cleantech, Venture Capital, startups

Investors Talk Biofuels Winners, Latecomers to the Party, and $100 Billion Dollar Companies at Algae Biomass Summit

Gregory T. Huang 10/24/08

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go—producing the fuel itself, providing tools, increasing yields, and overcoming industrial barriers. “Each could have a high-value product…and make a lot of money.”

Long concurred, adding, “The next wave will be picks and shovels, but also specialized opportunities.” A company could figure out how to use algae to power cement plants or wastewater treatment plants, for instance. “That’s a smaller-scale thing, a very focused business plan,” said Long. “Those opportunities will also get venture capital.”

When it comes to producing fuel to compete with crude oil, the algae proposition comes down to one thing: the cost per barrel. “Oil is a trillion-dollar market,” said Nelsen. Companies like Sapphire are essentially competing against the cost of deep-water drilling, he adds. If they can get the price down to, say, $60 per barrel with no carbon tax and no subsidy, they’ll “probably make a lot of money.” And the prospect of domestic oil fields is certainly appealing to some big customers, including the government. “If you’re the U.S. Air Force, you don’t want to depend on Iran or Venezuela for your source of fuel,” Nelsen says.

Both Nelsen and Long cautioned that although their companies have made some breakthroughs, it’s still too early to know whether algal biofuels will succeed. And they talked about several challenges besides bringing costs down. Green brought up the question of how to handle potential partnerships with oil companies, suppliers, and other organizations. “Oil companies are about drill, pump, and trade,” Long replied. “I predict none of the major oil companies will be major players in biofuels.”

Nelsen added, “Partnerships will come up before you want them to. The reason we’ve raised so much money [at Sapphire], more than some big venture funds’ funds, is we want to be able to pick our corporate partners based on what they can do for us, not based on money.”

And in terms of intellectual property protection in the field, Green suggested that “you better have a large litigation budget in your company.” Nelsen didn’t exactly disagree, saying, “I think it’ll be much more like biotech than the Internet. It won’t be wide open where anyone can play. I.P. will be one of the most valuable things that exists. There’s been naïve optimism in the algae community—algae are cute, let’s open a pond and start a company.” He added, “If it’s successful, there’ll be a lot of governmental regulations that will be important…For this to be a big industry, it will need major technical breakthroughs.”

What will be the effect of the current financial crisis on algae startups? Green pointed out that the next two years could be a good time to focus more on development. “Cleantech and biotech will see less impact than other sectors,” said Nelsen. “Even as oil prices come down and certain investors dry up and go away, there will be a lot of people with a lot of money who want to put it into cleantech. Valuations might come down a little bit…There’s a lot of enthusiasm for algae at this stage—some is justified, some isn’t. There’ll still be a flux of money coming in.” And he is confident that “there will be billion dollar companies” in algae-based biofuels down the road, “but will there be a $100 billion company?”

Lastly, Green asked about exit strategies for startups in the space. Both Nelsen and Long insisted it’s too early to think about that in any detail. “We’re trying to figure out if it’ll work,” said Long. “If successful, a company like Aurora or Sapphire could go public. In cleantech, a lot of companies will probably go the M&A route.” Nelsen added, “We think in 5-7 year time frames. We think about not selling. If there’s one thing that keeps me awake at night, it’s will we have the intestinal fortitude to say no when people want to buy us?”

Gregory T. Huang is the Editor of Xconomy Seattle. You can e-mail him at gthuang@xconomy.com or call 206-624-2249.