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  • Writer's pictureArnab Sinha

Case Study: Investing in a Direct-Air-Capture (DAC) can give investors up to 200X return.



Direct-Air-Capture (DAC) Snapshot

  1. Direct Air Capture is the process of removing carbon dioxide from the atmosphere using technology and putting it away for thousands or if possible, millions of years.

  2. Direct-Air-Capture (DAC) is a complementary solution[1], that works alongside other removal & reduction solutions (CCUS & Reforestation etc.) & makes up for their limitations — promising us net zero.

  3. The International Energy Agency’s Net Zero Scenario predicts that a colossal 980 million tonnes of DAC (Almost 1 billion) will be required to repair our climate within the next 30 years[2].

  4. BCG estimates an annual demand of durable Carbon Dioxide Removal (CDR) including DAC of ~40–200 Mt CO2 in 2030, growing to ~80–900 Mt CO2 in 2040. This translates into a ~$10 billion–$40 billion market opportunity in 2030, with an ample runway to reach ~$20 billion–$135 billion in 2040[3]

  5. There will be a huge supply demand gap for DAC credits. It has been projected that even ambitious DAC deployment cannot meet demand[4].

  6. Not technology development to lower costs, but deployment of DAC is necessary to reduce costs in decades to come.


Subject Company


Novonanmek Material Sciences Private Limited (Hereinafter referred to as Novonanmek), a 4-year-old Direct-Air-Capture (DAC) startup is seeking an investment of US$ 5 Million.


Novonanmek Material Sciences Private Limited, India’s first Direct-Air-Capture (DAC) company, which seamlessly integrates solid calcium oxide (CaO) pellets with a liquid sodium hydroxide (NaOH) solution. This innovative technology enables the capture of CO₂ from both the atmosphere and point sources, employing a twin-cycle operation that ensures continuous sorbent recirculation, thereby minimizing waste and environmental impact. The synergistic interaction between CaO and NaOH within a contactor-less design ensures efficient CO₂ capture and conversion into stable calcium carbonate (CaCO₃). This approach represents a significant advancement in the field of carbon capture, offering a promising solution to address emissions on a large scale while minimizing environmental consequences.

The salient features of this technology that makes it unique are listed below.


  1. Closed-Loop Efficiency: This is a closed-loop operation, ensuring the continuous circulation and utilization of sorbents, minimizing waste and environmental impact.

  2. win-Cycle Operation: The technology operates on a twin-cycle principle. The liquid sorbent, NaOH, cycles alongside other chemicals, while calcium carbonate alternates between CaCO₃ and CaO states. Sustainability and efficiency go hand in hand.

  3. Hybrid Sorbent Synergy: At its core, this technology harnesses the powerful synergy between a solid sorbent, calcium oxide (CaO), and a liquid sorbent, aqueous sodium hydroxide (NaOH). Together, they create a dynamic hybrid system that captures CO₂ and converts it into stable calcium carbonate (CaCO₃).

  4. Contactor-less Design: A meticulously designed pelletization process transforms CaO into high-surface-area pellets. These pellets not only facilitate CO₂ adsorption but also act as the contactor where critical reactions unfold. No need for a separate contactor, reducing complexity.


Novonanmek’s Valuation

An investment is preceded by the process of Valuation.We propose a new method to value Novonanmek.


The valuation method used to arrive at the valuation of Novonanmek is referred to as a “Market Comparable Valuation” or “Market Approach.” In a Market Comparable Valuation, the value of the subject company (in this case Novonanmek) is estimated by comparing it to similar companies in the market that have been sold or publicly traded. This method assumes that the market price of similar companies reflects the fair value of the subject company.

The method described here for valuing Novonanmek Material Sciences Private Limited, a 4-year-old startup based on the exit valuation of Carbon Engineering, a 15-year-old similar startup is derived from fundamental principles of financial analysis and valuation. It combines elements of benchmarking, delta factor analysis, and discounted cash flow (DCF) techniques to estimate the value of the younger startup. Delta Factor is the factor determining the degree of difference between the benchmark company and the subject start-up.


