How Biobased Energy and Consumer Goods will be Largest Cleantech Vertical – Featured on Biofuels Digest
By Richard Herbert, Featured on Biofuels Digest’s July 19th issue
Portfolios may be littered with the bones of first generation biofuel startups, but for strategic investors, the biofuels industry as a whole is far from cold in the grave. In fact, if you ask experts like John May, managing director of the investment banking firm Stern Brothers & Co, he’ll tell you that bio-based energy and consumer packaged goods (CPGs) are embarking on a technological reinvention of the petrochemical industry. Combined with shifting consumer preferences, the adaptability of this industry will have a substantial impact on what the world of fuels, chemicals, and consumer goods look like 10 years from now.
Consumer Demand Opening Doors for Biofuels to Succeed
May is optimistic about the bio industry: “It’s going to take decades, but over time the technology advances, consumer preferences for green aspects are going to drive the industry forward.”
And they already are. Consider, for instance, consumer interest in bioplastic soda bottles. Since Coca-Cola Co. launched its bio-based PET bottles in 2009, the company has sold more than 15 million of their PlantBottles in 25 countries around the world. And demand is rising, which is driving the growth of PET resin containing bio-based monoethylene glycol (MEG).
“Coke wants a totally green bottle. Consumer focus groups are telling us that if they don’t get on board with this, whoever does is going to take a big bite out of their profits,” comments May. “Those who are under 40 want everything to be green, organic, clean, and healthy.”
Likewise, interest in natural flavors is a rapidly growing, with the industry worth $3.5 billion in 2011 and predicted to rise to $5 billion by 2017 according to a recent MarketsandMarkets report. Similar upward trends are found in the natural cosmetics and personal care product space.
Consumer preference for bio-based fuels is also rising for passenger vehicles, commercial fleets, and within the airline industry. A recent Propel Fuels SoladieselBD B20 pilot program survey in California, for instance, found that 92% of participants would be more likely to buy algae-based biofuels for their vehicles because their eco benefits.
From bioplastics to natural cosmetics, bio energy to organic flavors; in virtually every industry, consumer demand for greener, more natural products is fueling a surge of research into biological alternatives. As such, bio products will continue to make inroads into spaces traditionally held exclusively by petroleum-based options, and that means a boost in potential for a wide variety of startups – whether they’re working in biofuels, renewable flavors and fragrances, or bioplastics.
Features of Bio-Based Goods that Make it a Uniquely High-Potential Industry
Biofuels are the quintessential example of the transformation that is taking place within this space. In many ways first generation biofuels have waned substantially in popularity and practicality. “I talk a lot about how people are expecting biofuels to be the same bone yard as the first generation of ethanol and that’s just nonsense,” explains May.
But far from their predecessors, advanced biofuel technologies have several advantages that make them uniquely adaptive, which not only keeps them on the cutting edge of technology, but also increases their attractiveness to investors.
For instance, cellulosic biofuel manufacturers can easily adapt their technology to switch to biogas fuel production by compressing the syngas. Because they have options on the output side, they’re able to adapt to changes in price and demand in the market to ensure they remain bankable and attractive for equity investments.
A perfect example of this kind of adaptation can be seen in Primus Green Energy, Inc. They’ve developed a proprietary process technology that converts biogas into a drop-in fuel, but given the hesitancy felt in the investment space about biomass technology, Robert Johnsen, CEO of Primus decided to refocus the company to reforming natural gas into syngas. Given its low cost, and the fact that it is essentially burned off as a waste at most well sites, Primus is able to capitalize on a readily available yet profitable fuel in order to get the funding they need to scale up.
Johnsen explains: “If we worked with biomass, we’d have to gasify it; same thing with MSW (Municipal Solid Waste). With natural gas, we do gas reforming instead, which results in a syngas that can be run through our system. Down the road we hope to go back and find a rational means to turn our talents, creativity, and capital to the challenge of biomass scale-up while not betting the company on the outcome. ”
These interchangability sentiments are echoed by May; “If natural gas prices triple or quadruple over time, the natural gas play, or Primus type deals won’t work anymore. But the good news is that their technology gives them the option to turn it into power, chemicals or another gas play as opposed to a fuel play which will make all the difference in the world.”
Yet biofuels technologies have potential that goes well beyond other types of energy. Many renewable biofuels technologies can be adapted to enter whole new markets, like the renewable chemicals space for instance. Since renewable chemicals are high-value products, profits are higher and markets are more stable, making them very attractive for investors. Given consumer demand for these types of products, there’s no doubt that the market is there.
