Hydrogen fuel cells are finally attracting VC interest

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The hydrogen fuel cell system in the ferry was built by a four-person technology company in Silicon Valley called Zero Emission Industries. The company is led by Joe Pratt, who has spent the last 20 years studying and researching hydrogen in labs and universities before launching his first company in 2018.

But despite its central location in the heart of the U.S.’s tech ecosystem, ZEI struggled to win the hearts of venture capitalists since its launch. Its first four years were funded by two government grants and less than $1 million in convertible notes from angel investors.

“We’ve been talking with investors off and on since the beginning,” says John Motlow, executive vice president of ZEI. While there was interest, the responses were the same, he says: We don’t know anything about hydrogen or maritime, and we’re not really sure why this is a big deal.

Flash forward to 2022, and the difference is night and day: There’s a commercial ferry boat in the water, Toyota is investing heavily in hydrogen fuel cell development—including in boats, there are VCs solely focused on green tech, and bank divisions set aside to research advancements in hydrogen. ZEI is raising a Series A round it expects to close in a couple months and is enjoying a “huge amount of interest,” Motlow says.

I sat down, virtually, with both Pratt and Motlow to discuss how this technology works, raising capital in an industry investors don’t understand, and what the future of maritime may hold. (Some portions of this Q&A have been edited or shortened for clarity and/or brevity.)

Courtesy of SWITCH Maritime

Term Sheet: Joe, you’ve spent so much of your career on the research side. What was the impetus for launching a tech company?

Pratt: While working at Sandia National Labs, and doing demonstrations and studies that I was a part of, I [spoke with] a lot of external stakeholders, both on the technical side and on the operator side—especially the customer base for marine fuel cell technology. And every time that I would talk to them about hydrogen fuel cells and the benefits that they have compared to diesel engines and conventional power systems, they got really excited. And they would ask me: Well, where can I get one? And I’d have to say, well, sorry, nobody’s making one today. And so after going through that time after time, and then through work that I did in the studies myself and my colleagues at Sandia, we found that there’s a really good business case for this technology. So putting those two things together, it was a pretty easy decision to say, Alright, there’s a real desire in the market, the systems out there, and it makes a lot of sense. So let’s go give it a shot.

What are the benefits to hydrogen fuel cell technology?

Pratt: You know, for operators, what it really comes down to is total cost of ownership. One, it’s a solid state power system. So, like a battery, it doesn’t have moving parts—there are very few in a fuel cell. So right away, you see decreased maintenance costs, increased reliability, decreased downtime—those are all economic factors for the operator. 

And then you just look at the cost of ownership in terms of the fuel, and we’re seeing really drastic decreases in the cost of hydrogen as the cost of renewable electricity drops further and further. So making green hydrogen from electrolysis with solar or wind power, in my view, will be cheaper than fossil fuels very quickly. So if you factor that into the life of a 20 or 30-year-old vessel, you pretty quickly get to a lower total cost of ownership with hydrogen fuel cells than than diesel engines. 

And then the last thing, which again comes down to a cost equation, is that there are increasingly stringent regulations on running diesel engines because of the air pollution requirements. So every single 5-10 years there’s a new regulation that comes out, and a lot of operators are finding that they have to replace their engines, even if they’re working perfectly fine from their standpoint, just because they don’t meet the current air emissions regulations. A great example of that is the Commercial Harbor Craft regulation that was just passed in California that is forcing owners to do just that. 

What are some of the other power alternatives right now?

Pratt: If we take a step backward, hydrogen is the building block of all of these decarbonized fuels. To make ammonia or methanol or renewable diesel or whatnot, you have to start with hydrogen. They take the hydrogen and then they add things to it, like carbon, or nitrogen or oxygen to make these other fuels from. So all of them are really just hydrogen carriers. 

Hydrogen—you can make it anywhere. You can make it from renewable energy. You don’t need to drill it out of the ground somewhere and then transport it over the ocean and then refine it and all that. You can take a region or a country or a jurisdiction that is currently importing oil and using that for their fuel, and make and install renewable energy generation infrastructure, and create their own fuel right there. You can actually go from being an energy importer to an energy exporter in some cases. Only recently has the general public sort of hit upon this idea of energy independence through hydrogen. The situation in Ukraine right now is a great example of the importance of energy independence and the leverage that other countries have over others when they control their energy supplies. 

