E4: Fission Founders, Part 1: Manufacturing Nuclear

24:43Brett Kugelmas also came to nuclear after startup success. And he identified many of the same challenges and opportunities that Matt did. Nuclear isn't inherently expensive to build. and there's no reason it shouldn't be much cheaper than it is today. Last Energy is building SMRs based on standard pressurized water reactor designs, innovating not on the technology itself, but on the business side. The reactor size, who they sell to, and how they go to market. Okay, so what does a gigawatt coal plant cost, right? Let's say a billion dollars. What does a gigawatt nuclear plant cost? Ten billion dollars.

25:19What is the difference functionally between a coal plant and a nuclear plant? If anything, a nuclear plant should be cheaper because you don't need all the fuel handling equipment. You don't need all those coal yards. You don't need all the trains going to them, right? You can drive the fuel up on a truck. So if anything, a nuclear plant should be cheaper than a coal plant on a per megawatt basis. And yet it's 10 times as expensive. So where did all that money get spent? Well, regulatory requirements. So our thought was just studying this for two years and realizing that this was the problem, that there was not a technology problem, that would have been fine if we just kept building you know my favorite two plants point beach one and two there's 1100 megawatts for you at less than a thousand dollars a kilowatt built in under three years 1968 to 1971.

26:03so in the ideal world we're just building 10 000 of those everywhere we need power plant all across the world all across the grid exactly like you see 1968 technology i got no problem with that but how do we get from here to there because you know you still need to put together a lot of money to do that and people who have money aren't going to necessarily fund that idea or take the risk on that. And so our thought was go small and go to different regulatory environments where their paradigm is fundamentally different. So Brett founded Last Energy to build small and build in the UK, where differences of opinion after the Manhattan Project pushed the government to create its own independent nuclear industry and regulatory framework.

26:42Brett believes they'll be able to move more quickly through the regulatory process in the UK than the US. The trade he's making is to use standard reactor design in order to minimize time spent introducing regulators to a novel design, which would likely run on the order of years and add uncertainty to the process. Plus, Brett believes the current reactor designs work great. We have many of them efficiently and safely humming along in the U.S. and globally, so why change anything? We pride ourselves on being the least innovative nuclear company out there. We focus on innovation around manufacturability and not around nuclear technology.

27:19So we won't touch the core physics, chemistry. You know, as much as people like to say these 19, you know, because there were like 50 different types of reactors built. As much as people like to say that they're proven because the National Labs built them once. No way. You got to operate something for 30 years before you begin to see what random corrosion issues happen. which bolts wobble loose on your pumps due to the frequency of how you arranged your pipe hangers. You got to really have decades of expertise. And by the way, that affects your economics today because it affects the rate at which you can borrow construction capital, the operational performance into the future.

27:59So this is why we decided to settle on just the standard PWR, shrink it down, design it for manufacturability. So how do we build 10 ,000 of something a year. That's what we think of even on our first power plant. Now, granted, there's going to be design improvements and iterations and continued design for manufacturability. But what I direct our engineering team to do is you're thinking about the big picture. You're thinking about high throughput manufacturing. That's how we need to make design trade-offs decisions. Thanks for listening so far. Hang on. We'll be right back after a quick word from our sponsors.

28:35One of the things I've noticed talking to nuclear startups and hard tech startups more broadly is how important it is to have a strong strategy from the beginning. There's something about needing to spend a lot of money on CapEx early that really makes you think twice about where you're heading. Plus, as A16Z American Dynamism partner, Catherine Boyle explained, the dynamics in these hard tech categories are just different. One of the things that I think is actually unique about this category, and especially with American Dynamism companies that we talk about all the time, is that these are often terrible categories with one extraordinary winner or a handful of extraordinary winners.

29:07like the power laws are so much more pronounced. Part of that is because of the regulatory aspect, where once you can get through the regulatory hurdle, you have a much deeper moat. If you compound that with manufacturing, hardware, physical moats that are built with these companies, that's why you see something like a SpaceX, which is the most valuable private company in the US. But when you look at sort of where the next, say, 10 aerospace companies are, there's just such a larger delta between the winners and the ones who are runners up, which is not true of cybersecurity or of typical SaaS investing.

