Risky Business: Does your biofuels venture pass the stress test?

So you have a disruptive technology. Good.

You have supporters and believers. Great.

You’ve said “what the f—” and you’re making your move. Fantastic. 

But how do you stack up in a stress test?

Lana: So, how’re we doin’?
Joel Goodson: Looks like University of Illinois!
From the motion picture “Risky Business”

A stress test used to be done with a cardiologist and a treadmill – but in recent years the concept has been expanded to the banking sector, for example, to measure resistance to credit, market or liquidity crises. It’s proven a useful concept for wider application — and in the complex world of industrial biotech, the Digest’s friends around the industry point towards what we call the MIFFPE test.

All about MIFFPE, biofuels and stress

MIFFPE – Markets, Infrastructure, Financing, Feedstock, Policy and Engineering. If your proposed venture does not pass a few simple tests across these topic areas, you might be headed for the ditch no matter how promising the underlying technology might be.

Markets. Are the doors open? Here we look for competitive price and performance. If your molecule is relatively novel (for example, ethanol for road transport, or succinic acid for green chemistry), does it offer a performance or price advantage sufficient to induce a shift?  If you are developing an “exact same” molecule such as BDO or renewable diesel — you may have lower hurdles in terms of a requirement to cost less or perform better, but you need to be reasonably sure it will be competitive enough that a “green preference” will secure adoption.

Also — is the market growing, and where? Ethanol has run into trouble lately because of falling gasoline demand – reducing the opportunities for blending. By contrast, the diesel outlook is more robust. And, for example, increasing electrification around the developing world will only help with the demand for dielectric fluids.

Infrastructure – is it available, adaptable? You’d be surprised what a retarding force on innovation that basic platform infrastructure imposes — or the liberation that transformational developments in platform technologies can have (think of how bandwidth costs, mobile access and the development of smart phones have affected the opportunities for app developers).

Barges, pipelines, water, power, railcars, blender pumps, flex-fuel engines, storage tanks. Co-location opportunities for advanced technologies. Just think for example, how the lack of pumps and engines have affected ethanol and biodiesel distribution. How the lack of CO2 pipelines may affect algae development at scale.

Finance – is it affordable? There’s always money out there – at a price you may not be able to afford. It’s not enough to rate your venture based on its next round of financing needs — whether that it a seed round, Series C, or first commercial plants. Ask yourself if you have a total capital plan — or, when and how your technology is going to have one.

Feedstock – are your feedstocks SARA – sustainable, affordable, reliable, available? If you are riding, for example, on the commodity crop rollercoaster, well, think about the stress imposed by 123 bushel corn yields and $7.00 per bushel prices. Are there novel feedstocks out there that are right for you?

But think about how even waste residues like recycled cooking oil can turn from “take-them-they’re-yours” free goods to “30-cents-per-pound-please” commodities.

Are you looking towards orphan crops that have received little scientific research or funding despite their significance for your technology. Or, perhaps, have received lots of funding but lack the elegant tools developed for hybridization, directed evolution, or transgenics with other microorganisms or crops. Algae and jatropha are two platforms where the crop development industries have been playing catch-up.

Are there harvesting systems available? Historicially, there haven’t been too many baling systems in Iowa, or low-cost harvesting systems for algae — important to know if you are using corn stover. And who is handling the logistics of aggregating your feedstock to ensure it is available all year long as you process it — given that, in many cases, it may be harvested all at once.

Policy – is it stable and positive? No one likes policy risk, least of all investors. If you have negative policy headwinds (e.g. your sector has policy disadvantages vis-a-vis your competitors , or you have advantages that are not guaranteed to last) – those are classic signs of stress.

What any technology would like is a competitive advantage during the whole of the development period. But what you need is an assurance of, at least, neutrality: if you can’t be assured of favorable terms, you must be assured that entrenched competitors, already at scale, will not have equally entrenched policy advantages.

Neutral is a passing grade for the purpose of a stress test, even though trade associations will naturally pursue competitive enhancements and accelerators for developing industries – and may get them.

For example, it is nice to have favored treatments such as investment tax credits, but it is essential to have comparable access to financing instruments such as Master Limited Partnerships and equal access to accelerated depreciation, reserve accounting practices, and the like.

Engineering – competitive price, performance and protection. Does your capex and opex add up to a compelling story vis-a-vis your competition? Does the capital cost of a first commercial plant give your capital formation team a low enough bar to clear?

Will it work at the required scale, or when will you know? Can you access multiple feedstocks and make multiple products to give yourself hedges against price volatility (upstream or downstream)? Do you have freedom to operate, globally or in a materially large enough market — and do you have adequate protection for your technology against copycats?

Scoring yourself on stress

How to score yourself? It’s a relatively binary test system. Give yourself 1 mark for a complete “yes” in all aspects of a given stress area, and a zero for anything else.

Be honest with yourself – remember, this is a stress test, and not a time to give yourself the “Easy A”. There’s no point in joining the legion of technology developers who deluded themselves into thinking they had all the problems licked, and didn’t.

How do you stack up?

6. Really? Hmmm. You overlooked a few items that are industry-wide problems – such as the lack of Master Limited Partnerships. Go back and do your math again.

5. You have a stress failure in at least one critical area. You will need to ensure that the compelling advantages in the other five areas outweigh the risks imposed by your “zero” in a critical area of operation. If feedstock is not SARA, for example, a policy advantage may overcome this.

4. You have two stress failures. We expect an imminent announcement that you have decided to de-emphasize the fuel markets, having discovered tremendous niche markets where higher margins await. Not to mention, smaller volumes, yet fewer competitors. Alternatively, that you have decided, after much reflection, to reposition as a technology licensor. If at least one of your stress factors is temporary in nature, you may simply be advising industry shortly that you are closing a plant for routine maintenance and upgrades.

3. We expect an imminent announcement that you have repositioned the company as a research and development organization.

2 or less. We won’t be hearing from you, because you’re on the way to oblivion, unfortunately, and there’s no reason you’d need or want to crow about it. In fact, you may have already dismantled. And it’s really a shame, because probably you did have a materially interesting technology, and found many believers along the way.

But that’s stress for you — just one heart attack or bank panic can deprive the world of a great leader in the blink of an eye.