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Solazyme, Founded on ‘Delusional’ Idea of Algae Biofuel, Stakes Claim as Industry’s First Mover

Xconomy San Francisco — 

Two teenagers arrived at Emory University in Atlanta as freshmen in 1989, and within days, they hit upon a “delusional” idea: starting a biotech company. Two decades later, it’s become a lot less delusional, as Jonathan Wolfson and Harrison Dillon have built South San Francisco-based Solazyme into one of the nation’s leading contenders in the race to create renewable biofuels.

“The first day I met him, we’re sitting in a dorm room, I asked him what he wanted to do,” says Wolfson, Solazyme’s CEO. “He said, ‘I want to be a geneticist.’ I said, ‘I actually just wanted to know what you want to do tonight,’—maybe we’d go get some beers, find some impressionable women. I guess the die was cast right then.”

The two struck up an enduring friendship, then went their separate ways on career paths in business and science. They reunited in 2003 to start Solazyme, with what was then a truly outlandish-sounding vision of using fast-dividing, super-efficient algae to produce renewable fuels. Seven years later, they have developed a process that can convert cellulosic biomass like sugarcane, with the help of algae as a middleman, into renewable fuels like diesel and jet fuel. Wolfson and Dillon have turned their once-delusional vision into an organization with 90 full-time employees that has active partnerships with big oil and consumer product players like Chevron and Unilever. It has signed a couple of contracts to supply renewable diesel to the biggest customer on the planet—the U.S. Department of Defense.

And Solazyme is doing this all with a technology that’s fundamentally different to what’s being done by rivals, including a couple of well-known players from San Diego—Sapphire Energy and Synthetic Genomics. To hear the Solazyme CEO, his company has made larger quantities of renewable fuel than all its rivals combined.

Jonathan Wolfson

Jonathan Wolfson

Solazyme certainly has its critics who doubt it will ever become a real biofuel company. And much is still left to prove, in terms of how meaningful this could be for Solazyme’s investors, much less the environmental state of the planet. The company’s process is “really close” to reaching a crucial milestone of becoming competitive with conventional crude oil on price, in the $60 to $80 per barrel range, Wolfson says. The company has already shown it can produce “tens of thousands of gallons,” of renewable fuel that meets all the necessary engine specifications. By the end of this year, he wants Solazyme producing more than 100,000 gallons of commercial fuel, an important step on the way to reaching truly massive scale production in 2012 and 2013. If Solazyme can really deliver that much fuel, it could have an important first-mover advantage in a renewable alternative in a global fuel market that’s worth trillions of dollars.

“The potential for this company is tens of billions in annual revenue if not bigger,” Wolfson says. “We will make renewable oils that can go into all the things we use oil for today.”

The Solazyme story, as alluded to above, really does trace its origin to a couple of teenagers who became friends as freshmen in college. Biotech had gone through its big wave of company creation with Amgen and Genentech and others, but it hadn’t yet really found its sea legs as an industry with multi-billion dollar products. Amgen had just broken through with its genetically engineered erythropoietin, an important treatment for anemia, and Genentech had helped usher in the era of genetically engineered human insulin that would replace animal derived insulin for diabetics. It was heady stuff to an ambitious teen from New York, Wolfson, and his new friend from Atlanta, Dillon.

“The future was completely open with respect to what the tools of modern biotech would be able to accomplish,” Wolfson says. “We were both completely fascinated by it.”

They stayed in touch as each went to graduate school in different parts of the country. Wolfson got his business and law degrees at New York University, while Dillon went on to get his doctorate in genetics—just like he dreamed—at one of the top programs in the country, the University of Utah.

On summer camping trips in the Rockies, the two kept talking about this idea of starting a biotech company. The spark wasn’t really there for Wolfson and Dillon in the therapeutic possibilities of biotech, but they shared a love of the outdoors and the environment. Then, one point in about 1995 or 1996, Dillon gave his friend a call.

“He called and said ‘algae for fuels,'” Wolfson recalled. “It sounded completely ridiculous and extraordinarily fascinating. I thought it was the most creative idea in the world.”

Algae has long captivated the imagination of scientists looking for a cheap source of renewable fuel, because the fast-dividing microorganisms don’t depend on a growing season like soybeans, or corn, and can pump out far higher yields of biofuel per acre.

