Startup Series: Charm Industrial
This episode was previously for members only. In an effort to make important content more widely available, the audio for this episode is now available for everyone.
Charm Industrial is a San Francisco-based startup scaling bio-oil production for three markets: carbon sequestration, hydrogen fuel, and steel production. Using a process known as “fast pyrolysis,” the company is converting cellulose (e.g. wood, saw dust, crop residue) into bio-oil, which can be used to bury carbon underground (negative emissions), to convert into hydrogen, and as a cleaner ingredient in the production of steel. Stripe announced this year that it became Charm Industrial’s first negative emissions customer.
Co-founder Peter Reinhardt walks me through a company overview and an in-depth explanation of bio-oil. He also talks about how a tech entrepreneur like him (or anyone else) that is motivated by climate change can find a way to make a dent.
Enjoy the show!
Recorded July 28, 2020 and published for Members August 27th, 2020
Our climate tech fund, MCJ Collective, recently invested in Charm Industrial! Check them out here.
In Today's episode, we cover:
An overview of Charm Industrial and the company’s mission to “return the atmosphere to 280 PPM CO2”
What Charm is doing to scale bio-oil production for new markets
An overview of bio-oil and how it’s produced
How Charm Industrial is converting carbon-rich biomass into bio-oil
Advice for tech entrepreneurs looking to make a dent in climate change
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Jason Jacobs: Hey everyone, Jason here. Before we get going, I just wanted to take a moment to give a quick shout out to the new paid membership option that we recently rolled out. This option is meant for people that have been getting value from the podcast and want to enable us to keep producing it in a more sustained way. It's also for people that want extra stuff, such as, bonus content, a Slack room that's vibrant and filled with people tackling climate change from a wide range of backgrounds and perspectives, as well as a host of programming and events that get organized in the Slack room. We also have a virtual town hall once a month, where you can get a preview of what's to come and provide feedback and input on our direction. We'll be adding more membership benefits over time. If you want to learn more, just go to the website, myclimatejourney.co. And if you're already a member, thank you so much for your support. Enjoy the show.
Hello, everyone. This is Jason Jacobs, and welcome to My Climate Journey. This show follows my journey to interview a wide range of guests to better understand and make sense of the formidable problem of climate change and try to figure out how people like you and I can help. Today's episode of the MCJ Startup Series is with Peter Reinhardt. Co-founder of Charm Industrial. We recorded this one a few months ago, but at the time was only made available via video and slides to members. Now, we are opening it up via audio to everybody as well.
Charm Industrial is a San Francisco based startup that's scaling by bio-oil production for three markets, carbon sequestration, hydrogen fuel, and steel production. They use of process known as fast paralysis, and the company's converting cellulose such as wood sodas, crop residue, et cetera, into a bio-oil, which can be used to bury carbon underground, also known as negative emissions, also to convert into hydrogen, and as a cleaner ingredient in the production of steel. Stripe announced this year that it became Charm Industrial's first negative emissions customer. In this episode, Peter walks me through a company overview, an in-depth explanation of bio-oil, which I desperately needed, and he also talks about how a technology entrepreneur like him, who is the Segment CEO or anyone else for that matter that's motivated by climate change and wants to find their spot, can go about finding their way to doing so, just like Peter has done with Charm. Peter, welcome to the show.
Peter Reinhardt: Thanks for having me. Excited to be here.
Jason Jacobs: I'm excited to have you. This one's kind of a weird one because you're a founder that speaks my language, building a company in a foreign language. So I'm excited to learn more about it and I'm excited to learn more about your journey too, because I think the area that you're executing in is one that's important for the quantified, and the even just the process of you getting to that place, I think is an interesting topic for the show and for me.
Peter Reinhardt: Cool. Awesome. Well, excited to talk a little bit more about Charm today. It'll be a quick intro. At a high level, what Charm is doing is scaling bio-oil production for three new markets that bio-oil hasn't really been used in historically. So those are sequestration, hydrogen and steel, specifically sand gas for steel. So we'll get into each of those three in a little bit, but now what the heck is bio-oil?
Jason Jacobs: I was just going to ask, if you tried to go on without explaining what bio-oil was, I wasn't going to let you. So I'm glad you're going there.
Peter Reinhardt: Perfect. Yeah. So bio-oil is basically where you take cellulosic biomass, so large amounts of cellulose. You heated up without oxygen, but in the presence of a little bit of water, usually somewhere between 5% and 20% moisture content and the cellulose basically degrades. And it degrades into this black liquid, it's quite viscus similar to crude oil in some ways at first glance, which has led a lot of people to try to convert this into a usable liquid fuel or a sort of syn crude or bio rude, if you will. But bio-oil is actually quite different from crude. So crude is like-
Jason Jacobs: Peter, before we get too far, can you talk about how you came to be focused on this problem?
Peter Reinhardt: Oh boy, that's a long story. You want me to break flow right here?
Jason Jacobs: I don't want to break your flow, but like, gosh, I mean, you're the CEO of Segment. So I mean, that's kind of a relevant piece of context for the audience.
