Dozens of deals – what are the hottest paths to $$$? Who’s forming capital in bioenergy this year, and when, where, why and how?
In the old days, the process seemed simple: seed round to fund some lab work at the bench level, series A for proof of concept, series B for the pilot, series C for the demonstration (and bringing in a feedstock and offtake partner), and then head for the IPO market.
Most of the early-stage capital was raised out of Silicon Valley, Boston or other capital havens for early-stage technology plays. Strategics were sought rarely, and sometimes one VC group would fund the entire company through, say, series B.
Ah, pilgrim, what times they were, but times gone by.
A combination of more companies, investor risk-aversion, the Great Recession, breakdowns in the VC model, murderous costs for debt in first commercial projects, and the general malaise in technology stocks – well, its been a recipe for tough conditions in biobased financing, just as large numbers of companies have come knocking on the door to do demonstrations, or first commercial projects.
The result – a proliferation of innovation — and why not? These are some of the most innovative industrial companies around: why shouldn’t their capital structures be just as ingenious as the construction of their magic bugs or catalysts?
So let’s look at 42 recent deals in the private and public markets, and both equity and debt side — to see what’s working, and what’s not.
1. Strategic investors swarm the sector
It used to be that strategics were thought to be not always a good fit for small, early-stage companies, that needed to push the development pace and be nimble in terms of business model, product, partners, and just about everything else.
The biggest deal of the year? In October, Novozymes and Beta Renewables announced an agreement to jointly market, demonstrate and guarantee cellulosic biofuel solutions. As part of the agreement, Novozymes acquired a 10% share in Beta Renewables, paying approximately $115 million cash for the equity, marketing fees, other intellectual property rights and milestone payments.
That thinking has changed. For example, Total and Genting Genomics led a $104 million Series E round in Elevance in July. Monsanto invested in Sapphire Energy’s $144 million Series C in April. LANXESS invested in a $30M Series C in BioAmber. Petronas and Dialog invested in a $56M Series C in LanzaTech in January. Also in January, BASF invested $30M in a Series C by Renmatix, the renewable sugars pioneer. BP Ventures and Unilever Technology Ventures invested in Chromatin’s Series D Round, and Flint Hills invested in EdeniQ in March. Also, Itochu invested in ZeaChem in March. Bunge invested in Cobalt Technologies’ Series E financing.
ZeaChem has been raising not only from strategics, but its group of VCs, and pulled down a $220 million loan guarantee from the USDA and is taking advantage of state-level investment tax credits for its Oregon project. And Itochu and Macquarie both invested in the company’s $25M Series C round this year.
In August, Waste Management and Renmatix announced they have entered into a joint development agreement to explore the feasibility of converting post-consumer waste into affordable, sufficient-quality sugars for manufacturing biobased materials. In addition, WM has joined global chemical giant BASF and Kleiner Perkins Caufield & Byers in Renmatix’s Series C raise, raising that total round to $75M.
2. Roll out thy own balance sheet
Something that many companies in the sector hoped to avoid – financing project #1 off the company’s own balance sheet. Well, it’s proven a powerful differentiator, and has been embraced reluctantly by some, aggressively by others.
This month, Praj announced that it will set up a 10 million litre demo commercial plant of its cellulosic ethanol technology in India. The company expects the project cost to be in the region of $25 – 30 million. Praj expects to break ground in early 2013. Also in Asia, Bangchak Petroleum announced a plan to invest $40M in biodiesel capacity.
But the most startling deal of the year so far? Last month, Evonik reaffirmed their commitment to biotechnology with a plan to invest some €350 million by 2014 to expand its Biolys business. An amino acid used in animal feeds, Biolys is a source of L-lysine produced via fermentation.
For long-term vision, nothing topped the news from Brazil that Petrobras plans to invest $1.05 billion in existing ethanol projects through 2016, including its joint venture with Sao Martinho, Nova Fronteira, as well as with some of its other corporate partners Total and Tereos.
3. Switching feedstocks
Natural gas is cheap, plentiful and there are a number of investors interested in finding uses for it, especially “stranded gas” which is being flared now because there simply is not an easy way to bring it to a power station to generate electricity for the grid. Last year, Sundrop Fuels stunned the marketplace when it switched from a solar-concentrator to turn biomass into a gas stream for its process – to a mix of natural gas and biomass. But the switch brought in a $150M+ investment from Chesapeake Energy and really got the company moving towards commercialization.
