Renewable Biofuels and Chemicals: Scale Up is King and Long Game Focus Key
VCs, driven by their appetite for quick results, are missing out on huge opportunities in renewable biofuels and chemicals. That leaves the market wide open to a variety of alternative investors who, if equipped with the patience needed, will realize the substantial returns that await those who can see the industry through a long lens. Only time will tell who will take home the prize.
Challenges that Continue to Mire Biofuels and Renewable Chemicals in the Valley of Death
“The venture community is poorly positioned to execute on the energy environment opportunity, which is huge, enormous.” That’s Gregory Manuel, formerly of Amyris Biotechnologies and former Special Advisor for Alternative Energy to the US Secretary of State. His view is that in order for the renewable biofuels and chemicals market to thrive, more investors with patience and an appreciation for the longer term required for these projects will be needed. Given the unique challenges faced by an industry that’s constantly running after an elusive breakthrough with only intermittent and marginal success, this could be a deal breaker. The good news, according to Manuel, is that those investors exist; it’s just a matter of them making themselves known.
Manuel is not alone in his thinking. Bob Johnsen, CEO of Primus Green Energy, Inc. has a similar view of the market today. He comments, “VCs are looking for quick exits, but if you consider the market for energy being enormous, it’s a long-game play. That said, absolute payouts are enormous and fluid.”
In recent years, renewable biofuels and advanced chemicals have attracted a lot of investor attention because of the lucrative payout promised. However, the biofuels industry has been struggling against a set of hurdles with little in the way of spectacular successes to show for their efforts. Perhaps most perplexing has been the problems on the process engineering side and scaling up effectively.
According to Manuel, broadly speaking, when you look at the technologies across a variety of sectors, there has been a real lack of understanding of things like the upstream process and feedstock requirements, quality control of feedstocks for different systems, optimization in the middle whether it’s for algae, fermentation, or catalytic production, and other nuts and bolts of the technology platforms required for this kind of development. As a result, the relationship between the upstream and downstream scale up is one that the industry has yet to fully recognize and appreciate.
Furthermore, time continues to be a major sticking point. “The customer adoption phase is very slow and very long,” reflects Manuel. Of course, there are also regulatory hurdles, especially in the high-value chemical space, which slow down the process even further.
As a result, a lot of the advanced chemical plays are having a tough time getting funding. Similar things are happening in the biofuels market according to Vonnie Estes, Managing Director at GranBio. “What’s happening with larger seed companies like Monsanto is that they’re a little bit in a “let’s sit and watch this area” mode. They’re not going to jump into this. Instead, they’ll let the market determine the course and will take over successful ventures when they’ve become real businesses.”
Aside from the scale up difficulties, the regulatory hurdles, and the long timelines experienced in this market, the most perplexing problem yet is the lack of technological breakthroughs needed to create a strong market position for any one renewable fuels or chemicals technology. Given the spectacular results the market expects, it is likely that not until a major breakthrough occurs will biofuels or renewable chemicals really find their stride.
Bob Johnsen put it well when reflecting on the work of Primus Green Energy; “Nothing succeeds like success! While in R&D, we miniaturize the footprint of the process to enable us to build a plant that produces only about 6 million gallons. But if we were to be successful in producing 25 million gallons out of our first commercial plant without hiccups, that then would be the foundation for building something four times bigger, like 100 million gallons.”
Yet virtually no one has been able to make the leap from pilot or demo scale to full commercial scale with any measure of success. One potential reason for this may be the dearth of people that possess the complex skillsets needed to work within this space. As Manuel put it, “You need a very complex skillset for doing things that have never been done before – industrial engineers, chemical engineers, and so on.”
US Market for Biofuels and High Value Renewable Chemicals Slow on a Global Scale
All of these factors – scalability, regulations, timelines, and poor results – have made investors rather skittish. As a result, many companies have gone unsold because buyers haven’t been willing to pay what VCs think their investments are worth. However, given the spectacular failures over the last year, some VCs may be looking to take the lower bids rather than being left with nothing.
As Estes correctly points out, cleantech takes a lot longer to develop than something in the IT sector, for instance, making a 10-year exit impossible. “The model is kind of broken from a VC perspective. Most VCs are upset now because they’ve kept putting money in and have had to make a monthly decision of whether to put in more money or let it fail
In particular, in the US market there is a major capital gap. “Lots of firms are going out to raise money for cleantech and coming back with a fraction of what they wanted to raise or nothing at all,” explains Manuel. As a result, many biofuels and advanced chemical firms are looking to overseas investors to get their projects the funding they need.
Yet visionary investors are still making plays in this sector, and people like Estes are optimistic about the prospects. “There are investors who are looking to stick with this technology. They’re out there. I think the economy is doing well enough that family funds that want to invest in something that is good for the world are going to stick with it. There are also big companies like Monsanto, Unilever, BASF with their venture arms that are willing to make a bet on 8 companies at $3 million each and see what happens. So I think that’s what’s going to happen. It’ll be more strategic
Manuel agrees. In his view, there will be a few folks who actually support cleantech with personal money, as well as companies in oil, energy, and environment patient government funds looking to change infrastructure. “These kinds of investors have a long-term view of the space, that it will take longer than you think, yet they’re in it with you. That kind of strategic partner is exactly the kind of relationship the smaller companies are going to need.”
Fitting the Right Investor Keys to Unlock the Renewable Chemical and Biofuel Opportunities
Clearly the matchmaking process between visionary investors and worthy renewable biofuel and chemical ventures is a difficult one. Certainly the risks are high, but so are the potential rewards, which is why many continue to plug away at their craft.
The fact remains that the first company to achieve that elusive breakthrough – with the help of an investor with a view to the long-term – will see rewards that are on a different scale entirely than anything else currently available. “In energy and environmental plays, the numbers are orders of magnitude larger in terms of opportunities, time, and capital requirements, as well as complexity to achieve when you consider regulations, skillsets, partners needed to go to market, etc. But when you do get it right, you’re coming home with a platinum medal instead of a bronze medal.”
Johnsen heartily agrees; “VCs are looking for quick exits, but if you consider the enormous size of the market for energy, it’s a long-game play.”
Article by Richard Herbert, President of Helix Recruiting, Inc. A boutique executive search and recruiting firm that specializes in: cleantech and renewables; specialty chemicals and alternative fuels; utilities and power generation.
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