Peter Reinhardt: It is. Yeah, yeah. My background is I studied aerospace engineering and then dropped out to start a software company called Segment that's done well. Segment's a little over 500 people today and we raised about 300 million in venture along the way. So, run Segment today and it's a company with its own exciting prospects and growing quite quickly. So yeah, about three years ago, I tried to figure out how to offset the emissions from Segment and started working with a few people inside the company to figure out how to do that. I was just super disappointed by what I was finding inside of nature offsets and so forth.
It's just very unclear that it was having the impact that we wanted it to, or that it was sort of promising to. You buy some land and set it aside, but what's to say someone doesn't cut down the trees next door, or what's to say that a hundred year time horizon that you're looking at, like Brazil will actually be or Indonesia will actually be stable from a government perspective, and like rule of law will matter. And of course, for a hundred years, it feels hard to guarantee some of those things. So I ended up going down a pretty deeper rabbit hole, spent about a year and a half of Saturdays with some friends trying to figure out how we might sequester carbon dioxide at the profit, lots and lots and lots of dead ends. And this was the culmination of the one dead end that might work or the one non dead end that might work. And-
Jason Jacobs: And what is, oh, I'm sorry. Keep going. I didn't mean to cut-
Peter Reinhardt: Yeah, no. And so it's this pathway of taking cellulosic biomass and bring process called fast pyrolysis to convert that into bio-oil, and then using the bio-oil downstream in these sort of new markets to where it hasn't been used historically.
Jason Jacobs: Where did the other areas that you looked at missed the mark?
Peter Reinhardt: Basically, none of the economics close on a lot of the other things that we looked at. So we looked at, for example, biomass to electricity, where you burn it, when you sort of pencil out the math and excel, like doesn't quite work and sure enough, you Google it. And all the folks in California for who were doing biomass electricity with great fanfare 10 years ago, all went bankrupt between like 2016 and 2018, so on and so forth. It worked at Algae, but the CapEx, the OPEX looks awesome, the yields that you get from Algae are fantastic, if you're thinking about producing various bio-oils or other sort of materials from them, but the yield comes at the cost of really intense CapEx and other like wastewater disposal.
We looked at taking municipal solid waste and doing gasification to take tipping fees on a waste product, and then convert it into something useful, whether that's jet fuel or hydrogen, but had a hard time getting in those work specifically because of the disposal, the ash that you produce at the end basically concentrates all the heavy metal content. And it becomes like an RCRA, a EPA-regulated disposal problem. So anyways, like there are way more dead ends than we could possibly cover that we hit. I'm sure there's things we, quite confident, there's things we overlooked, but this was the only thing we found that we could really wrap our heads around and find a model that worked from an economic perspective.
Jason Jacobs: And did you have a foundational training or education that equipped you to evaluate in these areas? Or did you need to find others to fill in those gaps?
Peter Reinhardt: The last two and a half years have been a huge exercise in network building to be able to assess a lot of these things. There's a lot of research on gasification that's been done over the last 30 years at NREL, internationally in Denmark and China and actually all over Europe. Canada in particular has done a lot of gasification research. There's a lot of people who are experts in some of these processes, all trying to sell into different markets that largely haven't worked out historically. And there's a couple spectacular failures that have happened in the U.S. as well, like [Kewer] and Range Fuels each raise between 200 and 300 million before going bankrupt. So lots of lessons to be learned. And I think a huge proportion of the last two and a half years has been reaching out and getting in contact with sort of an ever growing web of these folks who have lessons learned from the past.
Jason Jacobs: Okay. So back to bio-oil.
Peter Reinhardt: Sounds good. So yeah, you can think of bio-oil as being somewhat akin to crude oil, but the difference is that crude oil has about 2% content oxygen, whereas bio-oil is about 30% to 40% oxygen. So that means a couple things. One, it means that the energy content of the bio-oil is much less. It's basically already partially oxygenated. The other issue is that bio-oil is not really one substance, right? When you pull crude oil out of the ground, it's heavily alkanes and alkenes from our organic chemistry perspective, fairly simple, long hydrocarbon chains. Bio-oil is a mix of all kinds of stuff. It's like everything in the kitchen sink in organic chemistry, aldehydes, ketones, furans, phenols, sugars, aromatics. Like, it's everything. And it's because you have this very messy, thermodynamic process that's breaking down cellulose. And so when people think about trying to convert bio-oil into a liquid fuel, they usually think about doing that catalytically or refining it through hydrogenation or these sorts of things. But it's never really worked out economically, partially because it's such a gnarly mix of random chemicals as opposed to a much cleaner, simpler crude oil.
So part of the thesis behind Charm is to choose markets downstream that don't really care about this mess. So specifically when we look at sequestration, we're going to pump it into a hole. It doesn't really matter that it's a mess of oxygenated hydrocarbons. And when we think about the hydrogen market, we're going to beat this knot out of it with oxygen and steam. And so the fact that it's already partial oxygenated is irrelevant. When we think about the steel market and needing syngas there, same thing. So we've specifically chosen markets where the sort of complexity doesn't really matter as compared to like biofuels or any of these other sort of like more liquid downstream potential markets where the exact composition of the bio-oil matters a lot.