Why have you decided to focus on ships in particular?

Pratt: The international shipping community contributes around 3% of the world’s global greenhouse gas emissions. It has been traditionally one of the highest emitters of sulfur oxides, nitrogen oxides and other air pollution. And those air pollution emissions are usually centered around poor areas, which is commonly where sort of the disadvantaged communities are located. So there’s a disproportionate impact to those folks. Cleaning up maritime is a pretty important part of the whole solution for air pollution and greenhouse gas emissions. 

Tell us about the significant milestone in February—launching the first commercial vessel powered by hydrogen fuel cells.

Pratt: The Sea Change is the world’s first commercial hydrogen fuel cell battery project that had its genesis back in 2015, when I was still at Sandia National Labs and started trying to find out if it was even possible to power vessels like this with hydrogen fuel cells. That study showed that it was definitely possible, and we started working on building it after I left the lab. So it’s been almost four years since we started the company and working on that project was our first one… We’re excited to see the technology on the water. That’s kind of the first tangible proof that hydrogen fuel cells work in a real commercial marine environment. 

What are next steps?

Pratt: We’ve learned a ton through the project and are bringing that learning to develop Version 2 of our power system that is much better—all around it’s lighter, less expensive, smaller, more power, and a more integrated system that is easier for shipyards to install than what’s on the Sea Change right now. And also [the fueling system is unique]. It was designed from the very beginning that the Sea Change does not need any shore-based infrastructure to fuel. If you follow any of the work around hydrogen fueling stations for vehicles, you know that those costs somewhere between $2-4 million. What we’ve decided from the beginning is we want to eliminate a requirement to have a fueling station. 

The Sea Change has the version 1 of a product that enables it to be fueled anywhere from any truck that shows up at the dock. So all the equipment is on the vessel. When the truck shows up that has hydrogen, the hose comes off the vessel, connects to the truck, it fuels, and both can go on their way. That’s the way that a lot of vessels today fuel with diesel fuel: The diesel truck shows up and just feels the boat and then it’s gone. 

What is the cost of building a hydrogen-powered ferry versus a standard vessel?

Pratt: Every ferry is different. You can have a ferry that costs $2 million and one that cost $20 million. In terms of putting on a hydrogen fuel cell system instead of a diesel engine right now, the capital costs for a hydrogen fuel cell system is higher than a diesel engine. There’s variation there too, but we can say it’s around four times the cost today for a typical system on both sides. That’s something we’re working really hard to bring down. We’re on a pathway to bring that down to 2x the cost of diesel in the near term. And like I said, with the cost of hydrogen dropping every day, then we’re confident that the total cost of ownership is actually much lower than that of a diesel engine despite a little bit higher upfront capital.

Who will you clients be?

Motlow: It’s fleet owners as well as owner operators, municipalities—maritime touches a lot of different areas. There’s a major push to create a huge amount of offshore wind. There’s going to be a lot of offshore construction for renewable energy that, in many cases, having a zero-emission supply chain and vessels and support vessels is a requirement. So we’re seeing a lot of momentum picking up in those areas, because that’s going to start happening really quickly here.

Are you thinking about other vessels beyond ferries?

Pratt: Oh, absolutely. Ferries are a small subset of the total vessel potential. The maritime market for hydrogen is enormous. When we talk about commercial harbor craft alone, you have ferries, you have tourist boats, you have lots of tug boats and work boats, push boats, crew transfer vessels, offshore supply vessels. You start getting out of the harbor now into offshore supply, wind farm support. There are very large push boats that go on the inland waterways, the rivers in the U.S. Those are fantastic opportunities for hydrogen fuel cell power consuming enormous amounts of hydrogen, which again, further helps to reduce the cost. I would say ferries are almost just a drop in the bucket here in terms of where the technology can be applied and where we’re seeing interest.

How have you been able to fund your technology development so far?

