Qteros Finds Ways Around Funding Pitfalls for Biofuel Startups
If only funding for biofuel startups were as omnipresent as spilt oil in the Gulf. That’s not the case, of course, as biofuel firms have struggled to find cash. Yet Qteros, a Marlborough, MA-based developer of cellulosic ethanol, has a plan to remove some of the typical financial aches from its business.
Qteros, which has raised nearly $30 million in venture capital to date, has developed an experimental process for making ethanol from plant waste and other non-food sources that could someday make the cost of biofuels competitive with fossil fuels. John McCarthy, CEO of the startup, joined the company in January after engineering a $90 million partnership between his previous employer, the Cambridge, MA-based biofuel developer Verenium (NASDAQ:VRNM), and the energy giant BP (which is, of course, at the center of the oil spill crisis in the Gulf of Mexico).
In an interview yesterday, McCarthy said that Qteros doesn’t need as much capital as some of its competitors to succeed.
Lebanon, NH-based Mascoma, for one, has fallen behind schedule in raising money to build a cellulosic ethanol plant in northern Michigan, company CEO Bill Brady told Xconomy last month. Brady said that such facilities cost north of $100 million, but he declined to reveal exactly how much his firm needs to finance the project.
Qteros, conversely, doesn’t want to build or operate ethanol plants. The 50-person firm wants to make money from licensing its technology to other companies that have, at least in some cases, already invested in building ethanol facilities, McCarthy said. The startup needs capital to fund its research and development, but that amount will be way less than the amount needed to erect ethanol plants.
In Qteros’s licensing model, some ethanol producers would incorporate its technology into their existing plants. McCarthy said that retrofitting existing facilities to use his firm’s technology would be less expensive than building new plants from scratch. However, the four-year-old startup has yet to find an ethanol producer willing to fork over cash to license its technology. To gain the confidence of such partners, the firm still needs to generate more proof that its system for making ethanol works on a larger scale than it has shown in its own labs. So the company plans to provide this evidence by making larger batches of ethanol at the National Renewable Energy Laboratory in Golden, CO, and its pilot facility under development in Chicopee, MA. By the end of 2011, McCarthy said, the company expects to have data from those tests to show to commercial partners.
Despite its lack of a licensing deal, Qteros (formerly known as SunEthanol) has gained equity investments from backers of strategic value in the ethanol market such as BP’s (NYSE:BP) venture arm and San Antonio-based Valero Energy (NYSE:VLO), a major operator of oil refineries, ethanol plants, and gas stations. Its other investors are Battery Ventures, Camros Capital, Long River Ventures, Soros Fund Management, and Venrock Associates.
Qteros’s big draw is its consolidated approach to making ethanol from non-food sources like corn stalks, sugar cane leftovers, and wood chips. Normally, companies need expensive enzymes to break down such plants into sugars, which are then fermented with yeasts into ethanol. Qteros’s bacterium, dubbed the “Q Microbe,” does all those jobs, according to the company. Its process could reduce the cost of making cellulosic ethanol.
Still, there’s debate about whether the U.S. needs additional ethanol for transportation fuel needs. The issue, sometimes called the “Blend Wall,” is that country already nearly produces enough ethanol for making gasoline that contains 10 percent ethanol. Ethanol producers are lobbying to raise mandated limits on how much ethanol can be mixed into gasoline from 10 percent to 15 percent. McCarthy said that he believes that those limits will be raised to at least 12 percent.
Qteros is developing strains of its bug that could also be used to make chemicals from plant materials as opposed to using petroleum. South San Francisco-based Solazyme, for example, is a biofuel developer that is also using its algae-driven process to make ingredients for beauty products and food. Yet Qteros is pinning its initial commercial prospects on the ethanol market.
“Our view is that cellulosic ethanol is the here-and-now market,” McCarthy said, “and that’s confirmed by the various partner discussions we’ve been having.”