That feeling of discovery didn’t really last long. “I realized very shortly thereafter that we weren’t the first geniuses to think about this,” Wolfson says.

Japanese and Russian scientists had spent decades trying to harness the potential of algae to pump out fast, efficient quantities of oil. The U.S. Department of Energy’s National Renewable Energy Laboratory had been working on it for years, too.

So the idea sat on the shelf for a while. Wolfson got some experience in investment banking at Morgan Stanley, and tried his hand at entrepreneurship as the co-founder and president of InvestorTree, a financial services firm. Dillon decided to get a law degree on top of his genetics training, became a patent attorney, and got a taste of the business world at the University of Utah’s technology transfer office. The delusional dreams of their teens started to seem more outlandish as they got older. “We learned a little more about how things really work,” Wolfson says.

But by the early 2000s, they saw the possibility for reviving their algae biofuel idea. The Human Genome Project had just wrapped up, and suddenly a lot of high-powered gene sequencing centers had excess instruments that needed to be put to work. These centers around the country sequenced genomes of all sorts of species for the first time, like fruit flies, mice, rats, bacteria, and the first algae strains.

“When that happened, we kind of looked at each other and said this is an interesting time,” Wolfson says.

By 2001, they started working on the business plan, and writing what Wolfson calls “prophetic patents” basically around ideas. By 2003, about 14 years after their original bull sessions, they figured it was time to finally start the company they dreamed of. They moved out to the Bay Area because it’s the leading cluster of money, science, and entrepreneurship in the country.

By this time, Wolfson and Dillon were in their early 30s, and still “fairly delusional.” They didn’t know much about raising money or starting a company. The Bay Area economy was starting to recover from the dotcom implosion. One other company, Cambridge, MA-based GreenFuel Technologies, existed at the time (although it is now defunct). Almost nobody they met had ever heard of algae for biofuels or thought much about it.

When Wolfson and Dillon went around to raise money, they found nobody knew what to make of them. Biotech venture capitalists understood the molecular biology, but not the fuel business. Cleantech VCs, to the extent any of them existed, understood energy markets but not the molecular biology challenge with algae. “There was no real cleantech investment community. All these venture capital firms that now backswear they were investing in cleantech in the early 2000s, there were really only a handful,” Wolfson says.

A big break happened for Wolfson and Dillon when they met Jerry Fiddler. He was the co-founder of Wind River Systems, a software company started in his Berkeley, CA garage in 1981 that went on to generate more than $400 million in annual sales and eventually get acquired by Intel (NASDAQ: INTC).

By 2003, Fiddler had gotten interested in biology, and was taking classes at UC Berkeley. He listened to the young entrepreneurs that had an idea of algae for biofuel. And he provided some critical seed capital in the beginning, parceled out more money to Solazyme as it hit its early milestones, and has invested in every round since, Wolfson says.

By 2004, the company faced a serious identity crisis, which could have been the end. Solazyme’s original idea—like most algae biofuel companies today—was to use the natural power of the sun and plant photosynthesis to enable algae to grow and pump out its precious oil. This could be done in large open ponds, or inside stainless steel vats with lights inside to grow the algae in a more controlled environment. Both of those ideas, were in minds of Solazyme’s founders, “completely wrong.”

Essentially, they didn’t like using open ponds because they didn’t think such a process could be done cost-effectively at large scale. There were too many variables in the environment that would wreck the efficiency of a system, like competing algae species, bad weather, and the fact that algae create “shade” at the surface of water that doesn’t allow sunlight to reach more than a few centimeters below the surface of water. A controlled bioreactor could solve some of those problems, but it was too expensive, required a lot of electricity to power the lights, and couldn’t be done at scale.

Instead of focusing on algae’s ability to capture sunlight, which wasn’t great, Solazyme focused instead on its second property—its ability to convert simple sugars into oils. This was a property that had evolved throughout millennia, as algae found ways to store fat it could survive on for weeks even if trapped under a rock with little to no light. Molecular biology had shown that algae had the most exquisite pathways for converting sugar to fats and oils, and storing it. So Solazyme ripped up its business plan, and said it would ditch the idea of algae through photosynthesis. It would find feedstock from higher-order plants, like sugarcane or switchgrass, which had evolved a biological structure that was more efficient at capturing sunlight. And it would essentially feed that source of sugar into industrial fermentation vats filled with algae, which would then convert the sugar into oil. It would all be done inside a controlled industrial environment that already existed, to make antibiotics, industrial chemicals, or anything else made in fermenters. It didn’t require expensive lights to drive photosynthesis. And Solazyme wouldn’t have to spend huge amounts of capital building new facilities—it could lease existing facilities that were often cheap and underutilized. And once it made the oil, it would be compatible with all the existing infrastructure for distribution, refining, and retailing that Big Oil companies have been building up for decades.