29:39Like there's many, many more winners where the gains are distributed across many. So this just looks like a very different category. When we talk about nuclear as a whole or defense as a whole or aerospace as a whole, like these are categories where you really do have to be in the top handful of companies and work with those companies and they become extraordinary outcomes. Getting the strategy right is critical. My favorite strategy book is Richard Rummelt's Good Strategy, Bad Strategy. In it, he writes that a good strategy has three parts. One, diagnosis. It names or classifies the situation, linking facts into patterns and suggesting more attention be paid to some issues and less to others.

30:13Two, the guiding policy, which outlines an overall approach for overcoming the obstacles highlighted by the diagnosis. And three, coherent actions. The resource deployments, policies, and maneuvers that are undertaken should be consistent and coordinated. The coordination of action provides the most basic source of leverage or advantage available in strategy. Done right, strategy is based on a realistic assessment of the challenges and opportunities, a general direction about what's important. From there, companies can make better decisions about which specific actions to take. A good strategy doesn't guarantee success, but it gives a company the best shot.

30:49Talking to Matt and Brett and to the founders you'll hear from in the next episode made my strategy nerd soul happy. Let's dive in now on Blue Energy and Last Energy and on where they look similar in what they're trying to do here with building out their SMR facilities. Both companies believe that manufacturing and doing things repeatably in high volumes is going to bring them down the experience curve. But they each have a different approach to that. So we have Blue Energy looking at using shipyards as the place to go for their manufacturing. And these are places where you have an experienced workforce that has been building ships for many, many years repeatedly and has a lot of similar processes that go into that manufacturing.

31:32And they are doing more of a integrator partnership approach here, whereas Last Energy is going to stand up their own manufacturing facilities to manufacture their SMRs. And what you have here is Blue Energy operating as an integrator obviously needs to be in partnership with another organization, these shipyard builders, for example. and Last Energy, since they're standing up something themselves and vertically integrating that entirely, is able to have a lot more control. That said, Blue Energy gets to go in, move a lot faster since they're integrating with someone else and also benefit from the experience of those shipbuilders, right?

32:12And so I think it's interesting to see the pros and cons, the different type of approach towards how they want to set up their manufacturing. It's so interesting. And this is what I love about picking apart the kind of like interlinked decisions that companies make because blue energy is trying to build a hundred megawatt reactors and last energy is building i think 20 megawatt reactors i can't imagine you know it's like amazing to me that last energy is even standing up their own manufacturing facilities to do this but like i can't imagine the alternative for blue energy where they're like you know what we're going to take some bc money and we're going to go out and we're going to stand up shipyards They can produce these five times as large reactors.

32:51So everything is linked. I think you're absolutely right. It'd be nice to have access to a shipyard that's all yours in the workforce and it's all part of your team. And maybe down the line, they grow and they can do acquisitions or vertically integrate in another way. But you almost have to give up, I guess, some of that control if you want to go larger. And so it's just fun to see how all those different pieces kind of fit together in the company's strategies. Blue Energy and Last Energy are also thinking a little bit differently about how they're going to sell their power ultimately to an end user.

33:23And so Blue Energy, especially because they're building these bigger SMRs, is thinking, let's sell these right into the grid for a state like California or a country like Poland and set up power purchase agreements where there's a long-term agreement about what price is paid for that electricity over a long period of time. And Last Energy, on the other hand, is thinking, how do we go after the industrial market in particular? Because again, 20 megawatts is a great size for that industry. And actually sell to them what they call behind the meter. So directly to those businesses instead of going through the grid.

33:57This is why the strategy is stuff like once you start looking at these companies, even though they're these crazy nuclear companies that are manufacturing reactors, you still start to see that like all these decisions influence each other right like if you're going big you should sell into the grid and there's a lot of decisions in terms of how your business model works that way i would imagine that even changes the sales team that you set up and who you hire and all those different pieces whereas if you're last energy you're selling to to your point industrials or actually i think one of the interesting ones is is microsoft right like they just announced that they're doing they're going to power some of their data centers or they're at least exploring it using nuclear energy.