Gregory Manuel, formerly of Amyris Biotechnologies and former Special Advisor for Alternative Energy to the US Secretary of State, expounds on this idea further. “There’s a recognition that the level of efficiency you need to be at in the commodity spaces is so high that you have to give everything away, which will be the case for many years to come. You need to be at x-percent efficiency in the fuel space from processing feedstock to the actual fermentation to the downstream controls for distribution, etc. You can get there, and I think that some will get there, but it will take quite a bit of time. In the meantime, they’re all very focused on the high value chemical space because of the significant profit margins.”
As such, those biofuels companies that are able to tweak existing technology to serve new markets, either on a temporary basis or as a way of expanding their offerings, are far more likely to succeed and will ensure they’re not another dead start-up on the bone pile of first generation ethanol. “Frankly it’s going to force these companies to think creatively. The companies that don’t think like that are going to see themselves knocking on doors with no response,” comments Manuel.
Another way biofuels companies in the US are staying profitable is to market their technologies internationally. As Vonnie Estes, Managing Director at GranBio put it, “What is continuing to happen is that a lot of the tech is going to continue to be started and invented in the US and then deployed in other places.”
On the one hand, there are many regions – Asia, Africa, and South America, for instance – that have a lot of biomass that they don’t know what to do with. On the other hand are those countries, such as the UK, where there’s no space for biomass but an interest in using waste to create biofuels. “So they’re coming to the US and asking what tech there is and what can be licensed,” says Estes.
As a result, many biofuel technology companies are in an enviable position of having the adaptable tech other countries need, and the opportunity to license it at a high price. “The US is best in coming up with the tech because of people willing to take risks. The rest of the world will deploy them,” concludes Estes.
Manuel whole-heartedly agrees. “US companies will only survive if they look more proactively and creatively for partnerships. Deployment for companies in the US may happen in South America which will bring in revenues and enormous value to companies sitting in the US. This in turn will allow them to hire people and increase R&D and deploy in other economies – The Middle East, Brazil, China, India.”
To Thrive, Biofuels Need the Right Kinds of Investors; The Rest Should Get Out of the Way
Yet despite all of these advantages, there are still many bio-focused companies struggling to find the funding they require. May believes it’s because they’re failing to see alternative financial solutions available to them. An albeit creative, but nevertheless available pool of investors exists – they’re just looking for the right technology to back.
“I recently worked on a deal that had a lot of innovative attributes – loan guarantees, bonds, new market tax credits which are totally non-dillutive, low-cost subordinated capital that replaced a slug of equity that would have had to be raised. This was from a strategic equity firm not a private investor or VC,” explains May.
According to May, not only was this creative mix of financing part of the success, the stability of the industry involved – paints and solvents in this particular case – was also highly strategic. Unlike energy markets where prices fluctuate constantly, it was easy to make a case that the unguaranteed bonds wouldn’t require an off-take. What’s more, though most post-2008 project finance structures require a contracted cash flow, in this case it was not needed because of the lack of volatility.
“You don’t need the risk mitigation. If we give you an off-take with the biggest chemical companies in the world, why are we paying any interest? You don’t have any risk!”
The lesson learned by May that he’s applied to dozens of other bio deals is that when you de-risk a project (technological risk, feedstock risk, and off-take risk) for debt and equity, then combine the deal with an eclectic mix of financing, and then guarantee a minimum main play or production yield, you can make lenders comfortable and seal the deal.
Further, says May, those in the bio-based sector have to get out of the business of convincing people that it’s the kind of industry where they can achieve the rapid scale-up, hurdle rates, time horizons and liquidity events they’re used to. “It’s not solar, wind, or energy efficiency, and it doesn’t scale like software. It’s never going to and we have to stop apologizing for that.”
Rather than pinning his hopes on VCs, May’s approach is to find investors already in the same frame of mind rather than trying to coerce them into doing something they aren’t comfortable with. As such, his firm works with family offices, strategics, high net worth individuals, and even dabbles in crowdfunding.
In the end, May concludes: “It takes decades, and if you can’t wait to get to the point where the project is going to pay you a dividend, then don’t invest. You need to orient yourself to a de-risked approach to the debt and to the proper sources of equity.”
Technology Transformation, Alternative Financing, and Listening to Consumer Demand Spells Success for Bio-Based Materials and Goods
The path toward success for bio-based products and materials may be a winding one. It requires paying attention to which bio-based solutions consumers want, adapting existing bio technologies to new markets, and doing a little creative thinking on the financing end. But for those who can juggle these demands skillfully, there is a lot of reason for optimism.
Actually, to take the argument to its logical conclusion, given the potential for bio chemicals and fuels to invade nearly every facet of the supply chain as they replace petrochemicals, it’s only a matter of time before they surge past fossil fuels as well as wind and solar in terms of how they impact our daily lives. The potential treasure for those willing to take risks and push forward with renewables is substantial, to say the least.
As May concluded, “Bio will be the biggest industrial vertical in the cleantech space. The technology out there is just amazing.”
Richard Herbert is the 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.