How ocean startups are making waves and money

An interview with Steven Fox, a Partner at the Propeller VC fund, a dedicated $100M fund focused on the ocean-climate nexus

The ocean covers 70% of Earth but doesn’t get as much attention as it deserves. Propeller VC raised a ~$100M fund to change that and find disruptive startups that can grow into titans in the new blue economy. This week, Steven Fox, a Partner at Propeller VC, shares his perspective on what is under-hyped and over-hyped in ocean tech, compelling examples of strong unit economics, challenges to watch out for, and where the exit opportunities are for founders. Read on to learn more about this emerging category, and where to find the hottest startups.

1. Where are the most attractive markets in ocean tech?

Let’s think about this from first principles. The ocean covers 70% of the Earth's surface, and is essential to life on Earth, influencing climate and weather patterns, the carbon cycle, and the water cycle. It plays a critical role in absorbing 90%+ of the excess heat trapped in the earth due to global warming and absorbs approximately 25% of human-caused carbon dioxide emissions annually.

Our focus at Propeller is to work with the ocean to unlock key markets:

• Established $100B+ markets going through transformation such as energy procurement, maritime, and defense. Within energy procurement, offshore wind is a huge one. We are currently at about 70 gigawatts of production, and it’s expected to reach 490 gigawatts globally by 2035. That’s explosive growth, and it’s not speculative - the steel and cement are already bought and paid for.

• Markets that are having a step change in growth, such as aquaculture and ocean coastal data. Aquaculture is a ~$300B market today, and it was about half that size back in 2015. As aquaculture becomes a substantial part of global food production, it’s poised for another jump in growth.

• Markets that have potential exponential growth functions in them. We’ve taken bets in emerging areas like ocean carbon dioxide removal (CDR). Marine CDR is still small with tens of millions of dollars worth of contracts from early customers like Microsoft, Frontier, and Google, but we expect larger buyers to enter soon.

2. Who do you think are the customers for ocean coastal data?

There are several key customer categories for ocean and coastal data:

• Governments: They are the largest buyers and use data for defense, weather monitoring, water quality regulation, and regulatory compliance.

• Corporates and Commodity Traders: They are interested in how ocean conditions influence atmospheric change.

• Banks and Insurers: They procure ocean data to assess risk for real assets.

• Science and Nonprofits: There has been ~$2 billion put towards tracking ocean data for research and policy purposes.

3. Where do you think we are in the hype cycle for ocean tech? Are we in the beginning, or is it peaking?

I wrote my first check into this space over 15 years ago, and I still think we are very very early into this space. There have been pockets of hype, like marine CDR, which was in vogue a couple of years ago, and aquaculture, which has had moments of interest. But overall, I would say we’re still early in the hype cycle.

One indicator is generalist venture activity. While there is some interest from generalist funds, many are still in the early learning stages. Another indicator is how diffuse the markets are. Ocean tech is everywhere, so the numbers can look big, but real concentrations of value are only starting to emerge in specific geographies. Europe is quickly becoming the center for maritime decarbonization since ships sailing to European ports will now be required to pay a combined carbon emissions tax of $3.6 billion. The FuelEU Maritime Regulation came into force this year as part of the EU's Fit for 55 initiative and requires large vessels to gradually reduce their emissions intensity from marine fuels from 2% by 2025 to 80% by 2050. The EU ETS (the world’s largest compliance carbon market) extended the market to include maritime emissions.

4. What about overhyped areas in ocean tech?

Battery applications in the ocean are overhyped. People want to electrify ocean assets, but there are challenges: 1) saltwater and batteries don’t mix well, and 2) if a battery breaks down in the middle of the ocean, it’s hard to replace. Ocean electrification requires systems that can withstand harsh conditions. We have an investment in Navier which is doing autonomous electric transit vehicles. We think they came up with an elegant way around that problem through hydrofoiling that lifts their systems out of the water. That is one of the best use cases of electrification of mobility we have seen.

5. On the flip side, what do you think is under-hyped?

Resilience and infrastructure fragility are under-hyped. The most painful climate-induced events - wildfires, flooding, and storms - cause billions of dollars in damage annually. There’s an opportunity to innovate beyond sandbags and bulkheads. We’re investing heavily in this category because we think it will emerge as one of the most tangible, meaningful climate asset classes in the coming years. Data will play a big role in predicting these extreme weather events. For example, the Woods Hole Oceanographic Institution is working on air-sea interaction sampling to better understand how the ocean interacts with the atmosphere. Right now, only 200 to 300 buoys are collecting this data, but scaling up to thousands can help predict how bad a hurricane will be or what rainfall will look like in a crop field.

7. Let’s shift to the value chain in ocean tech. Where do you see the greatest value creation opportunities?

One area that’s top of mind is steel and cement infrastructure for offshore wind, coastal resilience, and defense. There are billions of dollars of steel and cement going into the ocean. We aren’t hoping that the infrastructure is going in, it’s planned, paid for, and banked. It’s a government-led market where governments in major governments around the world like the United States, Europe, and China are putting their feet on the pedal to increase the speed at which this will be deployed. However supporting infrastructure—bankability, insurance, operations, and labor—is lagging behind. Folks are investing millions of dollars to put down undersea fiber-optic internet cable networks without knowing who will put the cables in the water. I’m excited by startups that are focused on supporting this infrastructure build out whether that is optimizing operations or labor.

