Raising Money for the New Biofuels: A Digest special report

Capital. In biofuels, it means raising, raising, raising. Raise a round, toot some oxygen, then go raise some more.

Raise at base camp, raise in the Death Zone, reach the Summit, and raise again.

Who are the go-to people and organizations — who’s in the know?

It may feel like an endless slog up Everest. For every biofuels critics who cries “where are the gallons?” there’s a CEO who cries “where are the dollars?”

Equity, debt, grants, monetizable tax credits, loan guarantees. Money for research, money for the lab, money for the university, money for the pilot, money for a demonstration – above all, money for full-scale commercialization.

We say that biofuels are “capital-intensive,” mainly to be polite. It’s like saying that Genghis Khan, Alexander the Great or Attila the Hun had “land interests”.

A hot biofuels technology has a virtually insatiable appetite for capital. Only the winnowed out come cheap – and not always those. The winners? They’ll raise billions in capital before the race is done.

Put it this way. How much capital would you need to build enough capacity to equal just 30 percent of the current demand for fossil petroleum, and it cost you $8 per gallon for the capacity?

Um, $3.2 trillion. That would be roughly halfway between the GDP of France, and Germany. Even if 30% of that is equity, that’s more than $1 trillion.

Enough to make even a really tough $20 million Series C venture round look like – well, grains of sand on a wide, wide beach.

In today’s Digest we look at some of the the hottest ways to raise money. And, at Advanced Biofuels Markets, we’ll bring together the most active investors and hottest projects. For mutual opportunity, and to limn the new landscape brought on by disruptive technologies and disruptive times.

R&D grants and co-investments.

The lowest-cost capital you will ever find is the kind from WAshington, DC, in the form of R&D grants. These days, anything that has a really meaningful number is going to require a co-investment on your part, but that can often take the form of existing assets or operating costs that you can dedicate to a new project (e.g. salaries for research teams). It’s called “cost share,” and the government likes to tout how much private capital is “leveraged by our investment in R&D”.

A major FOA (or “funding opportunity announcement,” for those who prefer speaking English, or lack fluency in Acronymish) is expected from the DOE next year to advance algae as a feedstock – in particular, it is expected to push for higher yields.

In addition to DOE grants through the Office of Biomass, there are funding opportunities through the Department of Defense, USDA, and occasionally other departments invest in the sector, including the Department of Transportation. Don’t forget that the CIA has a venture capital arm, and that several states have aggressive investment programs.

Canada, several EU countries, and Australia have substantial R&D programs underway – for example, Australia’s CSIRO funds numerous research projects, and there is direct funding available through state government grant programs as well. SDTC is the investment vehicle in Canada, and has an authorized funding authority in the hundreds of millions.

This year at Advanced Biofuels Markets, we’ll have Valerie Reed, acting head of the Biomass Program at the Department of Energy, on stage on October 30th – and we hope to learn more about upcoming FOAs.

Loan guarantees

Ready for a commercial-scale demonstration or, even more critically, a first commercial project? You are probably thinking about, searching for, or going through the tough process of obtaining a loan guarantee. In these post-Solyndra times, there’s not much on offer at DOE, but the US Department of Agriculture still has substantial loan guarantee authority through its B&I program.

The available amounts may be smaller – if you are looking for $100 million in LGs, that window has passed for now – and the restrictions may feel arcane. But a good loan guarantee can reduce your cost of capital – on the portion covered by the guarantee – by 1000 basis points, or 10 percent, sometimes more.

Keep in mind that a loan guarantee is not a loan – you still have to find a lender, and not all of them qualify for the USDA program or make loans that conform with USDA restrictions. Having said that, there is some life in the bond market for both the guaranteed and unguaranteed portions of a loan.

At ABM, John May of Stern Brothers and Mark Reidy of Mintz Levin will join us in San Francisco, and Mark will be moderating the panel on October 30th, featuring DOE, USDA and the US Navy.

From the USDA, the Secretary’s senior advisor on biofuels, Sarah Bittleman, will be joining us on stage, also on October 30th.

The Defense Production Act

Yes, Virginia, the US government, under the Defense Production Act, can invest directly in defense-critical industries – and advanced drop-in biofuels qualify – if the President finds that either needed materials are either unavailable or available at unaffordable costs because manufacturing has not reached economies of scale.

The US Navy and the Dod’s Defense Production Act office are planning – and attempting to fund through shared DOE/USDA/USN commitments – up to $500 million in direct investment in military aviation biofuels. The goal? To create production at a scale that will allow the military to buy drop-in advanced biofuels on a cost-competitive basis with fossil petroleum. The program would require a minimum 50% cost-share from industry.