This year, Primus Green Energy said it would switch to natural gas for its demonstration – and Coskata said it would switch from hardwoods to natural gas, and now expects to raise $100 million from strategics interested in natural gas, by year end, enough to cover the equity side of its first commercial project.
4. Creative debt offerings
In June, Myriant announced that it closed a $25 million private bond placement for the construction of its flagship commercial bio-succinic acid plant located in Lake Providence, Louisiana. Three notable aspects there.
First of all, the structure. The most important news from this deal – aside from the considerable advancement of the Myriant story – is that the window has been opened on bond-financed scale-up of industrial biotech.
Second, the risks that have been absorbed by the debt side. We’re heard about the three impossibles for some time. Impossible to get a project without the term of the offtake being at least equivalent to the term of the debt. Impossible to get a project funded without the feedstock contracts covering the entire portion of the loan. Impossible to get a project funded without the offtake 100% covered by contracts. That may remain true for the bank side – but over here in bond world – the three Impossibles have been converted into the three “you’ll pay more, but it’s do-ables”.
Third, the rate. The USDA- guaranteed portion is going to come in with a very low single digit interest rate, and the non-guaranteed portion will come in around the mid-teens, giving an overall blended rate, we believe, around 9 percent for a deal with 60% of the debt guaranteed by USDA B&I program. That’s the kind of blended rate where the debt service could be more than covered via the project cash flows, and still provide sufficient returns to the equity side to complete the capital formation.
5. The more traditional pure-play VC route
The VCs are still active, though the rounds are smaller, the companies fewer, and more widely syndicated. In most of the strategic investments named above, at least one (if not several) VC firms were participating. For example: in March, Virdia announced $30 million in its latest round of financing, raising over $20 million from insiders, Khosla Ventures, Burrill & Company and Tamar Ventures. In addition, the company closed a $10 million in a venture debt deal with Triple Point Capital. LanzaTech closed a $15M Series C in October, and Agrivida raised a similar amount in its own Series C in September. Solix closed a $31.5M Series C round in August.
In renewable chemicals, Segetis had one of the bigger rounds in August when it raised $25.5 million in its Series C financing. Saudi Basic Industries Corporation (SABIC) Ventures B.V. led the investment with full participation by current Segetis investors including Khosla Ventures, Malaysia Life Science Capital Fund (MLSCF), and Royal DSM, through its venturing subsidiary DSM Venturing. A new Malaysian-based investor, PNB Equity Resource Corporation Sdn Bhd, also joined in this round of financing.
There wasn’t much notable Series A activity announced this past year, but In September, edible packaging developer WikiCell Designs announced that it closed a $10 million Series-A financing co-led by Flagship Ventures and Polaris Venture Partners. / In August, Cereplast entered into a stock purchase agreement with Ironridge Technology Co. on August 24th, for the sale of up to $5 million of convertible redeemable Series A Preferred Stock.
In August, Solegear Bioplastics said that it had closed a Series A financing, led by Yaletown Venture Partners and joined by a number of leading angel investors – but the amounts raised remained behind the stealth wall. Based in Vancouver, Solegear engineers, produces and distributes high-performance bioplastics made from rapidly renewable resources.
6. Alternate exchanges
There have always been alternatives to NASDAQ – reverse mergers, Frankfurt, the old London AIM markets, or the bulletin boards.
Now there are a couple of new possibilities. Earlier this month, Global Bioenergies announced a capital increase on NYSE Alternext in Paris for $3.8 million based on a price per share of 19.80 euros and now has a total capitalization of $45.5 million.
Last year, Algae.Tec completed a small $5 million IPO on the Sydney exchange, followed that up with $11 million in private placements – also known as PIPEs (private investment in public equities). Specifically, the company raised $6 million from La Jolla Cove Investors and a A$5M Australian private placement through Patersons Securities Limited.
Speaking of PIPEs, they’ve been successful for some US-side companies as well.