34:37The 20 megawatt facility feels like a pretty good fit for something like that, that kind of data center, as we talked about with Brett. Yeah, Microsoft's the big news right now, right? Actually, one of our early investors is the former chairman of the board of Microsoft, Dave Marcart. So I'll just leave it at that. It's all integrated from diagnosis through guiding policy through coherent actions. Microsoft recently announced that it was hiring someone to, quote, implement global small modular reactor and microreactor strategies to power data centers. It and others are going to need a lot of power to run energy-intensive data centers to keep up with the growing demand for AI.

35:16Those data centers need a lot of power, but they don't need a gigawatt. In addition to being easier to manufacture, Last Energy's 20 megawatt reactors are also well-sized to meet the needs of large data centers and industrial sites. It's a match that seems to be made in heaven. Brett told us that the company has already signed eight contracts representing 51 20-megawatt power plants to date, also under a PPA structure. Given the capital intensity of manufacturing anything, let alone nuclear reactors, the strategy doesn't end there. It extends to financing. One of my favorite things to jam on with nuclear entrepreneurs is how they think about financing their businesses.

35:53Venture capital is great for a lot of things, but it can be an awkward fit for nuclear. Josh Wolf told us that Lux looked at SMRs, but that they didn't make sense for his venture fund at the time. So what about these small modular reactors? Could you build 100, 100 megawatt reactors that are much cheaper and just add them on as you need electricity? And that seemed like a good idea. We probably saw about six or seven different schemes, some of which are being commercialized today. We did not fund them because we thought it was too long, too much bureaucracy, too much regulatory framework. You had this weird chicken and the egg problem with the Nuclear Regulatory Commission.

36:25We basically say, well, we're only going to help sponsor something if there's a customer. And the customer would say, well, we're only going to know if you are going to have approval that we're actually going to put money in. So there was this chicken and egg problem that created this paradox that created inertia and you never saw anything really fun there. The beauty of entrepreneurship though, is that founders can study the issues that prior attempts faced and design around them. Plus, as we talked about earlier, both Brett and Matt had founding experience under their belts by the time they came to nuclear.

36:52So they understood what VCs would finance and what they wouldn't. Financing a nuclear reactor startup is a challenge, but it's solvable. Matt told us about the different funding alternatives available. There's the literal funding of the company, which is, you know, done through equity, like any startup might, which is to fund the team and the design and basically the development of this platform. And then there's the literal plans themselves, right? And there's a couple different ways to do that. You know, there's some, like, one of the SpaceX that I think was amazing is they built the rockets on their own balance sheet.

37:22Like, wow, that's a, you know, if you can raise that much money and you can do that, lets you move so much more quickly. That's amazing. If we wanted to get to a point where we were doing regular project financing, it's up to us basically to make it as cookie cutter for those folks as possible. And I do think that that's how most, you know, energy products get built is they get built with project financing, which is, you know, primarily debt. And there's good reason to believe that that would be done on like a project by project basis. And, you know, that's also part of, you know, what makes energy more complicated than software is, you know, you've got something great.

37:54You've got to align the capital each time you want to deploy it. And that can be a challenge. Brett thinks about funding last energy in a similar way. Yeah. So let's differentiate between two different types of equity. So there's corporate equity. And that's what most people think of, like, let's say, from the VC community. So this is where you sell part of your company, your top level company and everything along with it, all of your IP. And so that's where you sell that to an investor for some amount of money. some percentage for some amount of money. And that's you raising money for the company.

38:23And then you use those proceeds to grow value for all the shareholders. So that's corporate equity. Then you have project equity. And sometimes people call this project finance. And sometimes people call this project debt or some combination of project debt and equity under project finance. Project finance is where you would set up an SPV, a special purpose vehicle. And you're putting certain assets in that vehicle, in that corporate entity. but that corporate entity is wholly owned or subsidiary or joint venture of your corporate entity. And that SPV, now you can sell off shares to that to different people.