Our benchmark: Acquisition of Carbon Engineering, a 15-year-old Direct-Air-Capture (DAC) company at a valuation of US$ 1.1 Billion.


Carbon Engineering’s acquisition by Occidental Petroleum[6] for a staggering 1.1 billion USD demonstrates the immense potential of the DAC industry. Here is why this acquisition should capture the attention of investors:


  • Proven Success: Carbon Engineering has been at the forefront of DAC technology for 15 years. Their acquisition indicates that DAC is a viable, scalable, and profitable solution for carbon capture.

  • Mainstream Recognition: The fact that a major corporation was willing to invest such a substantial sum in a DAC company is a clear sign of mainstream recognition. Investors should take note of this growing acceptance.

  • Market Demand: The demand for carbon capture solutions is rapidly increasing as governments and corporations worldwide commit to carbon neutrality. Investing in a DAC startup positions you at the heart of this growing market.


After Carbon Engineering has been acquired at US$ 1.1 Billion, looking at the scenario, there is hardly any chance that a working DAC technology would be sold at a price lower than US$ 1.1 Billion.


Delta Factor

The Delta Factor(D) is the factor accounting for the degree of difference between the benchmark company and the subject start-up. Even if two startups operate in the same industry, they may have different technologies, market positions, growth prospects, and risks. The delta factor quantifies how closely the subject company deviates from the benchmark company, allowing for a more accurate estimation of value. Two perfectly same company have a delta factor of 1. If they are 40% different, there comes into the picture two delta factors, Delta (Lower), Dl = 1–0.4 = 0.6 and Delta (Upper), Du = 1+0.4 = 1.4. Both account for 40% deviation from the benchmark company.


What We Foresee?

  1. Shift from Nature-Based to Technology-Based Solutions: As the clock ticks and nature-based carbon removal solutions gradually lose their feasibility, businesses will increasingly turn to DAC technology. The speed and efficacy of DAC will become essential when time is of the essence, outpacing slower natural processes.

  2. Ownership Over Removal Credits: With a long-term supply-demand gap and the resulting rise in DAC removal credit prices, businesses will grow reluctant to purchase these credits. Instead, they will opt for in-house DAC facilities to gain greater control over the cost and quality of the credits they generate.

  3. Business Dominance in DAC Facilities: The landscape of DAC facilities will evolve, shifting from a select few companies to a scenario where existing businesses will own over 95% of these facilities. This democratization of DAC technology will enable a wider array of industries to participate.

  4. Mainstream Sustainable DAC Technologies: A limited number, perhaps three, of sustainable DAC technologies will emerge as the industry standards, used in over 95% of DAC facilities. Less efficient alternatives are likely to phase out in this competitive market.

  5. Captive DAC Facilities: Just as captive power plants are common today, there will be captive DAC facilities integrated into larger industrial operations, ensuring a more efficient and controlled carbon capture process.

  6. DAC as a Thriving Industry: DAC will blossom into a fully-fledged industry, comparable in significance to power, coal, oil, and steel. It will contribute significantly to the global effort to combat climate change.

  7. Government Support: Governments will step in to either establish or fund DAC facilities, recognizing the critical role of this technology in carbon reduction efforts.

  8. Rising Demand for DAC: A growing demand-supply gap for DAC credits will drive prices skyward, making them economically unviable for many businesses. This heightened demand for DAC solutions will be due to the inadequacy of nature-based methods as time runs out.

  9. Transition from Credits to Technologies: Corporations and emitters with substantial carbon footprints will pivot away from removal credits due to prohibitive costs. Instead, they will seek technologies and stakes in DAC companies to directly address their emissions, making DAC technologies the new industry hotspots.

  10. Booming DAC Market Value: The value of DAC technologies and companies will skyrocket, potentially reaching US $5–10 billion or more within the next 5–10 years, making it a lucrative sector for investment and innovation.