Jason Jacobs: And how did you come upon this area?
Peter Reinhardt: So we started with just biomass gasification, and my co-founder, Sean, actually had the breakthrough about nine months ago that this intermediate bio-oil actually solved a bunch of interesting challenges for us. So one, it sort of simplified the machine, so we would just go from biomass to bio-oil instead of biomass all the way through to a clean syngas. So drastically simplified the machine. The second was that bio-oil solved a number of logistics challenges for us. So if you think about, if you're going to sell syngas or hydrogen or one of these things, then you either transport the biomass to the facility, the central facility, where you're producing the syngas or hydrogen, or in which case you have to transport biomass, which is expensive. You can only do within 50 miles or so because that's a low bulk density, or you can locate your machine at the source of biomass and then transport the hydrogen and syngas, which is again, super low bulk density, low energy content, et cetera.
So Sean's breakthrough was well, in the middle of this machine, we're actually producing a liquid if we just bring it back to room temperature. And so why don't we transport that liquid? If we transport that liquid also, wow, like the energy content is much higher, it's pumpable, you can put it in existing tank truck, doesn't require any pressure, so on and so forth. So the breakthrough of bio-oil as the transportable intermediate was significant and allows us to scale at both ends in the appropriate fashion. So on the biomass side, through decentralization of many facilities located near the source of biomass and downstream central facility for converting bio-oil into either syngas for steel or hydrogen for refinery.
Jason Jacobs: So the bio-oil that you're working with, where does that come from?
Peter Reinhardt: Yeah. So bio-oils is basically produced through a process called fast pyrolysis, and it can come from a number of different feedstocks. So primarily people today make bio-oil from wood and sawdust, that has some additionality concerns with it in a lot of cases. So instead we're mostly focused on crop residues. So corn stover, wheat straw, sugarcane bagasse, things like that. And we're also interested in purpose growing crops. So we have a field trial right now running in Louisiana in year three of a potential purpose growing crop. And we have a few varietals coming out of USDA quarantine soon as well. We're pretty agnostic to the actual feed stock. Again, if you're making liquid fuels, you get really picky about the feed stock, because you need extreme consistency coming in, so that you can get extreme consistency of the liquids coming out. You're trying to optimize for minimal oxygen content, minimal water content, minimal particulate content, all of those sort of things.
For our applications, again, we're going to drop it down a hole, or we're going to beat the snot out of it with oxygen and steam. We don't really care. We can see a lot more variety in the feed stocks coming in.
Jason Jacobs: And explain to me the purpose of your applications.
Peter Reinhardt: Yeah. So again, we've got three here. So on the left, you can think of the high level market strategy is we're going to have a fast pyrolysis unit, which will produce bio-oil from crop residues or waste biomass or purpose grown biomass. And we then think about sort of these three markets downstream. One market is the negative emissions market. So this is taking the bio-oil and pumping it underground. This is a novel concept, patent pending for this overall system. This is bio-oil pumped underground into geological storage as an alternative to super critical CO2. So we can get much deeper into that. The concept is that bio-oil is much denser carbon wise, has a higher carbon density than super critical CO2, doesn't require compression because it's already a liquid, is less buoyant than brine and less buoyant than super critical CO2, so it actually sinks to the bottom of the containing formation rather than trying to go to the underside of the containing formation like CO2 tries to escape, whereas bio-oil actually tries to stay put. So that's one potential market. We can talk more about that. The second market is-
Jason Jacobs: That's the Berry emissions? Am I-
Peter Reinhardt: Exactly. Negative emissions, just like someone wants to get rid of... Like Microsoft, wants to buy one megaton of negative emissions. This would sell into that market.
Jason Jacobs: Okay.
Peter Reinhardt: The second market is hydrogen. You can kind of split hydrogen into three rough markets of initially fuel cells then refining, especially in California, then refining globally. And then ammonia production for fertilizer. All of those consume vast amounts of hydrogen. The process there is that we would take the bio-oil and add steam and oxygen and heat as I was talking about before, and then go through a standard syngas cleanup train to convert that into hydrogen. That's again, fuel cells refining and ammonia production. The third market is, and this is maybe a slightly more interesting one is steel. So steel today, about 90% of the world's steel is produced with metallurgical coke. So this is coal that's been sort of, had all the volatiles baked off and burn the coal to both add carbon to the steel and also get the heat to melt and reduce the iron oxide into iron and steel.
There's a different process that uses syngas. So it's a different process that rather than using metallurgical coke uses hydrogen and carbon monoxide and a little bit of methane. One variant of that process is called the MIDREX process, and it's about maybe 7% of global steel production today. So the question is, where do you get the syngas from? Most of the syngas used today comes from oil and natural gas. So it's deployed in countries that have really huge volumes of gas and oil to use, but no coal reserves. So I think Venezuela, Russia, parts of the Mid East, Libya, et cetera. Not the most friendly places in the world. But we can produce syngas from biomass and from bio-oil. And so that syngas could be a drop in replacement for plants that are using the MIDREX process and potentially a zero carbon way to do steel manufacturing.
