Inside the Funding Rounds: Commonwealth Fusion Systems

18 June 2024

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Since it was founded in 2017, Commonwealth Fusion Systems (CFS) has raised more than US$2 billion in support of its mission to invent ARC, a compact fusion power machine that can be constructed fast and at low cost.

The idea initially arose as a project in a MIT nuclear engineering class taught by Dennis Whyte. The initial idea seemed promising and it continued to be developed over the next few iterations of the class, culminating in the ARC power plant design concept in early 2015. SPARC, currently being built, will be half the size of ARC and a testbed ahead of construction of the full-size, power-producing plant.

The major innovation in the MIT-CFS design is the manufacture and use of high-temperature superconducting magnets, which enable a much stronger magnetic field in a smaller space. The major milestone was the successful test of those magnets in September 2021.

Earlier this year FusionX brought together Jim Matheson from Harvard Business School; CFS co-founder and head of science, Brandon Sorbom; and Katie Rae the CEO & managing partner of The Engine Ventures, to explore Commonwealth Fusion Systems’ path from an MIT class project to fusion energy major.

This is that conversation. It has been an adventure, it would appear.

[Jim Matheson] It’s September 5th 2021, CFS is pursuing the magnet test which, as we now know, exceeded the 20 tesla threshold, creating the most powerful magnetic field of its kind ever created on Earth. That day, that moment, what did it feel like to be there.

[Brandon Sorbom] Definitely a very exciting day. Basically the papers concluded that if we build the magnet, all of the physics will work in SPARC. And, this demonstration was to answer the question: can they build the magnet? It was very exciting, a huge milestone.

Something that actually made it even more exciting is that, given the way the magnet operates, there were some error bars on when [the result] was going to be in. There was a six hour window: it could have been at midnight or it could have been 6 a.m. So for our party we had both dinner and breakfast ready. It turned out the magnet turned on around 4.30 in the morning.

So there was a bunch of people up very early in the morning. Lots of coffee.

[JM] What did it mean to CFS to actually have that be successful?

[BS] The way that we had structured our funding and the way we structured our plan was risk milestones. And that was really the first phase of milestones. In three years, it was the biggest risk the company ran: does this new magnet technology work? It was a really big moment. It was like, “We really need to do this in order to say ‘Okay, now we can build SPARC’”.

[JM] Katie, you were there as well, as an early investor in CFS. How did you view that event, both at the human level but also as an investor and a board member?

[Katie Rae] The company had been set up to get to that event. But it was more than that. It was such a culmination of the many, many years that Dennis [Whyte] and Bob [Mumgaard] and Brandon [Sorbom] and a full team of people had dreamed it was possible.

And it set this milestone that just was so important… The gravity of it wasn’t just like, ‘Oh, the experiment worked’. It was kind of like: ‘Holy crap, we got it right. It worked pretty much how we thought it would work’. And ‘Let’s go, fusion’s coming!’

To see the groundwork that needed to be laid for that, it was a 50-year journey. And the number of supporters that were around, the people that were excited for this moment, was everything. With fusion. people across the industry, across government, students, climate activists… It was just a very exciting moment.

And then there was the business side. Not just the retirement of risk, it was a value creation moment. We’re like ‘Holy smokes, this investment might be worth something’.

And so that was exciting, not just for the money. We knew we were working on something that could have a true long-term impact, a long-term impact on society and the cost of energy and all of those things. It felt really, very real. It was a really proud, exciting moment.

With a very deep pause, and then, ‘Okay, the work’s just beginning’.

[JM] So back in 2015, Brandon and Bob and the team as students at MIT started this class project with Dennis that ultimately becomes SPARC. And soon after The Engine’s getting going and you start getting chatter around ‘the CFS thing’ that’s coming out of the PSFC. What was your first response to that?

[Katie Rae] In 2017, Engine Ventures started making our first investments. We’d spun out of MIT, really under the mission of finding incredibly impactful global companies that can make big changes. And so, of course, Commonwealth Fusion was a dead center to something like that.

It was certainly on the larger end of what was possible with a $200 million venture fund. But Bob had been introduced to me by Yet-Ming Chiang–I funded one of his companies called Form Energy.