Pratt: Primarily through grant funding. For the Sea Change vessel, we received a $3 million grant from the California Air Resources Board. We have another project that started about a year ago that received $2 million from the California Energy Commission, and then we had some angel investment up-front.

How much have raised from angel investors in particular?

Motlow: We’ve raised $900,000 in convertible notes… We are raising our Series A [now] and we’re seeing a huge amount of interest. 

Did you try to raise money from venture capitalists prior to now, or is that not a route you wanted to take?

Motlow: We’ve been talking with investors off and on since the beginning, and it has been very interesting seeing how the perception of hydrogen has shifted just in the last four years—and really in the last two. In 2018, we had a lot of initial conversations, letting people know what we’re doing, right after we won the grant. And people were interested, but [said they] don’t know anything about hydrogen, and don’t know anything about maritime, and were not really sure why this is a big deal and why [we were] focused on this. And now it’s completely night and day different where there are hydrogen-specific VCs with hydrogen theses and hydrogen desks at major banks… 

I think there’s still quite a bit in education that needs to be done. But Joe and the guys who came before him have been working on this technology for decades. It’s really well understood. There’s a lot of those key lessons and familiarity that still needs to get disseminated across institutional investors and the general public.

When do you expect to finish raising the Series A round?

Motlow: We’re targeting closing that within the next couple of months.

Thanks for reading. See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

– Voyager Innovations, a Manila-based technology company that owns PayMaya and Maya Bank, raised $210 million in funding led by SIG Venture Capital and was joined by investors including EDBI, First Pacific Company, PLDT, KKR, Tencent, International Finance Corporation, and two funds managed by the IFC. 

– Newfront, a San Francisco-based insurance brokerage platform, raised $200 million in funding led by the Growth Equity business within Goldman Sachs Asset Management and B Capital and was joined by investors including Founders Fund, Meritech Capital, Y Combinator, Index Ventures, Bloomberg Beta, XYZ, Susa Ventures, Pruven, Propel, Vetamer, Altai, Doordash CEO Tony Xu, and others. 

– Pax8, a Denver-based cloud services provider for small businesses, raised $185 million in funding led by SoftBank Vision Fund and was joined by investors including Liberty Global Ventures, Catalyst Investors, Sageview Capital, and Blue Cloud Ventures. 

– Genies, an avatar technology company to create and sell online characters, raised $150 million in funding led by Silver Lake and was joined by investors including BOND, NEA, and Tamarack Global. 

– Observe.AI, a San Francisco-based workforce platform for contact centers, raised $125 million in Series C funding led by SoftBank Vision Fund 2 and was joined by investors including Zoom, Menlo Ventures, Nexus Ventures, Scale Ventures, Emergent Ventures, NGP Capital, Steadview Ventures, and Next47 Ventures. 

– Natural Fiber Welding, a Peoria, Ill.-based sustainable materials startup, raised $85 million in funding led by Evolution VC Partners and was joined by investors including Tattarang, Lewis & Clark AgriFood, Collaborative Fund, AiiM Partners, Engine No.1, Raga Partners, Tidal Impact, Scrum Ventures, Gaingels, BMW i Ventures, Ralph Lauren Corporation, Advantage Capital, and Central Illinois Angels.

– IMMO, a London-based residential investment platform, raised $75 million in Series B funding led by Oak HC/FT and was joined by investors including Moore Speciality Credit, FinTech Collective, and Talis Capital.

– Trace, an Austin-based sports game film platform, raised $47 million in Series C funding led by Pelion Venture Partners and was joined by investors including Lakestar, Toba Capital, and NextGen VP.

– Jobox, a Palo Alto-based infrastructure provider to home service marketplaces and retailers, raised $42 million in Series B funding led by General Catalyst and was joined by investors including Resolute VC, NNS, Expanding Capital, and Star Farm Ventures founder Joey Low.

– Real, a New York-based mental wellness platform, raised $37 million in Series B funding led by Owl Ventures.

– Quiq, a Bozeman, Mont.-based A.I. conversational platform for brands, raised $25 million in Series C funding led by Baird Capital and was joined by investors including Venrock, Foundry Group, and Next Frontier Capital. 