Jason Jacobs: And when you play this in terms of the go-to-market in any of these potential verticals, how much of that process in terms of like, first of a kind plant and scaling and that is consistent across where you can kind of build once and reuse? Or is it completely separate and distinct for each one of these applications?
Peter Reinhardt: Yeah, you can think of the sort of... There's maybe three different machines involved here. One machine is the fast pyrolysis bio-oil machine. These are like relatively well known. People have been building these for 30 years. They haven't been hugely economically successful because again, they've been targeted at these liquid fuels markets, but they exist. You can mostly get them off the shelf. We will tune ours differently, right? We don't care about water content, water content can be high. We don't care about particulate, we don't care about oxygenation, things that they've been trying to optimize for historically we don't care about, but it's mostly an off-the-shelf kind of system.
Underground injection, the machine that actually, or the system that sort of drills a well and handles the injection, that's well understood. We have 50,000 injection wells across the U.S. as a country today, and we inject about four gigatons of liquid waste across the U.S. 11% of the entire nation's liquid waste is injected today. There's some considerations around acidity and monitoring and so forth, but for the most part, there's not a machine to develop there. The real machine development is in the gasification of bio-oil. So what's the exact mixture of steam and oxygen, heat, catalyst, time of flight, cooking? How do you inject the bio-oil? All of that, that reactor is quite custom and novel. So we're focused on sort of the details of the top two machines. And then the third machine on gasification is a bit more novel, and then has a whole polishing train after it that's totally off the shelf.
Jason Jacobs: And when you look at these three areas, are these three areas that you're committed to? Are these three potential areas? I guess, how are you thinking about them and also where are you in each of them in terms of go-to-market?
Peter Reinhardt: Yeah, we think of this as kind of similar to Tesla's top secret master plan, which you can Google and is obviously public, but I think Tesla at its core realized that the expensive part of what they were doing and the critical thing economically was the batteries, bringing down the cost of the batteries was the whole kitten caboodle. And so when you think then about like, well, what's Tesla's go-to-market strategy? It's basically anything that consumes batteries is fair game. So like you want to put storage batteries in your house, on your wall? Like, great, they'll sell you storage for that. You want to build like grid scale things in Australia to store energy? Great. They'll sell you a boatload of batteries for that. They'll start with premium cars with big batteries and come slowly down market as the battery cost comes down.
But the core thing is like, they're open to selling into whatever market, involves batteries, as long as they're able to achieve the economies of scales on the battery production. This is very similar. The core economy of scale is going to come on the fast pyrolysis production of bio-oil. These are all premium markets, where for various reasons we think we can achieve a premium margin and slowly work down into the lower priced things over time, in the same way that Tesla works down into lower priced vehicles over time. But ultimately the thing that matters is achieving economies of scale on the fast pyrolysis units.
Jason Jacobs: And where are you with that?
Peter Reinhardt: Yeah, so we're doing, over the next six months, we're doing all the sort of final non-site specific, front end engineering for the fast pyrolysis unit. And then the next year, all the site specific, front end engineering and hopefully beginning deployment of the first demonstration plant. On negative emissions, were in the process of doing our first prototype. We got a little bit more on this later in the deck, but we have signed a contract with Stripe. They very graciously made a million dollar purchase in negative emissions of which Charm is providing 250k of that purchase. And we're actually going to go sequester bio-oil. So we're just going through the permitting process, but we've got the bio-oil and we've got the wells identified and so on. So we'll hopefully get a first prototype done there. We've built a few previous prototypes on fast pyrolysis and we built a couple previous prototypes on gasification, but hopefully if you remainder this year, finish out a lot of the final engineering and then start shifting our gears towards meaningful scale demonstration facilities.
Jason Jacobs: And from looking at other, I'd call them thorny tech markets like this which is all new to me, but obviously within that, different markets behave differently, but I'm still kind of unpacking it collectively. That's the disclaimer, but it seems like there's so many different potential gotchas. For example, there might be scarcity of materials on the input side, or there might be geo political risk of those materials, you continuing to have access to those materials because the country that is the biggest producer of them might shut its stores, right? Or there is cost risk that without future regulation that doesn't exist yet, the math will never work. There is capital gap risk of like the first of its kind or kind of in between, too risky for equity, but too early for project finance kind of thing, right?
And so as you, and I'm sure there's a bunch of other risks that I'm... Or there's science risk. Like, will it even work? Right? And I'm sure a bunch of others that I'm missing, but as you look at the landscape here, how would you characterize the risk and the riskiest assumptions that Charm needs to prove out to know that you've got a big business here?