38:58So that's still equity, but a different type of equity, and it's non-dilutive to Topgo. So from that perspective, yes, you can sell equity, and that's what we are doing, but we're selling equity in the power plant corporate entity, in the physical asset, in the real asset itself. To Josh's point, funding a nuclear startup purely with venture capital doesn't make sense. So both Brett and Matt are planning to use a mix of VC dollars to fund the company and project financing to fund the projects. And each is taking different approaches to the challenges that Josh laid out. Last Energy, for example, is focusing its efforts in the UK, where regulation is somewhat less burdensome, and pre-signing customers in order to both smooth the regulatory process and make the projects financeable.

39:40It's much easier to ask the capital markets to fund a project when there's a signed contract with long-term guaranteed cash flows on the other side. Blue Energy made trade-offs explicitly designed to ease the burden of working with the NRC, using a design they're already comfortable with, and a manufacturing approach that they believe will make all the approvals after the first go much more smoothly. He explained by walking us through his thought process on how long it should take to manufacture each reactor. Let's go backwards. In order to start building it, you need a construction license from the NRC.

40:11So that's going to take basically a minimum of two years. And again, optimistically, that could take two years. We're not designing a new reactor. We're not showing them a technology they don't understand. We're taking a reactor that they've already looked at, a technology they've already looked at, and we're putting it in a new packaging, so to speak. And we could be blissfully surprised or we could be disappointed by that process. But I think two years would be, I think, on the optimistic side of realistic. And then I think to get to that point, I think people think, oh, you just sent to the NRC.

40:38It's like, no, probably you need about two years minimum of work to find a site, do the work that you need to do on that site. There's a lot of work that has to happen in order to submit that application. You can't just submit an application with an idea. You need a concrete proposal. The license is given to a particular site, not to a design. In a sort of really great case, you could be looking at something in six years. And again, these are not technically constrained problems. These are people problems and bureaucracy problems. And I don't mean that in a cynical way. I just mean, literally, it's about working with people to collaborate, to get certain things done, to get certain approvals, to be allowed to do things.

41:14The interesting thing, and I think what makes me really excited is whether the first one is in six years or seven years or eight years, and I'm optimistic that it can be closer to six, you now have a fully baked supply chain to start printing these things out. Right? And that, to me, is like the really exciting thing. This is not, we built one. Oh, my God, you have to go through that whole process all over again to build the second. It's like, no, no, no. Like now we have a shipyard with a staff that knows how to make these things. They can make a second one. We have the regulator has seen this exact design come through with all the questions they've already asked.

41:44Venture capitalists typically operate funds with a 10-year lifecycle, which means that they have to return money to their investors, limited partners, within 10 years. That means for a startup to be successful on a VC's portfolio, it needs to go public or get acquired roughly within 10 years. So the bet on Blue Energy from a VC perspective is that the company will get its first reactor out the door, generating power, and have both the PPAs for future reactors and a clear path to much faster rollouts going forward within those 10 years. All of the hardest work will have been done, and the company would be one that the public markets would be willing to invest in.

42:20Oklo, a nuclear startup that was founded in 2013, recently announced that it's going public via SPAC, co-led by Sam Altman, exactly a decade after its founding. You'll hear a lot more from its co-founder and CEO, Jake DeWitt, in the next episode. But we'll introduce you to him quickly here. He told us that there are real advantages to being public, chiefly that it helps with project financing the company's plans through the PPAs it's signed, and that he's been pleasantly surprised by public market investors' appetite for, and familiarity with, nuclear. I have found an incredible amount of familiarity, of savviness, of depth of understanding, nuanced understanding in the public investor markets.

42:58It's been awesome. And I think that's a really good sign for the industry as a whole. Because one, it's supporting the fact that it takes a lot of demand. And I would argue there's probably more demand than there is actual peer exposure in the public markets, which is good. And also, I think that helps pull, obviously, in support in the private markets, which is great throughout the whole pipeline. And I think that's really a positive here. It's also important because I think investors are increasingly seeing that there's differentiation, that not all nuclear things are going to look the same.