– Terradepth, an Austin-based ocean data and dissemination company, raised $20 million in funding co-led by Giant Ventures and Nimble Ventures. 

– EQL, a Melbourne, Australia-based launch platform for retailers, raised AUD $25 million ($18.6 million) in funding from investors including Insight Partners and AirTree Ventures. 

– Sydecar, a San Francisco-based deal execution platform for venture capital investing, raised $8.3 million in seed funding led by Deciens Capital and was joined by investors including Pipeline Capital Partners, Anthemis Group, and Hustle Fund VC.

– Glow Labs, a loyalty rewards software on the blockchain, raised $4.15 million in seed funding led by Harlem Capital and was joined by investors including Forerunner Ventures, Female Founders Fund, Red Beard Ventures, and Human Ventures. 

– Swoops, an NFT basketball game, raised $3.5 million in funding led by Courtside Ventures and Alpaca VC and was joined by investors including Gary Vaynerchuk, CEO of DraftKings Jason Robins, Slow Ventures, Red Beard Ventures, Future Perfect, Magdalena Kala, Jon Oringer’s Pareto Holdings, and NBA Boston Celtics and Philadelphia 76ers ownership. 

– TellTail, a Boston-based platform for pet breeders, raised $3.4 million in seed funding led by General Catalyst and was joined by investors including The Companion Fund and Scribble Ventures. 

– Lucky, a New York and Miami-based omnichannel commerce tech company, raised $3 million in seed funding led by Unusual Ventures and was joined by investors including Plug and Play Ventures and angels such as Alloy’s Sara Du, Pixlee’s Kyle Wong, and NBA’s Wesley Matthews. 

– Connectd, a London-based network for early-stage businesses, raised $1.6 million in seed funding from investors including Freeserve’s founding executive Rob Wilmot, CEO of Anker Capital Jonas Anker, angel Gareth Hawkins, Deep North’s Aleks and Dejan Subosic, and former head of equity research at HSBC Steve Scruton. 

PRIVATE EQUITY

– New Mountain Capital acquired a majority investment in Citrin Cooperman, a Norwalk, Conn.-based advisory, tax and assurance firm. Financial terms were not disclosed.  

– Protegis Fire & Safety, backed by Align Capital Partners, acquired PDS Systems, a Columbus, Ohio-based fire detection and protection technology company. Financial terms were not disclosed.

EXITS

– Imprivata, backed by Thoma Bravo, acquired SecureLink, an Austin-based critical access management company. Per terms of the deal, Vista’s Endeavor Fund exited its position in SecureLink. Financial terms were not disclosed. 

– A One Rock Capital Partners affiliate agreed to acquire Prefere Resins Group, an Erkner, Germany-based phenolic, specialty urea, and melamine resins manufacturer from Silverfleet Capital. Financial terms were not disclosed. 

OTHER

– Ultrahuman acquired LazyCo, a Bangalore, India-based tech wearable company. Financial terms were not disclosed. 

– Valtech acquired The Berndt Group, a Baltimore-based customer experience agency. Financial terms were not disclosed. 

IPOS 

– OFBusiness, a Gurugram, India-based raw materials provider, is in talks with banks to raise as much as $2 billion for an initial public offering in India, according to Bloomberg.

PEOPLE

– AlleyCorp, a New York-based venture fund, hired Marshall Porter as partner and Jay Hass as partner and CFO. Formerly, Porter was with GymPass and Hass was with RRE Ventures. 

– Citigroup, a New York-based investment bank and financial services corporation, hired Geoff Feldkamp and Gregor Feige as managing directors, according to Bloomberg. Formerly, Feldkamp was with Barclays and Feige was with JPMorgan.

– KKR, a New York-based investment firm, hired Pamela Alexander as managing director and head of corporate citizenship. Formerly, she was with Ford Motor Company.  

– Neotribe Ventures, a Menlo Park-based venture capital firm, promoted Neeraj Hablani to partner.

– Piva Capital, a San Francisco-based venture capital fund, hired Elizabeth Lowery as senior advisor and Daryl Kennedy as esg and investor relations manager. Formerly, Lowery was with TPG and Kennedy was with The Investment Association.