Cracking The Code to Biofuels Investments

By Doug Williams, special to The Digest

The mid 2000’s saw a tremendous surge in interest in biofuels technologies. I got caught up in it myself. I’ve worked with biofuels and bio-based chemicals technology start-ups for the last decade. It’s certainly been worthwhile. The industry has since suffered its first dot-com bubble-like crash. It’s perhaps a good time to look back at a few things.

In particular, I think it’s important to look at the technology investment side of the industry. While there are still a lot of folks working on the biofuels challenge, the investors seemed to have scattered. But they’re critical for this industry to continue into the future.

So what have we learned?

Fuels probably weren’t the right target

Fuels are the cheapest liquids on earth (besides, perhaps salt water). Expecting a fresh-out-of-the-box technology could produce them cheaper than fossil-fuels is a bit far-fetched. Typically a new technology will target a higher-priced market segment. Over time, as the process is refined, lower-priced markets can be targeted. But VC firms also like companies that address very large markets.

With the benefit of hindsight, biofuels technology companies perhaps should have targeted chemicals that are currently produced through extraction from natural products (i.e. not fossil based), may be hard to make synthetically, or may have other supply limitations. Companies Amyris and Solazyme are producing oils that replace natural extracts.

Younger companies have found success developing solutions to renewable materials. Rennovia (nylon precursors), Yulex (natural rubber alternative), and BoltThreads (spider silk) have found success in their development of alternative pathways to existing products.

Producing these types of products industrially may drastically change their industries. This would be the best first step to developing a technology platform that, with continued innovation, could be applied to commodity products. Consequently, these three companies have raised $133 Million in investment in recent years.

Transformational technologies are a prerequisite

Many of the investments from the mid-2000’s were only incremental. The majority focused on incremental improvements in the conversion yield of established pathways (biological and catalytic). They were all struck by the inefficiencies of the processes as a whole – cellulosic sugar production; gasification cold-gas efficiency.

The only way to overcome these inherent challenges are to discover new, transformational concepts on how to attack the problem from a unique perspective.

Potentially transformational technologies are certainly hard to find. But there are, I think, a few examples:

• Greenlight Biosciences, based near Boston, is developing a platform that uses an unconstrained metabolic process to produce a variety of products with yields that exceed traditional fermentation routes.
• Zymergen, based in the San Francisco Bay area, is using big data to enable fast, custom genetic development to radically improve biological applications.
• Siluria Technologies, also in the San Francisco Bay area, used a biological process to develop solid-state catalysts that can produce hydrocarbons directly from natural gas.

These three companies have raised $170 Million in investment capital in recent years. Their unique take on how to attack these technical challenges.

Scale-up to commercial has to stay under $100 Million.

In Silicon Valley, the Minimum Viable Product has become a first step for any start-up. In the case of biofuels, the MVP amounts to a sizable commodity chemical production plant. These projects have ranged in cost from $200 Million to $500 Million; only the $200ish Million dollar versions ever actually got built (POET, DuPont, Ineos).

This is a big problem for traditional venture capital investors. Most VC funds aren’t big enough to be able to put that much capital into a single (still high risk) venture. They can really only participate through a commercial exercise if it requires less than $100.

During the financial crisis, the type of risk capital needed for these first commercial exercises never materialized in a broad fashion. To-date, no start-up company has successfully constructed and started up a large scale alternative/biological fuels/chemicals facility using private investment capital. Those that have are either large companies (mentioned above) or used public-market capital (such as Amyris, Gevo, Solazyme).

Venture Capital model may not be compatible.

This high capital requirement also implies traditional venture capital may not be the right investment venue for biofuels. It can really only work if an interested company would want to acquire these technologies pre-commercial stage at a multiple of the approximately $100 Million it takes to bring a new technology through research and scale-up phases. There aren’t enough acquirers within this market to merit a broad, decade-long investment interest in biofuels.

The lack of real “winners”, a biofuels version of Google or Facebook, is also an investment turn-off. The VC model requires investment home runs. If there’s no model for big winners to emerge, then the VCs won’t follow.

Doug Williams is a business development consultant for biofuels and bio-based materials start-ups. He currently lives in the San Francisco Bay Area and is the author of Advancing Fuels: A review of the challenges facing the emerging advanced biofuels industry (amzn.to/ZsC2JA).