43:22They can look different, they can take different approaches and they're getting smart across the board on those things. So, you know, think about what's sort of in the public domain now. You've got a small light water reactor, you've got a small gas cooled reactor, and A.V.S. is a small liquid metal fast reactor. It's kind of cool to see that exposure. So you're seeing investors getting pretty smart on this stuff. I think that's going to carry through. I also think it creates a good signal then on the venture side of things, which I think is really important for just sustaining the pipelines. I have to say the reception and uptake has been, I mean, just to put it, I guess, clearly and plainly, it's exceeded our expectations.

43:51And we were obviously already pretty, pretty optimistic. And one of the hard things here, all of us are meaningfully pre-revenue for a while. And most nuclear companies are going to be like that for a bit. But that, you know, investors understand what that means and they know how to look at the risk from that. And they're seeing that there's several ways you can understand how the how milestones come together and how progress gets made, which I think is awesome because then that supports sort of what that roadmap looks like. And then that kind of allows you to focus, iterate and communicate accordingly.

44:15What Jake said about public market awareness creating more support in the private markets is really important. The same day we spoke to Jake, I'd spoken to a pre-seed nuclear founder who cited Oklo as an example of a company that would generate most of its revenue and impact after its first decade, but they could get its investors liquidity within that 10-year window. The more examples there are like Oklo, the easier it should be for new nuclear startups to raise venture capital. 10 years isn't a hard and fast rule. Many VC agreements with their LPs give them an option to extend the fund life by a couple of years, often multiple times.

44:49And no one realistically is going to get mad if you have a 100x company in your portfolio that's going to take a couple more years to get liquid. But it's helpful for investors to see that big outcomes are possible within around that decade timeline. Investors are tempted by the sheer size of the opportunity on the other side of commercialization. Global energy markets are in the$4 to$6 trillion dollar range annually, practically limitless. And energy has this useful feature that the cheaper it gets and the more we produce, the more people use it. Zooming in, operational reactors can be a great business once they're up and running.

45:25Blue Energy plans to manufacture 100 megawatt reactors. Let's do a little bit of back of the envelope math around that. So let's start by assuming a capacity factor of 90%, which is actually slightly lower than what we see in the U.S. today, which means that the plants would run 90 % of available hours in a year, or 7 ,844 hours. That's 784.4 gigawatt hours of electricity, or converting that to megawatts, 784 ,400 megawatt hours. At a rough wholesale electricity price estimate of$40 a megawatt hour, you're looking at$31 million in revenue from the reactor each year. And these things can run for decades.

46:09And Matt isn't just thinking about making one reactor. He wants to print out hundreds. The way we think of it is these shipyards in South Korea, which are the ones that we're talking to, they make something on the order of 50 of these big ships a year. So that's about four, this is each of these shipyards. This is about four a month. And in terms of the complexity and steel tonnage of what we're describing, it's similar to like one of those ships. So there's no reason why a single shipyard, even working at 25 % capacity for us, couldn't be doing one reactor per month. And in our case, these are small modular reactors.

46:44So think about the order of 100 megawatts. But that's, you know, over a gig a year. And, you know, you project that out to, you know, 2038, you're at like six gigs, which is, you know, a lot of ARR for us, but, you know, not a hugely meaningful amount of energy for the world. If you take that same shipyard and like There's such a demand for this, as we think there will be, when you actually can deliver secure, clean, reliable power on demand. And you took over that whole shipyard. So instead of 25 % capacity, you were at 100 % capacity. Okay, now by 2038, you're at around 35 gigawatts. And that's about$25 billion of energy demand.

47:17If you're adding, from the date that we make our first, if you're adding a new shipyard at 100 % capacity every year, because this is just flying off the shelves, Very quickly, you're at well over 150 gigawatts of energy in the next 15 years. And look, we could end up anywhere in that range. And there's a lot of things to be determined. But the whole point of the design and the reason why I think this is exciting is that there is a world where you can ramp up. And there's 200 plus shipyards globally of this size that I'm describing. A lot has to go right for blue energy to get to 150 gigawatts of energy.