Peter Reinhardt: Yeah. I think if you'd asked me that question two and a half years ago, I would've said that I felt it was almost entirely technical risk. So taking, and this gets super in the weeds, but when you take cellulosic biomass feed stocks, most of the cheap cellulosic biomass feed stocks have high ash content. And so historically, the reason why people haven't really made use of those feed socks is because when you do gasification on them, you end up with a lot of ash slagging inside your reactor vessels. So the question is like, how do you deal with that? Turns out there's been a bunch of research on that. There are ways to avoid it. You change the temperature profile, et cetera. But technical risks like that, that are very in the weeds of like the exact reactor design and the choice of feed stock and so on, the things that enable the economics to work were technical risks that I think we felt acutely maybe two, two and a half years ago.
For the most part, I feel like we've proved out those technical risks and the broader ecosystem has as well. So I no longer... Like, we're shifting gears to like what final engineering drawings kind of look like, because we've built a couple of these machines, we sort of know where we think most of the bodies are buried, and I think we know how to work around them. So I would've said technical risk a couple years ago, but I don't feel that way anymore. Now-
Jason Jacobs: And that's just sort of fast pyrolyzer piece that you're talking about?
Peter Reinhardt: Yeah, for the fast pyrolyzer and for the gasifier.
Jason Jacobs: Okay.
Peter Reinhardt: Yeah.
Jason Jacobs: Okay.
Peter Reinhardt: I now feel like we pretty much know how those are going to work. So now I feel like a lot of the balance of the remaining risk actually is more on the go-to-market side of like, what will the markets for these products look like? So with coronavirus, the steel industry is actually not having a great time, right? There's a lot less construction. There's a lot less building. So is the steel industry going to be eager to go spend money to invest in figuring out how to green itself? Maybe not. Similarly, in the refining and ammonia production world, like those companies aren't doing super great either. A lot of bankruptcies in the oil and gas industry, so on and so forth. So I think I now receive most of the risk on the go-to-market side, and then I think you have to ask yourself like, "Well, what are the main forces at play here?"
And like, "Do I believe that over the next decade governments and companies will feel increasingly that negative emissions, for example, or greening the steel industry or getting away from high carbon intensity fuels, do we think that governments and companies are going to feel like it's an important thing for them to do over the next decade? And do you think they're going to feel like it's more important or less important than now? I think we would both answer like, governments and companies are both going to feel like it's more important. So whatever subsidies and incentives and so forth are in place today, they'll probably get better, they'll probably be more government spending, they'll probably be more policy to support it, et cetera.
So I think on the one hand, in the very short term, when you look at the impacts of the pandemic and other things, yeah, there's definitely go-to-market risk in those areas, but when I look farther out, it's kind of like a tsunami of support. It's like a endless kind of tide rising in support of these sorts of green activities. So anyways, that's where I perceive the biggest risk though, is in bridging the gap to that future where it's obvious that we should buy these things and deploying the first demonstration plans, the first-of-kind, to your point, is this gap in between an angel round and like a successful commercially operating thing, that could be funded through private equity and debt and so on. So there is a funding gap there. And I think in the long term, it's obvious that the go-to-market can work. In the short term of navigating the complexities of the current world, I think that's substantially more complicated.
Jason Jacobs: And how far away is the math working today without those future incentives, whether it be a price on carbon or a subsidy that you were alluding to? And then what are the levers to close that gap? And will that government intervention in some way, be a requirement in order for this to be successful?
Peter Reinhardt: Yeah, we'll maybe just pick on one market here as like an example of the sort of scaling and economics. So focus on just negative emissions for a moment. Our first contract with Stripe is to deliver $250,000 worth of negative emissions at $600 per ton CO2. So I think that's a pretty high price point. That's the price point that's required at the sort of current model that we're delivering on, which I'll explain in a second. In context though, like nature-based emissions, avoidance or reduction might be on the order of like $10 per ton, but direct air capture to geological sequestration right now is on the order of $800 to $1000 a ton. So when we compare to sort of other machine-based or technological solutions to negative emissions, it's actually like 25% cheaper than direct air capture and super critical CO2 injection.
And this is with a very inefficient first model. So what we're doing is we're buying excess capacity from a bio-oil supplier, we're driving it 3000 kilometers by truck, and then we're putting it hopefully into a injection well. You can see all the inefficiencies with that, which is like the bio-oil is over spec, unnecessarily over spec, and therefore more expensive than it needs to be. It's purchased in super low volumes, which means there's no volume discount. It's transported by truck, which means you have to pay a driver, even train would be better. Plus, there's carbon emissions along the way that need to be subtracted from the overall effectiveness. There's no volume discount on the injection side, this is super low volume, et cetera, et cetera, et cetera. So you start stacking up all of those things and very quickly the price of a local deployment with dedicated facilities, higher volume, all that, you start seeing really meaningful cost reductions in there. That's with like very small investment of a first project.
Then you start getting into like, okay, well now let's say, let's go build 10 of these things. So, sorry, this is at $600 a ton, let's say you just take it local, pretty easily like $400 a ton. Let's say you go build 10 of these facilities. Rough model gets you down to about $200 a ton. And let's say you get to gigaton a year scale, you get down to about $50 a ton. That's not the cost, that's with some margin, like a sustainable margin that then can be project financed. So I think when you look at those cost curves, it's starting at a lower point than direct air capture and has basically a similar kind of economies of scale curve, but since it starts lower, it probably ends lower as well. So that's what we're excited about and that's sort of roughly how the economics drives through.
