Welcome back to Deep Tech Catalyst, the channel by The Scenarionist where science meets venture!
Today, we are thrilled to welcome Chris Burk, Techno-economics Specialist.
In our chat, we explored how Deep Tech founders can incorporate techno-economic analysis early in the development process, and why this strategic integration can ensure that their innovative solution is commercially viable.
In other words, how to formulate data-driven assumptions right from the beginning of a technology-intensive startup to guide crucial decisions and meet investor expectations.
Here are the key themes covered:
🎯 The Importance of Techno-economic Analysis (TEA)
🧮 Components of Technoeconomic Models
📊 TEA vs Market Analysis
⏳ Early Application and Strategic Planning
🔬 A Case Study
🛠️ How to Approach a TEA Model
🎧 Prefer to Listen?
KEY INSIGHTS FROM THE EPISODE
What is Techno-economic Analysis (TEA)?
Techno-economic analysis (TEA), often referred to as techno-economic modeling, uses analytical modeling to examine how technical and financial parameters influence economic benefit. A key distinction between a techno-economic model and a financial model is that it includes both technical and financial inputs.
Key Components of a Techno-economic Model
INPUTS
Technical aspects of the technology might include measurements taken in the lab, such as yields, raw material ratios, temperatures, pressures, and engineering assumptions—these are the technical inputs.
Financial inputs might include prices, cost correlations, and discount rates, among others.
OUTPUTS
The outputs of such a model are typically the capital costs, operating costs, and revenue at a commercial scale, which can be combined in various ways to estimate profits or return on investment.
Capital costs are one-time expenses incurred at the beginning of a project. For example, when building a plant or installing equipment.
Operating costs, on the other hand, are recurring annual expenses needed to operate the process. These include costs for raw materials, utilities like electricity, gas, and water, labor, waste treatment, and overhead costs associated with labor.
Lastly, revenue is typically the value of the product produced multiplied by the quantity produced.
Technoeconomic modeling is valuable from the very beginning—for instance when a startup emerges from a university lab with an economically viable idea. It makes sense to translate this idea into numbers to see if the numbers work out.
TEA vs Market Analysis
Market analysis and techno-economic analysis are 2 distinct but interrelated areas that can inform each other.
Market analysis focuses on the size of the market and the pricing of the product, potentially using a demand curve to illustrate price versus market size.
In a techno-economic model, where you estimate revenue, the product price is derived from this demand curve, and the feasible size of the plant you plan to build is also determined by the market study.
For example, your techno-economic model may indicate that you can produce your product at a certain price point, and your market analysis might then determine that at this price, only a specific segment of the market is accessible.
This information could dictate the size of the plant necessary.
Additionally, if future improvements lower the production costs, a larger market might become viable.
Showing your TEA to Investors
These analyses are fundamentally different but complementary. Regarding engaging with investors, it is crucial to present a model that they can comprehend.
An advantage of utilizing Excel for early-stage companies is its familiarity, as many investors understand how Excel works.
If you have a well-constructed model, it’s not just abstract numbers on a slide—it’s a clear, interactive tool that investors can explore to understand the potential financial outcomes of your venture.
Strategic Planning and Timing
From the very beginning, if you're working on something in the lab and it appears to have the potential to be economically viable, it's prudent to consider developing a simple techno-economic model before even thinking about raising funds.
This isn't just about determining if the project will be profitable, but also if it will be commercially viable in the real world, meaning that it could be genuinely useful.
Therefore, it makes sense to incorporate techno-economic modeling from the outset.
Just as you wouldn't delay understanding the thermodynamics of your project, you shouldn't postpone understanding its economic viability. This can guide your project development and ensure it's aligned with real-world commercial potential and investor expectations.
Case Study: Applying TEA in the Early Stages
Here’s a case study of a biotech company specializing in metabolic engineering technology.
They could engineer microbes to enhance their performance, so techno-economic modeling was integral from the start.
Initially, the company used a basic techno-economic model to explore various microbes and potential products, making broad assumptions due to limited data on performance metrics.
The model included both upstream processing (fermentation) and downstream processing (purification).
Key performance metrics for fermentation included:
the rate, titer, and yield—factors like how long fermentation takes
how much product is produced
how efficiently raw materials are converted.
After conducting tests to refine these metrics, they began analyzing the market for one of their potential products, the amino acid alanine.
They needed to decide whether to build a production facility or outsource production.
Initially, the margins made building their own facility seem uneconomical. However, after identifying a much larger market, the scale of production changed the financial outlook.
A larger fermenter, for example, doesn't cost twice as much as a smaller one—cost increases are not linear but scale at about a 1.6 multiple. This insight into economies of scale led them to decide that constructing a larger facility was financially viable.
The model also included sensitivity analysis on various parameters to identify those with the highest degree of uncertainty, such as the cost of glucose or the yield of the fermentation process.
These insights guided their R&D efforts, focusing on parameters that could significantly impact financial outcomes.
This case demonstrates how techno-economic models can guide strategic decisions, from R&D targeting to capital investments and market entry strategies.
How to Approach a Techno-economic Model
When you first build your model, start with readily available data, such as cost correlations from literature for equipment costs or raw material prices from online sources.
Alternatively, reviewing industry reports that compile data on manufacturing costs and market prices can also be insightful.
Sometimes, for setting B2B pricing strategies, it can be beneficial to directly engage with the industry. Asking potential clients how much they currently pay for similar devices and conducting surveys about potential pricing for your new product can be practical approaches.
This workflow gives you a preliminary estimate to work from.
Once you have a basic model, you can perform sensitivity analyses or consult published techno-economic analyses to see which costs are most significant—this helps prioritize where to focus your efforts in obtaining quotes.
So, you might only seek detailed quotes for the major cost components, which saves time and effort.
Before you go, don’t miss our latest Deep Tech Briefing!
Beyond keeping you ahead of the curve, Deep Tech Briefing is designed to help you understand deep tech’s most important trends, technologies, startups, and capital moves, what they mean for the future and the market, and how to capitalize on change.