“This business is about cost, volume, cost, volume, cost, volume,” Wolfson says. “It’s not that complicated. You are competing with petroleum.”

This change of heart in the business plan, as you might imagine, led to a delicate conversation with the board of directors.

“I went to the board and said, ‘I know we told you we could do this, but I don’t think we can,'” Wolfson says. The original technology idea was misguided, and would take too long to come to fruition. The alternative was this second idea, which might work, but was completely unproven.

This is where the entrepreneurial spirit of a place like the Bay Area took over. “There was not that much money invested in the company at the time. The board had entrepreneurs and risk-takers. It was still a seed round. They said ‘go for it,'” Wolfson says. “They could have made our lives difficult, but they were supportive.”

Fast forward to the present. Solazyme has stuck with this idea of algae that essentially pumps out oil inside those giant, dark fermenters. It has continued to work on molecular biology of making algae strains that are ideal for pumping out various kinds of oil—for diesel fuel, to soap, to cosmetics. It has hired people with different backgrounds in chemical engineering, and agricultural oil extraction processes, who have experience running large-scale industrial processes. It has raised a reported $75 million in venture capital, although Wolfson says it’s now more than that, without providing a specific figure. Solazyme was awarded a $21.8 million Department of Energy grant last December to build out a large-scale fermentation plant in Pennsylvania for algae biofuel production. Last week, the company delivered 1,500 gallons of algae-derived jet fuel to the Navy for testing and certification. That’s not much in terms of quantity, but if Solazyme can pass these early tests, it could impress a huge future customer. The Navy has a goal of getting half its fleet running on renewable fuel by 2020.

Solazyme certainly has its critics. The company has to buy biomass as feedstock, adding an important cost to its production process, instead of relying on the free wattage from the sun to grow its algae. Wolfson dismisses this point, saying that the sun isn’t really free, because of all the production steps that need to be carried out to nurture algae in open ponds.

It’s possible that algae biofuel rivals that rely on the sun will succeed, Wolfson says, but it will probably be further out in the future. He’s staking his claim that the industrial fermentation route is the one that will grab the early lead.

“This is going to sound arrogant,” Wolfson says. “But I think we’ve made more fuel in the last couple months than all our competitors, put together, have ever made.” If Solazyme can truly go from making large test batches like it makes today, to make large quantities for commercial sale in 2012 or 2013, then it should have a big advantage over all those who follow. And even if the others follow fast, the market for fuel is so big that there’s room for many companies, Wolfson says.

If everything goes according to plan, when might Solazyme turn profitable, and then start making real money? Wolfson didn’t offer a firm answer to that question. Even though he’s now pushing 40, his answer to that retains all the can-do optimism of a teenage entrepreneur, with a lot more caveats that come with experience.

“Our mission is not about telling people we’re going to do something, it’s about actually making money,” Wolfson says. “It’s about making a difference in the world also, but it’s about making money and making an enormous return for our investors while doing something we all think is important.”

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  • mike cahill

    sounds like a great idea.How will you harvest the groth material you need as biofuel/additives?

  • Do you think that there’s still a chance for a pure solar-algae play in the biofuels industry? Solazyme abandoned the strategy several years ago, and currently it looks like cellulosic ethanol is going to be the winner. But, as Bruce Bigelow wrote here http://www.xconomy.com/san-diego/2010/07/14/exxonmobil-and-synthetic-genomics-open-greenhouse-for-algae-biofuels-development/ , there are new technologies being developed all the time that are still exploring algae as a fuel producer. How difficult will it be for algae-fuel producers to scale up quickly and challenge Solazyme’s first-mover advantage?

  • Joe

    Hmmm…. so as an investor what advantage does this have over direct production from camalina and jatropha?? In terms of $$ my guess is not much. Maybe some tunability w-r-t fatty acid chain length but is that a meaningful enough distinction to become profitable??
    Very inchoate company at this point, but give Joule Inc a look.