47:50If they get there, that's$100 billion per year. in what is essentially annual recurring revenue. That seems crazy, and we're not saying that it's anywhere close to guaranteed, but the energy markets really are that large. Of the 10 largest companies in the world by revenue, 7 are energy companies. Of the top 25, 13 are energy companies. We spent a bunch of time talking about how these businesses are financed because we think it's really important, maybe as important as the reactor design or manufacturing process. One of the main reasons nuclear has struggled is because, as Matt put it, it's a terrible business.

48:27But there's nothing inherently terrible about it. Uranium is as energy-dense a fuel source as exists on planet Earth. Regulation is a real issue, but entrepreneurs view it as a part of the diagnosis to be designed around, not a non-starter. And nuclear reactors, Matt, Brett, and Isaiah believe, can be manufactured as cheaply as any other big, complex machine if we start treating them like regular big, complex machines. That leaves financing as an enormous risk. Will these companies be able to get the funding, both venture and project financing, that they need to stay alive long enough to ride down that experience curve?

49:03Josh Wolf told us that to be successful, nuclear needs to tap into the two emotions that motivate people, fear and greed. The greed aspect is you just need typically one story for people to rally around, one narrative of success. That could be a public company. It could be somebody that made an investment in existing utility like Exelon Chicago or somebody that is just seeing runaway success that suddenly people galvanize around. And that's the beautiful thing about markets. It's, you know, somebody, whether they want to leave a legacy, whether they truly believe in it, whether they think that they're going to make a fortune, even if it's a, you know, sub 1 % or one basis point probability that this will work.

49:43But my gosh, the magnitude, if this does, is so enormous that it, again, it appeals to that vector of greed. When it comes to manufacturing more nuclear capacity, in the immortal words of Gordon Gekko, greed is good. Trillion dollar markets are up for grabs in the energy transition. I think we need to rebrand the energy transition. It sounds a little corporate and boring to the electronisans, by the way. All right. I dig it. Trillion dollar markets now up for grabs in the electronisans then. And the capitalist bet here is that with a big enough prize at stake, entrepreneurs will figure out ways to work through all of the issues we discussed in episodes two and three.

50:24that the best way to decarbonize isn't through degrowth or even government intervention, but through good old-fashioned capitalism. That was one of the most interesting things to me in these conversations. I've been so worked up about regulation as an outsider, someone who doesn't have to actually deal with the NRC. And the founder's response has essentially been, it is what it is. We'll play the game on the field. Obviously, I think they'd all be happier if the regulatory process was smoother. They're signing themselves up for years and years of paperwork and meetings and delays. And there's no question that we would be able to decarbonize more quickly and get more energy on the grid more quickly if the NRC adopted a more pragmatic stance.

51:06But the incentives here, both to make an impact and the financial incentives, are so strong that the right kind of people, often second-time founders who have the resources and experience to take big swings, are willing to go through the pain for even that 1 % shot at making it out the other side. There's this great quote from Thoreau that trade and commerce seem to be made of rubber because they always manage to bounce over the obstacles which legislators are continually putting in their way. That one seems apt here. Yeah, totally. I mean, I'm optimistic around this category of startups, these blue energies of the world, the last energies that are saying, nope, we're not going to innovate on design.

51:44We're going to focus on manufacturability. And then we're going to go to market with this new power purchase agreement model. I think there's a lot of potential for that. And I think like solar, going small, improving manufacturing might not feel like it's going to have this big impact the way that gigascale reactors do. But I think that we'll see that this will pay off. They will come down the experience curve and the productivity learning curve. And I think that means in the end, we'll wake up in 10 years, 15 years, to just dozens of gigawatts of new nuclear capacity being produced every month.

52:18On the next episode, we have five more startups for you. We're going to go even more sci-fi and talk to founders who are building advanced reactors using different fuels and coolants, serving end markets like the military, the global hydrocarbon market, and even the moon. Thanks for listening and see you next week on the next episode of Age of Miracles. Thank you for listening and watching to this episode of Age of Miracles. If you like what you hear, please rate, subscribe, and share. And if you're feeling really generous, tell us what you think in the comments. Plus, we have a ton of resources and references in our resource hub if you want to go deeper, and we've linked them all in the show notes below.

52:57See you next week.