8. What’s the most compelling unit economics you’ve seen in the ocean sector?

I am bullish on marine CDR. There is direct air capture… biochar… but most folks are leaving out two key pieces: transportation and storage. There’s the capturing of carbon, but then you have to move the carbon and then store it. I worked on a whitepaper with colleagues at different think tanks that looked at how China is approaching carbon capture and utilization. China is investing millions of dollars in technologies like direct air capture but is pouring billions of dollars into pipelines and storage.

What I love about our marine carbon capture startups is their unit economics. They treat the ocean like an open loop system where their technology interacts with the ocean directly and uses its natural pumping mechanism to transport and store carbon dioxide. So they don’t need to worry about transportation or storage costs like other carbon removal players do. One of our portfolio companies, Calcarea, captures carbon on maritime ships as the ships cross the ocean and pump out carbon dioxide. Their solution captures the carbon dioxide from the flue stack, binds it with limestone pebbles, and then drops the pebbles into the ocean where the carbon dioxide is stored permanently. By the time the boat arrives at the port, it already reduced 90% of its emissions and the company doesn’t have to pay as much carbon taxes if it’s docked in Europe. Calcarea doesn’t have to worry about transportation and storage costs because they’re doing it in a way that mimics the natural cycle of the ocean over time.

9. Do you have any rocket ships you would want folks to be aware of? Rocket ships from a fundamentals standpoint: strong top-line revenue growth, economics, and path to exit.

Within our portfolio, the two I would point to right away are CarbonRun and Navier. CarbonRun just announced a $25M offtake agreement with Frontier doing riverine ocean alkalinity enhancement carbon dioxide removal. For a dozen years, these scientists in Canada were restoring rivers that were too acidic by introducing base compounds to reduce the PH levels so salmons could reinhabit the rivers again. These scientists then realized they could do this same process while also capturing carbon. I anticipate that they will experience a big jump in revenue this year, and there are indicators for accelerated growth the year after that. They now need to take their methodology to the most acidic rivers around the world. Navier is the electric autonomous vehicle startup that I mentioned earlier. They are at a cool inflection point in making and selling ships in the Bay Area. The CEO describes them as electric flying boats. Normally boats have to come out of the water and down again, which causes an uncomfortable experience - even giving some people sea sickness. She took out all those unpleasantries. Our CEO does this thing where she will fill up a glass of red wine to the tippy top and put it on the boat, and you’ll see it not spill at all because the boat is flying above the waves. Mobility and electrification just make so much sense because there’s no drag. You are above the water and get better performance and distance. She’s also introducing things like full autonomy. It’s one of the first boats I’ve seen that can dock itself autonomously. It’s an impressive, high growth company.

10. Can you share some challenges that founders should be aware of before starting an ocean startup?

First and foremost, engineering in the ocean is tough. It’s a brutal environment to work in and destroys many things. Even founders who want to build software that requires a probe into the ocean need to take this challenge very seriously. Customer sets are diffuse and global, which makes it hard to scale beyond a beachhead market. Take shipping right? There are centers of excellence all around the world - Los Angeles, Greece, Singapore, and more. It’s not like you can go to New York and most of the bankers there. You have to work with your global rolodex to build out business development opportunities. Another challenge is the lack of experienced ocean tech veterans. Unlike the broader climate tech trend that has veterans from clean tech 1.0, ocean tech is newer. You are pioneering a new space, so you have to educate investors, talent, and all kinds of folks. Talent is scarce.

11. How do you think about exits in ocean tech?

Part of our investment thesis is to invest in companies with clear paths to acquisition. We spend a lot of time with potential acquirers in the space. I recently went to the American Association of Port Administrators Conference which brings together the CEOs of all major ports around the world. There weren’t many founders there, but I went to learn from these potential customers and acquirers of our businesses. Given our 12-year returns timeline expectation for our fund, we like to think through what our 8 to 12-year exit window can be for the investment and who the potential acquirer could be. Yes, a handful will hopefully hit the IPO curve, but a lot of them will become a strategic acquisition. I’ve been an LP in several funds, mostly in climate technology, and the ones that have done the best were heavy on the M&A or invested in Tesla in 2014.

12. Many of our readers come from a business background. Do you have ideas for how these folks can get into this space?

We run the Ocean MBA program annually with MIT and Woods Hole. It’s free, and we even offer stipends for long distance attendees. If you’re interested in ocean climate tech or even noodling on an idea that is ocean adjacent, we encourage you to apply. We also have a ton of portfolio companies that have hired post-MBA business professionals and are eager for great talent*.

*If you would like to connect with Steven to work at one of their portfolio companies, shoot us an e-mail address with a blurb at thegigaton@gmail.com, and we will do our best to connect you. He has graciously offered to meet with relevant folks.

And that’s a wrap! One quick announcement below from one of our readers. If you are hiring, looking for a co-founder, or recruiting, please reach out at thegigaton@gmail.com and we will consider getting your ask featured in our upcoming article.

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