Jason Jacobs: Is there a template and best practices, if you will, for the phasing and staging of building this kind of company from zero?
Peter Reinhardt: There's not a lot of successful examples, to be honest. There's a lot of spectacular failures. Like I mentioned, [Kewer] and Range Fuels before. Those are both companies that basically tried to go from a bench top prototype, maybe something slightly larger to like a full blown, like multi-thousand ton per day facility in a single jump and on crazy timelines. Spectacularly failed. I think SpaceX and Tesla are probably two examples of like large scale infrastructure, hardware deployment, meaningful size pieces of equipment that have succeeded. So I think there's a lot of lessons to be learned there, but yeah, there's not... I mean, I don't know. I'd love to hear if you have ideas on these sorts of things, but there's not a ton of success stories of deploying large scale infrastructure rapidly, quickly, and in the midst of minority process as well.
Jason Jacobs: One that... There was a prior guest on the show, you should talk to Rob Hanson from Monolith Materials.
Peter Reinhardt: That's true. They've done awesome work. Yeah.
Jason Jacobs: And he came from Silicon Valley, right? And he moved his family to get the infrastructure built and then did all-
Peter Reinhardt: Yeah [crosstalk] promising. [inaudible] is another one that's super promising.
Jason Jacobs: Oh yeah. Yeah. Yeah. I've had [Gene] on the show multiple times, now most recently to talk about hydrogen. But what gives you the confidence then to go down this path? I it purely a... I mean, do you view it as kind of, almost like a philanthropic endeavor? Or is it the market opportunity? Like, I guess where is the slider on that scale in terms of duty versus profit?
Peter Reinhardt: Yeah. And I should say I'm also personally deeply invested in Charm. Funded about half of it so far. So the sort of philanthropic question is maybe more apt than it seems. I guess when I look at how industrial processes are deployed at scale, they basically... Sorry, in software, we often talk about sort of an 80/20 rule of like 80% of the returns go to 20%. It's like this very steep power law, where you get like a couple companies that are massively successful and most are not. I actually think that that curve is much more gentle in software than it is in infrastructure, which is to say like, if you look around the world and you're like, the winning process for steel manufacturing was metallurgical coke, how many companies around the world... Like, how many winning processes are there? There's one, right? Then there's this other 7% tiny. And then that's it. There's like one and a half winning processes.
And so when you think then about if you have 400 or 1000 companies trying to go build the next great steel manufacturing process, like there's going to be one winner and the others are going to be entirely zeros. So it's an even more extreme, refined curve than the like power law of returns and software, say basically like 99.9% are going to be zeros and one is going to totally dominate like entire market and the entire deployed infrastructure base. So I think about Charm maybe along the at dimension, which is like, there's a 99.9% chance that something about this won't work economically or something will fail along the way. And for whatever reason, it won't become the dominant process, but there's a 0.01% chance that maybe it works out and it is the dominant path for negative emissions or steel manufacturing or hydrogen production.
And so from my perspective, having had some success with Segment, I'm super risk tolerant in a way that I think others maybe can't be or aren't. And so I'm willing to take on that risk, but I don't see that entirely as philanthropic because I think there's a reasonable shot at that huge outcome. And not only sort of economic results of that, but actually the impact.
Jason Jacobs: So if you were just evaluating, put impact aside and you were just evaluating... If your risk profile is X, and you're looking to find bets that have that risk profile to maximize your financial upside, would you pursue this market? Or would you just keep building software all day long?
Peter Reinhardt: If you're just trying to maximize economics, I think you would probably just go pursue software all day long. And that's in fact exactly what you see a venture does. Even a venture that's focused on cleantech is often actually focused on software systems to manage cleantech systems. There's some venture that, and private equity that enters the realm of like true infrastructure after it's achieved some meaningful scale, at which point most of the meaningful companies are trying to not use balance sheet capital to fund the infrastructure build out anyways. So I think if you just look where the dollars go when they're searching for economic returns, they generally don't go into these areas. And when you look at the companies that have succeeded in these areas, they are often financed by people who've had success or are able to fund it with... Like SpaceX and Tesla, perfect examples of companies that have been funded by someone who had deep pockets and just believed and was willing to make that bet on themselves.
Another example is in the defense industry. I think Trey Stevens mentioned recently to me that no defense company, really successful defense company has been built by anyone with less than a billion dollars in personal capital. So anyways, I think that is the way that a lot of these industries get successfully entered.
Jason Jacobs: And you mentioned that you've done about half the initial investment of Charm personally. How has Charm been funded today? How much capital have you raised? And what profile of investors have you worked with thus far?
Peter Reinhardt: Yeah, we've raised about 3.5 million, almost entirely angel investors who I've worked with previously or who really believe in the mission. And I think that we as a team will figure it out along the way.
Jason Jacobs: And how much of those investors come from more Silicon Valley software DNA versus some of the areas that you're working in with Charm?