  11. Collaborative DAC Ventures: Businesses, corporations, and emitters will collaborate to purchase DAC technologies and jointly establish DAC facilities, fostering a more sustainable and cost-effective approach to carbon capture.

  12. End of Carbon Removal Credit Marketplaces: Traditional carbon removal credit marketplaces may ultimately become obsolete as businesses choose to eliminate their emissions through owning DAC facilities to remove their own emissions, rather than outsourcing carbon removal at exorbitant costs.

  13. Survival of Naturally Occurring Materials: DAC technologies and companies utilizing naturally occurring materials for carbon capture will endure, emphasizing sustainability and efficiency in their processes.

Assumptions for Valuation of Novonanmek

  1. Our valuation approach is been intentionally conservative to guard against overly optimistic expectations. We have utilized conservative assumptions to maintain a realistic and grounded valuation.

  2. The cornerstone of our valuation approach is the historical success of Carbon Engineering, a 15-year-old startup operating in the same industry in Canada. This startup achieved a highly successful exit event, which serves as a reference point for assessing potential value within our market. This historical precedent provides valuable insights into the industry’s capacity for delivering substantial returns. The exit of Carbon Engineering underscores the validation of market demand and the feasibility of successful exits within our industry. This validation reinforces the soundness of our valuation approach, as it aligns with real-world market dynamics.

  3. Benchmark Valuation: The benchmark valuation is taken as $1.1 billion USD. This is the known valuation of the 15-year-old startup. The assumption here is that this valuation is a reasonable reference point for estimating the value of your 4-year-old startup.

  4. Our valuation methodology relies on the assumption that Novonanmek will follow a trajectory akin to that of Carbon Engineering, albeit with age-related adjustments. This assumption is central to our analysis, allowing us to extrapolate from the recent success story of Carbon Engineering while accounting for the unique characteristics of Novonanmek.

  5. The DCF method, even with one data point, has been considered because it provides a structured approach to estimate the present value of a significant future cash flow event, such as an exit. By applying a discount rate that accounts for risk and the time value of money, DCF quantifies the current worth of that event in today’s terms. This approach is akin to a rational investor’s perspective, valuing the anticipated windfall of a successful exit based on its potential to generate returns in the present, making it a practical and relevant method for assessing the startup’s value. We have used “delta Factor,” scenario analysis, conservatism, transparency, and sensitivity analysis to collectively strengthen the reliability of our DCF-based valuation.

  6. Delta Factor: The method assumes a delta factor. For this particular valuation delta factor of 0.6 and 1.4 have been considered assuming Novonanmek deviates from Carbon Engineering by 40% in terms of technology, market, potential, or other relevant factors. The delta factor quantifies how closely the subject company deviates from the benchmark company, allowing for a more accurate estimation of value. Two perfectly same company have a delta factor of 1. If they are 40% different, there comes into the picture two delta factors, Delta (Lower), Dl = 1–0.4 = 0.6 and Delta (Upper), Du = 1+0.4 = 1.4. Both account for 40% deviation from the benchmark company.

  7. Technological Relevance: It assumes that the technology or solution offered by both startups has remained relevant and in demand over the years, supporting growth.

  8. Discount Rate: A discount rate of 12% is used in the calculation. This rate reflects the time value of money and the risk associated with the investment. The assumption is that this discount rate is appropriate for adjusting the benchmark valuation to its value when the benchmark company was 4 years old.

  9. Consistent Growth Rate: The method assumes that the growth rate in the benchmark startup’s valuation remained relatively consistent over the specified period (from the 4th year to the 15th year). This assumption allows for the application of the discount rate in reverse to estimate the value when the startup was 4 years old.

  10. Number of Years: The method assumes an 11-year difference between the current valuation of the 15-year-old startup and the estimated valuation when it was 4 years old. This represents the period for which you are estimating the change in valuation.

