Are Fusion Startups Trading Equity for Government Grants? A Worthwhile Exchange?

The U.S. government’s fluctuating involvement in the fusion power sector seems to have entered a more committed phase as of recent developments.

Helion and Commonwealth Fusion Systems (CFS) have been awarded a total of $260 million by the Department of Commerce under the CHIPS and Science Act. This 2022 legislation supports domestic semiconductor development, aiding the creation of advanced semiconductors essential for the operation of their reactors. Helion received $175 million, while CFS garnered $85 million.

However, these funds come with conditions; both companies will provide the government with nonvoting shares in exchange for the financial support. This marks a significant moment for the fusion sector, which is finally capturing the government’s interest, although perhaps not in the way industry leaders had hoped.

Traditionally, government backing for startups meant that funding was nondilutive, allowing existing investors to maintain their ownership stakes while increasing the company’s available capital. Investors appreciated these arrangements for enhancing their companies’ financial health without additional costs. The government’s investment was aimed at fostering American innovation without direct participation in the success of selected companies.

The previous administration shifted focus towards changing this approach.

Minor Awards with Major Implications?

For both Helion and CFS, this latest funding is relatively small compared to their total fundraising efforts, with CFS having raised around $4 billion and Helion approximately $3.2 billion. The significance of the awards may lie more in the signal they send: after years of reduced funding for fusion, the U.S. government appears ready to reinvest.

Fusion power, which mimics the sun’s energy production by fusing atoms, represents a costly venture. It demands advanced materials, intricate computer modeling, and sophisticated manufacturing techniques. Over the past decade, considerable private investment—over $14 billion—has flowed into the sector as numerous companies work to establish functioning power plants.

According to the Fusion Industry Association, however, investments in the U.S. are insufficient to keep pace with international competitors. The association urged the government last year to provide a one-time capital infusion of $10 billion, $5.4 billion of which would support fusion startups.

“Other countries are aggressively advancing their commercial fusion sectors, investing heavily in state-supported initiatives to lead in fusion technology,” a CFS representative noted. “The proposed $10 billion is designed to bolster the research infrastructure outlined in the DOE’s Fusion Roadmap and to bolster the U.S. fusion industry against competitors like China.”

Recently, the federal funding approach has been slow and sporadic. The Biden administration initiated the Milestone-Based Fusion Development Program, a plan offering funds as companies achieve technical milestones. However, funding in the early years was minimal, and subsequent awards, while larger, still fell short of industry demands.

Now, with a collective $260 million awarded to two companies, it seems that efforts to influence government support are beginning to pay off, although the funds are sourced from the Commerce Department rather than the desired research budget and involve equity terms.

The Fusion Industry Association had not anticipated the need to negotiate equity stakes in exchange for funding, according to sources familiar with the discussions. Nevertheless, Helion indicated that the government will receive about $175 million in nonvoting equity reflecting its Series G valuation of $15.5 billion—translating to roughly a 1% stake. The stake size for CFS remains unspecified, as the company has not disclosed its most recent valuation.

“This investment structure has become increasingly prevalent in significant U.S. government funding initiatives,” said David Kirtley, co-founder and CEO of Helion. “It aligns the interests of Helion with U.S. taxpayers in our journey toward commercial success.”

A CFS spokesperson affirmed this viewpoint, stating, “This U.S. equity stake allows taxpayers to share in our commercial growth in exchange for investing in crucial research and development to foster an American fusion industry.”

Not the Only Ones

Helion and CFS are among several companies that have exchanged federal investments for equity stakes.

For instance, MP Materials, a supplier of critical minerals, provided the government with a 15% stake in return for a $400 million investment along with a $150 million loan and profit-sharing agreements. Similarly, USA Rare Earth gave a 10% stake for a $277 million award and a $1.3 billion loan. Additionally, Intel transformed an $8.9 billion government award into a roughly 10% equity stake. Various instances illustrate this trend.

Elsewhere, Proxima Fusion, a German fusion startup, revealed that both the German government and the European Union have provided equity investments, alongside funding from government-backed ventures.

Not every fusion startup has offered equity in exchange for federal support; firms like Thea Energy and Avalanche Energy have received government funding without relinquishing ownership. Inertia Enterprises, which collaborates with the Lawrence Livermore National Laboratory on fusion technology, also maintains its equity position.

While only a few startups have engaged in such equity arrangements, it could establish a precedent for the industry.

By investing directly in fusion startups, current administrations are emphasizing that fusion technology is strategically crucial for the U.S. This could enhance investor confidence, but it may also create hesitancy as venture capitalists weigh the implications of potential dilution against the benefits of partnership. Furthermore, issues surrounding priority in funding scenarios or project closure could arise.

Despite the billions raised by the fusion industry recently, significant capital will be needed to actualize its ambitious goals. Federal assistance, once a straightforward path to scaling operations, has now become more intricate. The effectiveness of these new arrangements remains to be seen.