There’s been a ton of grief up on Capitol Hill this year over the funding of the program, and we’ll have to see what happens when the Navy’s 2013 budget is finalized. If not 2013, count on the Navy to seek funding for 2014 if President Obama is re-elected. If Romney is elected, there will certainly be a change at the Secretary of the Navy level and that may well brings changing winds at the Pentagon.

To help us navigate the state of play with the DPA, as well as an update on the Navy’s testing and certification efforts for advanced biofuels, the USN’s Director of Operational Energy, Chris Tindal, will join us on stage on October 30th in San Francisco.

Venture capital and sovereign wealth

Whether you are raising capital for a seed round, Series A or Series E – venture capital, though harder than ever to find, is an incredible source of early-stage finance, as well as providing an incredible set of advisors who can connect a venture with strategic partners, downstream customers, upstream feedstock providers, as well as help navigate the financial path from formation to exit.

These days, some of the most attractive pools of capital being raised are in the form of sovereign investment funds that are co-managed by a venture capital partner. A good, vibrant example for industrial biotech is the Malaysian Life Sciences Fund – which has invested in companies like Cobalt and LanzaTech.

There are likely to be (understandable) restrictions on the geographies of investment – sovereign funds in Brazil or Malaysia are intended to benefit, well, Brazil and Malaysia. But they can also tap a company into a rich vein of support – from establishing offices to signing feedstock contracts.

And, though the invested amounts are smaller and there are more VC firms in an average round, per million invested, than before – venture capital remains a sought-after early stage source. Even though some people carp about the valuations that VC give, or ask – in Digestville, we see everyone always carping about valuations.

At ABM, we’ll be joined onstage on October 30th by Roger Wyse, managing director at Burrill & Co and a long-time advisor to the Malaysian government on industrial biotech.

Hybrid venture capital and multi-class investment – Capricorn Investment Group

Larger amounts, and later rounds, require unusual vehicles that have access to a big pool of managed funds. That’s where hybrid, multi-class firms have been emerging – thee firms make venture investments, but also invest in ways that are more reminiscent of private equity or public equity, and can provide not only seed and early-stage investment, but can boost in the later stages.

These firms can sometimes take on the attributes of family offices, or are offshoots of the, Bill Gates’s Cascade investment arm is one of the big investors, for example, in Sapphire Energy, where he is joined by Venrock, which is the venture investment arm of the Rockefeller heirs.

In some cases, there are investment companies that specialize, for example, in pre-IPO stocks – to provide pools of capital as companies round third and head for an IPO.

At ABM, we’ll be joined onstage on October 30th by Annie Hazlehurst, principal at Capricorn Investment Group – which was founded by EBay’s Jeff Skoll and is one of Silicon Valley’s most prominent multi-class investment companies.

Strategic investors

Strategics? They giveth and, in some cases, they taketh away. Aside from the large balance sheets from which their funds flow, they can provide crucial access to feedstock, and crucial credibility through brand association. Bunge with Solazyme, Total with Amyris and Gevo, Waste Management with a wide selection of companies, Petronas with LanzaTech, Valero with Mascoma and Diamond Green Diesel, P&G with LS9, DSM with POET – just about every company in the top 10 of the 50 Hottest Companies in Bioenergy has a key strategic investor.

Plus, these days, it is increasingly tough to raise a Series C venture round without a strong strategic providing validation of the technology and some assurance of access to downstream markets, or sustainable, affordable, reliable, available feedstock.

Joining us on stage at ABM on October 30th we look at strategic investments from two perspectives. First, CEO Dan Simon of Heliae will look at that early-stage algae technology in the context of the strategic investment from the Mars family (yes, of M&Ms fame). Bill Roe of Coskata will also join us as we look at the Coskata decision to embrace natural gas as a feedstock – in part, driven by the need to access equity capital for commercial scale..

Then, Duke Leahey of Nidus Partners – which brings a trio of strategics — Bunge, Monsanto, and Novozymes — to the table, will look at the investment landscape from the strategic investment POV.

Institutional Investors

Ah, yes, the deep deep pool of capital available through the institutions – mutuals, pension funds, insurance companies, sovereign funds and so on. Generally they focus on public equities – so they’re available only post-IPO, but the pool of capital is immense.

How immense? Well, we’ll be getting into this later this month in the Digest, but there’s more than $200 trillion invested in debt and equity, globally. Much of it available via the crazed confines of lower Manhattan. As any post-IPO company can tell you, these are the deepest pockets around – deeper than it is easy to imagine.

Put it this way: if you set fire to a $20 bill every ten seconds and burned it to a crisp, it would take you 370 million years to burn today’s global capital pool.

Who’s investing in biofuels among the institutions. We look at that sector today with a companion, free downloadable database.

The bottom line

There’s capital aplenty. It’s tough to find. Best to be well armed with a great story – but most importantly, great partners.