  11. Linear difference Adjustment: The method uses a linear adjustment based on the delta factor. It assumes that the effect of dissimilarity is proportional and linear, meaning that a 40% dissimilarity, positive or negative, results in a 40% adjustment to the benchmark valuation.

  12. No Consideration of Other Factors: The method focuses primarily on the delta factor and the discount rate as the main drivers of the valuation estimate. It does not explicitly account for other factors that may have influenced the actual growth of the 15-year-old startup’s valuation.

  13. We emphasize the substantial growth potential of Novonanmek as it matures and advances toward a similar exit event in the future. This potential growth is a key driver of our valuation assessment

  14. Acknowledging the inherent risks associated with early-stage startups, we have taken these into account in our valuation analysis. We have developed strategies to mitigate these risks, ensuring a balanced and realistic assessment.

Justifications for 12% Discount Rate

  1. Sustainability Focus: Novonanmek operates in the field of Direct Air Capture (DAC), which focuses on addressing pressing environmental challenges, making it a strategic player in the sustainability landscape4. The chosen 12% discount rate aligns with Novonanmek’s commitment to long-term environmental impact.

  2. Environmental and ESG Trends: Novonanmek aligns with Environmental, Social, and Governance (ESG) trends, appealing to investors committed to sustainability

  3. Established Technology: Novonanmek’s technology is an established technology based on calcium looping which is established chemistry. The process is more or less similar to that of Carbon Engineering3, the benchmark company. Novonanmek’s process is also similar to that of Heirloom’s, another US based company in the Direct-Air-Capture (DAC) space5 with established technology. Novonanmek’s technology involves mineralization which Bill Gates calls “gold standard” in carbon removal.

  4. High Tailwind: Increasing global focus on environmental sustainability, particularly the urgency surrounding carbon emissions reduction & removal and achieving net-zero targets6.

  5. Involvement of Large Multinational Corporations[6,7,8]: The involvement of the world’s largest companies in Direct Air Capture (DAC) initiatives, by either pre-purchasing DAC removal credits or investing to scale up DAC technology, reflects the level of interest and investment by industry leaders in the technology, thereby reducing risk to a very large extent.

  6. Long-Term Potential[2,4]: DAC projects have long-term sustainability goals, necessitating a lower discount rate to capture sustained growth and returns over a multi-decade horizon. Long term potential indicates a reduced level of risk from an investor’s perspective.

  7. Long term Supply-Demand Gap [4,8]: The expectation of a growing supply-demand gap for DAC removal credits underscores the increasing need for our technology. This market dynamic supports our choice of a 12% discount rate. Demand-supply gap also indicates a reduced level of risk from an investor’s perspective.

  8. Market Demand [4,8]: Huge Market demand of DAC removal credits is commensurate with a discount rate of 12% and again presents a lower level of risk from investment perspective.

  9. Innovation and Technology Advancement: Novonanmek represents a significant technological advancement in the DAC field, contributing to a lower discount rate.

  10. Market Sentiment [3,4,9]: The discount rate of 12% considers market sentiment and investor expectations that prioritize long-term sustainability and growth potential over immediate returns.

  11. Intellectual Property Protection: Novonanmek has filed a provisional patent to protect its technology.

Calculation of Novonanmek’s Value

  1. Benchmark Value: This is the known valuation of Carbon Engineering at the time of its exit, which is $1.1 billion USD. This serves as a benchmark or reference point for comparison.

  2. Delta Factor (0.6 and 1.4): The delta factor is a way to account for how closely Novonanmek resembles or deviates from Carbon Engineering in terms of technology, market, potential, or other relevant factors. In this case, it is assumed that Novonanmek has deviated by 40% from the benchmark startup. Thus, the Delta Factors considered for this calculation will be Dl = 0.6 and Du = 1.4 as both indicate a deviation of 40% from the benchmark company, Carbon Engineering.