In February, Amyris completed a $58.7 million private placement of its common stock and placed $25 million in 3% senior unsecured notes due in 2017. The purchase and sale price for the shares was $5.78 per share.
In July, Gevo announced that it has agreed to sell 12.5M shares of its common stock at a public offering price of $4.95 per share. The gross proceeds to the Company from this offering are expected to be $61.8M. The Company also announced the pricing of its public offering of $40M aggregate principal amount of 7.5% convertible senior notes due 2022. Cautionary note on Gevo, though – the dilution price was high on the offering, causing Gevo’s shares to drop by almost half after the offering was complete.
In July, Pacific Ethanol closed a public offering of 28.0 million units at a public offering price of $0.43 per unit, for gross offering proceeds of $12.0 million. The warrants are exercisable immediately. The Series I Warrants have a 5-year term and an exercise price of $0.63 per share. The Series II Warrants have an 18-month term and an exercise price of $0.53 per share.
A smaller yet creative deal came out in August, when Lignol announced a non-brokered private placement of up to 30 million common shares of the Company at CAD$0.08 per common share to raise up to CAD$2.4 million together with the execution of a Share Purchase Agreement to acquire from Wasabi Energy Limited 275 million ordinary shares of Australian Renewable Fuels Limited for a total purchase price of CAD$4.27 million.
8. Joint venture
This month in Brazil, Dow and Mitsui have secured all necessary governmental regulatory approvals and completed the formation of a previously announced 50:50 joint venture in Brazil, making Mitsui a 50% equity interest partner in Dow’s operation in Santa Vitória, Minas Gerais. The MOU with Mitsui that lead to this milestone, is aimed at providing innovative and sustainable product solutions for global flexible packaging, hygiene and medical applications. This represents the world’s largest biopolymers play and Dow’s largest investment in Brazil.
Last month, Ensyn and Fibria Celulose announced the creation of a strategic alliance between the two companies. This alliance includes the establishment of an equally-owned joint venture for the production of cellulosic liquid fuels and chemicals in Brazil, as well as a US$ 20 million equity investment in Ensyn Corporation by Fibria.
The window effectively closed by the end of Q1 of this year, but while it was open, IPOs were a lucrative channel. In the 2010-2012 IPO window, seven companies raised a total of $801 million: Ceres, $65M, REG, $72M, KiOR, $150M, Gevo, $123.3M, Solazyme, $227M, Amyris 84.8M, Codexis 78M.
It started slowly in 2010, with Codexis and Amyris just barely making it out of the gate, but Solazyme, Gevo and KiOR had excellent IPO results in 2011. Then, just as suddenly as it opened, the window closed again, with REG just getting out with reduced proceeds, and Ceres having to reschedule its IPO twice to get it done.
Since then, Enerkem tried and missed, and Coskata and Genomatica indicated that they will abandon its IPO efforts for now, leaving companies like Mascoma, Fulcrum and BioAmber having filed S-1 registration statements, but no indications that they will be out soon.
The waters for some seemed better outside of the IPO channel. In August, Genomatica announced it had raised an additional $41.5 million in a Series D round of preferred stock financing. The investment featured strategic partners, including new investor and partner Versalis, the largest Italian chemical company. Existing investors Alloy Ventures, Draper Fisher Jurvetson, Mohr Davidow Ventures, TPG Biotech, VantagePoint Capital Partners and Waste Management also joined the new round.
10. Merger combined with recapitalization
In Australia this month, ASX-listed Australian Renewable Fuels and Wentworth Holdings Ltd. announced a proposed merger agreement that will see national biodiesel provider, ARfuels, injected with $14 million in capital. ARfuels will make an offer to acquire all outstanding shares of Wentworth, backed by a unanimous recommendation by the directors of Wentworth. The merger will be implemented by way of an off-market takeover of Wentworth by ARfuels.
The bottom line
Creativity is the order of the day. There is still plenty of money on the sidelines – the most creative means are generally necessary, at this time, to unlock it. Most of the creativity has been, so far, on the equity side.
But with project developers moving from pilot and demonstrations to first commercial projects and Nth commercial projects, creative debt structures that unlock project finance money will be key to advancement. For that reason, the recent Myriant deal, which tapped into the huge bond market, may be the most instructive of all.
More background on the story from the Digest
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