This past weekend, I was talking about a tech company with a friend of mine. The company in question looked promising, but the exit strategy patently seemed geared toward a quick sale.
“It’s a burger,"? he said. “Born to flip."?
That description will become more common in the world of biofuels. A whole raft of cellulosic ethanol, biodiesel and butanol companies have launched in recent years and gathered hundreds of millions in venture capital. Their processing techniques range from futuristic (getting microbes to convert plant matter into alcohol) to slightly retro (employing the Fischer-Tropsch method once used by the Third Reich to turn coal into tank fuel to convert leaves into liquids).
Established conglomerates, however, are coming to town. Today, DuPont and food/agricultural giant Danisco from Denmark said they will plunk $140 million into a biofuel joint venture. Earlier this year, Chevron and Weyerhauser, the lumber company, formed Catchlight Energy to produce cellulosic ethanol. Daimler, the car maker, and Archer Daniels Midland have also become allies. Oh yes, and Tyson Foods and ConocoPhilips want to turn scraps from the slaughterhouse into biodiesel.
When conglomerates gather, it’s tough for start-ups to survive, particularly in manufacturing. In software, it’s a lot easier. Two or three people can coin a novel application and become a global success through word-of-mouth marketing. Not so in fuel. You need long-term R&D funding, prototyping plants, large refineries, and miles and miles of pipeline connections. The land use planning meetings alone can turn a young college graduate into a bitter, middle-aged man.
Last year, Don Paul, the recently retired CTO of Chevron, estimated that it takes 15 years and $3 billion to get a fuel from the lab to market.
That really narrows down the likelihood of a Facebook of ethanol. Think of it. A prototype plant that produces 500,000 gallons a year can cost nearly $15 million. (the budget for a plant by Mascoma in New York.). A 100-million gallon a year plant can run over $75 million. (Range Fuels.) and 100 million gallons is a drop in the sea. The U.S. consumes over 140 billion gallons of liquid fuel a year.
Fortunate start-ups have already landed alliances or received investments from conglomerates. Coskata, which will make ethanol and other fuel from plant waste and garbage, has linked up with General Motors and Marathon Oil. Solazyme, which cooks algae into a fuel precursor in brewing kettles, has a research agreement with Chevron. Acquisitions in this area will likely become more common in recent years.
So in the future, we will probably see fewer deals where venture capitalists pour tens of millions into a cellulosic ethanol company. Instead, you will see a few million going into companies on the fringes of scientific knowledge that will be flipped while they are still in the lab.