  3. Discount Rate (12%): The discount rate is the rate used to calculate the present value of future cash flows or, in this case, the present value of the benchmark startup’s valuation at a specific point in the past. It reflects the time value of money and the risk associated with the investment. Here, a discount rate of 12% is used.

  4. Number of Years (11): This represents the number of years ago you are trying to estimate the valuation for. In this case, you are estimating the value of Carbon Engineering when it was 4 years old, which is an 11-year difference.

  5. Benchmark Value: $1.1 billion USD.

Applying the Delta Factors Dl & Du: Multiply the benchmark value by the two delta factors to account for the fact that Novonanmek has deviated by 40% from Carbon Engineering.

$1.1 billion USD × Dl = $1.1 billion USD × 0.6 = $660 million USD

$1.1 billion USD × Du = $1.1 billion USD × 1.4 = $1540 million USD

Present Value calculation

Based on delta factor Dl = 0.6

$1.1 billion USD × 0.6 = $660 million USD

Assuming Novonanmek will be valued US$ 660 Million (applying delta factor of Dl = 0.6) after 11 years from now, we discount the $660 million USD back to the 4th year using the discount rate of 12% and the number of years (11).

Present Value = $660 million USD / (1 + 0.12) ^11

Present Value of Novonanmek ≈ $189.73 million USD


Based on delta factor of Du = 1.4

$1.1 billion USD × 1.4 = $1540 million USD

Assuming Novonanmek will be valued US$ 1540 Million (applying delta factor of ) after 11 years from now, we discount the 1540 million USD back to the 4th year using the discount rate of 12% and the number of years (11).

Present Value = $1540 million USD / (1 + 0.12) ^11

Present Value of Novonanmek≈ $442.71 million USD


Investment & Return Scenarios

We have considered the conservative scenario above where the valuation of Novonanmek does not go above US$ 200 Million. We have analyzed the scenarios from a US$ 10 Million valuation to US$ 200 Million.


Conclusion

As depicted in the analysis in section 4, investment in Direct-Air-Capture (DAC) is a highly lucrative investment and has the potential to return up to 200X the investment amount.


References

  1. Realmonte, G., Drouet, L., Gambhir, A. et al. An inter-model assessment of the role of direct air capture in deep mitigation pathways. Nat Commun 10, 3277 (2019)

  2. Direct Air Capture — A Key Technology for Net Zero https://iea.blob.core.windows.net/assets/78633715-15c0-44e1-81df-41123c556d57/DirectAirCapture_Akeytechnologyfornetzero.pdf

  3. The Boston Consulting Group — The Time for Carbon Removal Has Come (https://web-assets.bcg.com/67/f7/0f41cd074a66b49cdb8baf5e59c0/bcg-the-time-for-carbon-removal-has-come-sep-2023-r.pdf)

  4. Occidental’s Big Buy May Change Course of $150 Billion Market (https://about.bnef.com/blog/occidentals-big-buy-may-change-course-of-150-billion-market/)

  5. https://www.novonanmek.com/

  6. Amazon follows Microsoft, investing big in carbon capture https://www.cnbc.com/2023/09/12/amazon-follows-microsoft-investing-big-in-carbon-capture.html

  7. McKinsey partners with Stripe, Alphabet, Shopify, and Meta on $925 million carbon removal commitment (https://www.mckinsey.com/about-us/new-at-mckinsey-blog/mckinsey-partners-with-stripe-alphabet-shopify-and-meta-on-$925-million-carbon-removal-commitment)

  8. JPMorgan Chase seeks to scale investment in emerging carbon removal technologies, announces agreements intended to durably remove and store 800,000 tons of carbon (https://www.jpmorganchase.com/news-stories/jpmorgan-chase-seeks-to-scale-investment-in-emerging-carbon-removal-technologies)

  9. The Boston Consulting Group — Shifting the Direct-Air-Capture (DAC) paradigm https://www.bcg.com/publications/2023/solving-direct-air-carbon-capture-challenge




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