Yet-Ming Chiang called me one night, “Hey, Katie, I’m..I’m…” I don’t know, he was halfway around Iceland or somewhere with Bob. “…you got to meet Bob. He’s coming back. You got to meet him.” And I was like, “Okay…” And so, Ally Yost – now a senior member of Commonwealth Fusion Systems but an associate at The Engine at that time – and I started talking to Bob.

Now Bob doesn’t roll in with a small deck. He says, “I got a 700-page deck. Any question you have, I have the exact numbers behind it”. Ally and I kind of scratched our heads when Bob left. We were like, okay, super serious about this, we’re not messing around. And we dug in a bit more, and I was like, “Oh, there’s been a lot of diligence done on this”. And Ally and I joked that that diligence would fill the room if you printed it out.

We’d worked very closely with Vinod Khosla, who’d done an incredible amount of diligence with multiple teams. We were looking at this from very different angles. If that had not been done, we couldn’t have made this investment. But we got super-excited. And when we get excited at The Engine… Ann DeWitt and I were arm wrestling over, ‘ If we do this deal, who gets to write the book?’

But we also had to be sober about the amount of capital that the first round was supposed to be. We thought the first milestone wasn’t achievable with that, but we thought it was a good start. You know, most people are too optimistic in the early stages. So we had to be pretty sober that it would be much more than that, and then multiple billions of dollars until we were at a commercial point.

But some of my board members at the time, like Jeremy Wertheimer, who’s an MIT Alum, Bob had given us a tour of the PSFC, and I looked at Jeremy, I said, “Do you think this is our mission at The Engine?” And he laughed. He said, “It couldn’t be more magnificent.” And I was like, “OK”. And we went ahead.

Let me tell you, too, about my first tour with Brandon in the basement of MIT. He said, “Let me show you how we really made this thing.” The first thing I thought was, ” Who’s futon is that?” People were sleeping in this basement because there was so much work to be done.

[JM] What was it like inside the company preparing for the financing and trying to overcome this symmetric information problem: you all believed in what was possible, but you have to go out and convince them about this mission: it’ll take a crazy long time, lots of things you’ve got to overcome… How did you do that with people like Eni who came in in a really important way. How did you then [think] that this is something a European power company ought to get involved in?

[Brandon S.] There are a lot of challenges here to deal with. First and foremost, this is something that isn’t really taught in school, not even to a specialized graduate, and the background of most people is you have a barrier, you have a big barrier. So we have to make a bunch of material to be able to talk to both those people, and diligence teams.

With the technical experts we’re able to go really, really deep into any question they want to ask us. So that’s the 700-page pitch deck. But then we also need to be able to present the information to somebody who hasn’t been studying this for 30 years, to be able to really have that dynamic range, to go back and forth, and say, “okay, here’s the high level of how this works.” And then at the interface with the diligence team, have the investor base be able to say “Okay, I understand this enough at a high level, I can kind of see what all the nuances are”.

And not just from the technical side, but also like And not just from the technical side, but also like ‘what’s the whole plan?’ It’s one thing to say, right now we’re building SPARC and it’s going to get us to commercially relevant energy. But past that, like ‘what’s the plan?’, and actually spelling out the first power plant and what’s the next power plant after that, and… So, really going into both the technical side and the planning side, and putting together our diligence and approaching it from a pedagogical standpoint.

[Eni] were really great partners, and I’ve really had a lot of fun through the diligence process, they asked lots of great questions. We learned through this whole process. You can really tell a great investor by the questions that they ask. I would get calls at like midnight and the sort of questions they’d ask could be very esoteric. I’d pick up the ‘phone and it’d be “Can you explain H-modes to me?” and I would have a midnight conversation about H-modes.

[JM] One of the things that you articulate well is the road map: ‘a lot of things to do, but we know where we’re going and the risks and how we’re going to retire them…’ that’s really important.

So eventually, you raise $115 million in the Series A, more than target. And then there’s an A2. So what was the thinking around the A2 and sequencing the capital raising?

[KR] A lot of people think of this as a quote ‘a moon shot’. I don’t buy that. This was a very well-thought-out engineering project that we were going to go through a very serious set of milestones.

It’s still that. It’s not like we’ve been pivoting around for the last five years, six years, whatever we’re at. And that’s a very important concept to understand: it is real milestones and real progress, so the board can really understand how we’re doing.

