Stay Patient on Biofuels

 | Apr 17, 2013 | 1:00 PM EDT
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I am back in Washington today, attending Biofuels Digest's Advanced Biofuels Leadership Conference (ABLC), the premier event for the renewable fuel industry. This excellent conference, organized each year by Biofuels Digest publisher Jim Lane, brings together the leading companies in the space to discuss trends in the technology, business prospects and financing. The attendees are the "who's who" of the industry, and I would surmise it is the single most important annual invent for investors in the space.

Last year I first posted on biofuels (giving it the moniker "Renewable Revolution"), so now is a good time for an update -- one year into what I view as a three-to-five-year theme. Although it is still in the early going, I am excited about this theme simply because of the dozens and dozens of companies pursuing it. The level of activity reminds me of very early days in Silicon Valley (say, in the 1980s), when hundreds of tech companies were funded by venture capitalists but did not yet have the revenue and earnings that would ultimately explode in the 1990s.

One major change over the last year is the slamming-shut of the window for initial public offerings, which has forced many start-ups to go back to their VCs for additional rounds. At this time last year, a high-profile deal got pulled (Enerkem, a waste-to-fuel name based in Montreal, Canada), signaling that the public markets were not yet ready to forgive the blowups that occurred in the first wave of biofuel IPOs; look at the charts of Codexis (CDXS) and Amyris (AMRS) for insight. After a year of no IPOs, the French biochemical company BioAmber is going on the road to raise more than $100 million. Many are skeptical the company can get a deal done, given its early stage of development, so it will be a tell on whether the IPO window can reopen.

The big issue for the industry -- and the problem that blew up the first wave of names -- has been scaling. Process technology that works at demonstration scale often hits snags in moving to commercial production volumes. For instance, a high-profile blowup last summer came in isobutanol producer Gevo (GEVO), whose first commercial scale plant in Luverne, Minn., ran into contamination issues and had to halt production to regroup. All eyes are now on KiOR (KIOR) as the company starts its first commercial plant in Mississippi. From a financing perspective, the industry needs KiOR to succeed in order for confidence to be restored.

Another trend is the focus on byproducts (now called "co-products") meant to generate additional revenue. Everyone wanted to chase the fuel market because it is so large, but because of cost issues many are finding that lower-volume chemicals at higher margins can make the business models work near-term. This is actually true across all "generations" of the industry. For instance, ethanol production is being supported by many of the co-products, such as distillers grains that are used for animal feed, and the inedible corn oil that can be used for biodiesel. The best names in the space should prove to be the ones that can most fully utilize its output streams to generate revenue.

As I first posited last year, this industry is worth tracking, but we're likely to see 2015 before it really explodes in the way tech did in the 1990s. The pieces are in place, VC funding has been extensive, and technology developments are impressive. If many of the companies can hit their milestones as advertised, they will be at commercial production in, well, 2015. With real revenue and earnings, the capital markets will be willing to finance the next wave of production plants, and off to the races we'll go. In the meantime, patience and diligence are the watchwords for this industry.



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