An Institute of Industrial Commercialization

May 8, 2012 |

Good biofuels technologies face crushing challenges in their timelines – why not intensively study and compress the process of industrial commercialization?

“Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours. … Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.” – J. Reuben Clark, former US Under Secretary of State

Frank Mars, the chairman of Heliae, and a board member of the Mars Corporation, recently told me a story.

“When I meet young people, I ask them: “Imagine I gave you a million dollars and you could buy anything at all, even something really way out of the box, what would you do with the money?” You get mostly the usual stuff, a house, a boat, a business. Occasionally you get something outside the box. Myself, I’d buy time. It’s the one thing you really need and can’t get more of.”

The Time Problem

Time. Of all the barriers to advanced biofuels, it’s by far the most perplexing one. It’s the whole reason, for example, that the public sector needs to be involved in biofuels at all – with all the attendant problems of instability and multi-stakeholder negotiating that public investment brings.

How’s that again? The whole reason? What about energy security, emissions, or economic development? The Three E’s, you know. Aren’t those the drivers of public involvement?

Sure, all of those are important concerns, but the timelines are what make the risks too tough for private investment, and force project developers to seek public investment in order to meet those goals. It’s not the risk, it’s not the capital call, it’s the crushing amount of time from discovery to return.

The Crushing Investment Math, illustrated

Let’s do some math to illustrate. If you invest $2 million, $10 million, and $30 million every other year in bringing a technology forward to the commercial threshold (and you’d be a miracle worker in doing so) – and it results two years later (after construction) in a 2 million gallon demonstration plant costing $40 million and two years after that in a 40 million gallon commercial scale plant costing $280 million, well, that’s $362 million invested over nine years in a high-risk project.

Sounds daunting. But it gets worse. On an all-equity basis, you’d need to make a profit of $3 per gallon of fuel produced, in order to realize a 20%+  internal rate of return. That’s table stakes for getting high-risk investment dollars out of venture capitalists – a lot of them want even more.  Even with some debt, you’d need a profit of $2 per gallon – unobtainable.

20% returns? Those VCs – they’re not vultures, though they may feel that way at times. With the failure rates they see on new technologies, they need those kind of returns, Else they can’t raise funds from angels and institutions, who want elevated rates to justify the elevated risks.

The 3 Classic Remedies

So, what’s a project owner to do? There are three doors to go through.

Door number one, you accept a lower rate of return. Something a strategic investor with a strong balance sheet and a deep interest in the sector might be able to justify – as long as other projects with higher IRRs don’t crowd out the investment calendar.

Door number two, you lay off some of your costs with public support in the forms of construction incentives, production credits, R&D funding and loan guarantees. It’s not greed that drives you to seek all this. It’s time.

Door number three, you try and speed up time to market – or more specifically time from cash in to cash out. Popular techniques? Bringing investments out of the lab later, speeding up the construction timelines by doing things like skipping a full independently financed and run demonstration, or cashing out sooner via IPO.

So, you start to see the financing picture for advanced biofuels pretty quickly. A LOT of attention paid to raising strategic investment. A lot of discussion of what the government can do to help. A lot of venture capitalists doing whatever they can to speed up the process, and getting out as soon as they can.

Are capitalists privatizing the profits, socializing the investments?

It’s not rapacious capitalism, exploitation, bad technologies looking to prop themselves up on the public dime. It’s the timescales required to bring forward industrial biotech, compared to the timelines needed, for example, to bring forward a digital media or digital technology.

You wonder why prescription drugs cost so much? Well, they require big R&D bets, and because of all the safety built into the clinical trials, it can take 10-15 years to bring a drug forward from original patentable discovery to commercial product in the market. You get 20 years from the date of the patent app – so, that’s 5-10 years to recover all that money in development, and deliver a competitive rate of return.

An Institute of Industrial Commercialization

So, there’s the time problem – what’s anyone doing about it? Well, we mentioned that companies and investors are imperfectly attempting to shorten the timelines, as well as bring in public and strategic investors who can afford to think in longer timelines because they can accept lower returns. There are limited on strategics and public investors – how much they have and what they can do with it.

The best area of opportunity is in reducing timelines to commercialization. That, more than any other factor, increases the rate of return relative to the risk, and would catalyze investment. It’s not being studied – commercialization, that is – in any important way.

Now that’s compression.

What the world needs is one less institution doing basic or applied research, I mean, we’ve built an awful lot of pilot plants – and one more institution (which is to say, one) dedicated to reducing the commercialization timeline. Because capital right now is neither sustainable, affordable, eligible or available at the returns offered today. Returns that can be improved by compressing the timelines in better ways.

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