounts.
As I grow, I would reduce the cost through vertical integration.
Lower costs would let me sell to cheaper markets.
Throughout the entire journey, I reinvest all profits into building more factories.
Once I make enough profit, I would start making other car parts.
I would repeat this process for each part.
When I can make all the car parts cheaply and in big numbers, I would start making full cars.
A Few Final Words
I hope you found this essay interesting! If you know someone who might enjoy it, feel free to share.
Got feedback? Email me at theahmedhassan1@gmail.com.
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Until next time,
Ahmed