And it’s not that curveballs weren’t thrown at this team, but I think it became very clear partway through the first set of milestones, could we go faster? Could fusion get there faster? If you’re an entrepreneur, and your board’s asking you that question, that’s a really good sign of the excitement level. And so when that question was put forth, we also thought they did need more money, it was because of the excitement.

[JM] So Brandon, if you and Bob and the team were thinking about this, how did you decide to take more money? And there’s always this tension of, I want to avoid dilution, I want to get as far as I can. How did you balance that?

[BS] I think it really boils down to speed, what we thought was needed to actually be able to take things forward, to either buy down this faster, or actually buy down time. It was great having our investors come to us and say, “If we gave you more money, what could you do?” And so we actually did think hard about it. Not just stepping back, but actually really thinking hard about change of direction.

And so we came up with a list of things that we said, “Okay, the Series A was really to get to the magnet”. It was a little bit enlarged, we were trying to work on SPARC, but it was really focused on the magnet. And we had enough to get to the magnet. But for the A2, we were able to do things, for example, like the site in Devens. That was definitely not funded by the Series A.

[KR] I remember that first board meeting when you had the spot where SPARC was going to be. And there’s basically wires coming out of the ground. There’s mud everywhere. That was a seminal moment because suddenly we’re like, wow, when people see this, it’s real.

[JM] Katie, how important was the tape offering in underwriting the Series A? Were investors hoping to get all the way to fusion but seeing a really valuable tape company, a valuable base camp on the radar?

[KR] Yeah, I mean, we see this a lot, right? It makes you feel good as an investor. Oh, there’s a base camp. ‘We wouldn’t lose all our money, it’s probably not paying 100x we thought we’d get but…’ But I think it is a psychological crutch, it’s not a bad thing. And I think different investors want that. But for the most part, people have signed up for this to get to fusion.

[JM] So, Brandon, we get the test in September 2021. We close the Series B later that year. So, clearly, there’s a lot going on. You’re not waiting to do the tape test to get to the Series B. How are you managing existing and new investors that whole time, the narrative?

[BS] We were talking to people much before [the Series B]. I think one of the things that goes hand in hand to my comments about the diligence is that what we found with a lot of our investors are very long-term, Some of the the Series B folks started talking to me before the Series A and said, “Well, this isn’t a good fit right now, but we really like you guys. I think the technology is really cool, but it’s just not the right size for us. You know, maybe talk to us more”.

We’re continually educating, right? It wasn’t just like ‘call me in two years’. We were having calls sometimes like every couple of months. Having these long-term relationships is really important.

So, I guess after the magnet test, it sort of felt like things just moved with all these people we’d been talking to and having conversations for the last couple of years and educating them.

There was another big piece of it. The peer review and how they’re not just getting something that we put out. We thought the best way was to go and talk to anybody in the community, whether it’s the physics community or the magnet community, and say, ‘Okay, like, what does this look like?’ Really stuff about the test. So, I think conversations just started to accelerate.

[KR] Can I add one more thing? It was intentional, right? Let’s go back to the engineering mindset. We have a moment when the magnet gets flipped on and its ‘let’s hope it works’. I mean, you basically knew it was going to work. But, you are a relationship-based team. So, for many years, it was ‘we’re going to get to this magnet’. And then, you would say, ‘we’re halfway to the magnet’, ‘we’re three-quarters of the way to the magnet’, ‘the magnet’s going to turn on’. And, you built so much credibility by that. I just think that builds a lot of trust with a lot of people.

[JM] Let’s look ahead, you raised that at a really exquisite time in late ‘20 and 21 but if you look ahead and think about the macro environment, how do you see the future capital stack?

[BS] Yeah. So, I think, you know, for the next. So, our next milestone is SPARC, turning on SPARC. And then, after that, we’re going to build ARC. So, you know, we’re looking at the next big capital, they’re large projects. Potentially, project finance in the future. We’re looking at a lot of good institutional investors.

[KR] It’s an incredibly important time, and anything that’s difficult, I guess, you just expect that there are health declines. But this is a ridiculous moment. [CFS] is going to raise more money. I think every single month they’ll do something more, and not just on the engineering side now. Now they’ve built an entire business team. They understand what the market looks like. Investors love that because they now know how you will return capital.

Funding

© FusionXInvest 2024. All figures are in US Dollars.