Peter Reinhardt: Yeah, I'd say it's mostly Silicon Valley network, although starting to broaden now into other folks that are more familiar with building out infrastructure, cleantech, more deeply, et cetera.
Jason Jacobs: Your perspective is really interesting because there's a lot of Silicon Valley talent who's climate-motivated and trying to figure out how to build companies in climate impactful categories. And then what they're finding is that a lot of the climate innovation, not all of it, but a lot of the meaningful climate innovation is more this kind of infrastructure of moving atoms, tough tech, et cetera. And then when you look at funding sources, there are, funders like the kind that you've raised from that believe in you and will back you no matter what you do, because they know that you're a great entrepreneur and you operate with integrity and things like that. But then I think some of the investors that do this for a living, they do a lot more homework in terms of the actual underlying technology and economics risk and reliance on future policy and things like that.
At the earliest stages of this kind of innovation, how important is it do you think to do kind of the breakthrough energy venture style, exhaustive diligence versus more of the Silicon Valley ethos of just like, if you find a good horse or a good team, then just get them capitalize and let them rip?
Peter Reinhardt: Yeah. I mean, I think if you're a career venture investor who's career is on the line, you're going to be a lot more tentative about making these kinds of investments. And almost all of those people got deeply burned in the 2008, that whole Clean Tech Revolution in BC, where they wrote huge checks. They wrote huge checks to infrastructure companies to try to build out infrastructure again, from balance sheet capital, which was just like not the, was and is not the right way to fund this kind of infrastructure development. So I think a lot of those people got super burned and got super reticent. And again if you're a career VC, you're just not worth taking on that risk. But if you're an angel or you're a wealthy individual, a super angel, if you will, like you're not staking your career or reputation on it, you're willing to take more risk there, and so I think there's different decision making profile. It's not just about the rigor, it's about the capacity for risk.
So anyways, I think a lot of the sort of more institutional VCs and so forth in cleantech are super risk averse actually now, which is a problem. And therefore they're funding a lot more, sort of incremental things or software even if it's guised as being sort of more revolutionary than it is. Anyways, I obviously have a bone to pick with the venture investors in the space.
Jason Jacobs: Are you speaking about the Silicon Valley investors or the cleantech investors?
Peter Reinhardt: Both. They're both fundamentally structured similarly, right? In the sense that they have LPs who are looking for 20% to 40% IRR in terms of rate of return and it's that structure and the fact that it's not their own money that fundamentally creates this structure, which is not ideal where they're imagining putting huge amounts of balance sheet capital to work on building out this infrastructure. I mean, so the key thing I think for founders like myself to do and what I see the really impressive ones doing that I look up to is finding creative ways to raise non-dilutive capital, non-corporate equity to fund things along the way, whether that's incremental revenue and premium markets or grant funding, or project finance debt with things like Generate Capital, so on and so forth. Like, all of these sort of not straight Silicon Valley VC sources of capital, but getting much more creative about where the capital is coming from along the way so that the corporate equity is a 10th or less of what it needed to be in the Clean Tech Revolution of 2008.
Jason Jacobs: How are you thinking about capitalizing Charm as it scales given that it seems like it will need a lot of capital?
Peter Reinhardt: Yeah. It'll need a lot of capital, but actually a lot of investors have been dismissing me for how little corporate equity I think will be required, which is interesting. Because again, these VCs also want to own a lot of a corporate cap table, but yeah, ideally a lot of project finance. Like when you can say, "Okay, here are the contracted revenues with these corporate buyers for negative missions. Here's the contracted costs with farmers for biomass coming in. And here's the construction drawings and permits for us to go execute on building the machine that delivers the two in between. And here's the source of capital, which is like a bank and maybe a little bit of construction equity that we roll in and roll out once construction is done." Those kinds of structures allow you to put a lot of capital to work and in a way that doesn't have to come off the company's balance sheet. So I think that historically is how infrastructure gets built. And there's no reason for us to do it differently.
Jason Jacobs: So what needs to happen between now and then? And how much capital will it take? And what source of capital do you think is the right one?
Peter Reinhardt: Yeah, the key is breaking through from the sort of R&D and first-of-kind demonstration facility into the scalable project finance, the low cost of capital debt, right? And so it's really that first-of-kind plant that is the hardest one to finance because it takes a meaningful amount of capital, but has poor return because it's a demonstration, it's not really set up to be commercially viable, and also is not yet at low enough risk because it's the first-of-kind for debt to come in. So that's the hard circle to square. I think in launching an infrastructure company, I don't think there's a great source of capital there and that's why folks get really creative. And that's what we're planning to do too, in terms of grant funding, NRE, where a customer is paying for a little bit of the development, those sorts of things come in to just blend down the amount of corporate equity needed for that first-of-kind demonstration plan. And then after that, then you start getting into Generate Capital and so on and being able to... That whole outlook of investors around being able to deploy sort of incremental facilities beyond that first demonstration plan.
Jason Jacobs: Uh-huh (affirmative). And I'd be remiss if I didn't ask you by the way. So are you the CEO of Charm?
Peter Reinhardt: I am. Yeah.
Jason Jacobs: And how are you thinking about the future? Is a two company CEO path a long-term answer?
Peter Reinhardt: It seems like it is so far. I think the key really is that my co-founder Kelly really leads and manages the team on a day-to-day basis. So she's our CTO, manages the engineering team, has driven the fabrication and research and development of, alongside Sean the other co-founder of everything that we've been doing to date. So I think teammates is really the key to making something like this work. So huge credit to Kelly.
Jason Jacobs: And did you have more slides by the way? Or did we get through most of what you wanted to cover?
Peter Reinhardt: I had a few. We could compare permanence, which might be interesting to some viewers of just sort of negative emissions and how bio-oil compares there and some of the geology in that. So that's interesting.
Jason Jacobs: Let's do it.
Peter Reinhardt: Cool. And then we can wrap up after that. So this is a cross cutting section of Kansas, going from Southwest to Northeast. And what we're looking at is the cross section of the sedimentary layers in Kansas. And this bottom most, sort of crosshatching is the tectonic plate. It's granite layer. Everything on top of that is sedimentary in various forms. So when we think about doing sequestration of bio-oil in Kansas, for example, there's two layers that are really of note. One is this Hutchinson salt layer. So in this layer we can inject something called a Class V salt cavern, and these salt caverns are constructed by actually pumping fresh water down and dissolving out salt. They pump the brine back up to the surface and then inject the brine even deeper down to dispose of it. So we're literally carving out the cavern inside this salt layer that's 3000 feet down.
And these salt caverns are huge, typical salt cavern could hold five to 10 or more megatons of bio-oil, so vast. Traditionally they've been used to store propane, natural gas, things like that. We also use them in the strategic oil reserve as a bunch of salt caverns that then have oil, crude oil stored in them. So when we talk about it, we're looking at some salt caverns where they're actually being filled back in on purpose to prevent surface collapse. So we'd be anyways injecting by well in to help stabilize them. Another option is for us to inject into an industrial Class I disposal, well, which would be much deeper. So in Kansas, the layer of interest is this Arbuckle layer. This is a dolomite layer, so it's carbonate. And the top 50 feet or so of the Arbuckle layer has oil in it. And so there's a lot of oil extraction in Kansas that targets that layer. Below that is mostly brine.
So we would be injecting into the Arbuckle formation into that more brine layer. And the crazy thing about this is actually when you inject into the Arbuckle, it's actually gravity fed for the most part. So you literally have a hole in the ground and you're pouring stuff in the top and it just kind of... The column pressure is enough to actually inject into the layer. So very little kind of energy consumption to actually drive that injection. So compared to super critical CO2 injection and direct air capture, super critical CO2 is buoyant on water. And so what would happen if it was injected into the Arbuckle for example, is it would float up and basically push against the underside of the containing formation there.
And so the dynamics of that sort of equilibrium then mean you need extensive monitoring near the surface to ensure that the CO2 hasn't found a route up through all these layers to escape. And so that drives the monitoring costs up for CO2 injection quite a lot. By contrast, bio-oil injection or bio-oil is denser than water, so it sinks to the bottom. And then it also has that tendency to autopolymerize. So in other words, it sort of turns into a gummy [inaudible]. And so as we inject over time and as it flows into the formation, it will actually harden and solidify in place. So when we think about permanence and monitoring and those sorts of things, sort of substantially easier than super critical injection. Anyways, we could go down a whole rabbit hole of acidity and well boroughs and all sorts of other things. That might be enough.
Jason Jacobs: What else?
Peter Reinhardt: I think that covers probably most of what we can in half now.
Jason Jacobs: So one question I didn't ask you is just where do you need help? Are there key hires you're trying to make, or certain types of partnerships, anything that viewers who are interested in what you're doing can do to help out Charm Industrial?
Peter Reinhardt: Yeah, appreciate it. All right. We can also subscribe to our newsletter, where we'll post job postings and sort of updates in the future. If you just go to charmindustrial.com. And as of July 2020, we're looking for introductions into the steel industry in particular. So if folks happen to have connections there, we'd be very grateful. You can reach me at peter@charmindustrial.com.
Jason Jacobs: Awesome. Well, Peter, anything I didn't ask you that I should have? Or any parting words for viewers?
Peter Reinhardt: I'm sure there's some question we should have covered, but no, [inaudible].
Jason Jacobs: Great. Well, thanks so much for coming on the show and thought this was great. And I wish you and Charm Industrial team best of luck.
Peter Reinhardt: Thanks so much.
Jason Jacobs: Hey everyone, Jason here. Thanks again for joining me on My Climate Journey. If you'd like to learn more about the journey, you can visit us myclimatejourney.co. Note, that is .co not .com. Someday we'll get the .com, but right now .co. You can also find me on Twitter @jjacobs22, where I would encourage you to share your feedback on the episode or suggestions for future guests you'd like to hear. And before I let you go, if you enjoy the show, please share an episode with a friend or consider leaving a review on iTunes. The lawyers made me say that. Thank you.
