Proterro Inc. doesn’t have any issues with office furniture or parking spots. In fact, the promising startup, which is developing a fermentation-ready sugar for biofuels, is a virtual company that doesn’t even have employees, or at least, not the kind of employees one might think an advanced biofuel up-and-comer would have. CoolPlanetBiofuels, another potential advanced biofuels winner, does have employees—and they’re good. Mike Cheiky, president of the Camarillo, Calif.-based company, has received the World Economic Forum Technology Pioneer for the Energy and Environment award twice and has been issued 40 patents, with several more on the way. Both companies have arrived at the same place, however: they're on the cusp of breaking out as the latest, greatest, unknown technology providers that could change the future of biofuel production. Here’s how they did it, and why each company’s growth path, although very different, shows that the winner’s platform for advanced biofuel players is large enough for several to stand on.
A Sweet Story
Surprisingly, the Proterro story is not a unique one, according to Kef Kasdin, general partner for Battelle Ventures and CEO of Proterro. “This virtual company model is one that we have adopted in several cases in our portfolio,” Kasdin says. Currently, the company has a CEO, a CTO and a vice president of development, all of them employed as consultants by Proterro. Admittedly, Kasdin wears two hats, currently acting as the CEO while continuing to fulfill her duties for Battelle Ventures’ early stage capital venture fund, the same fund that helped Proterro get off the ground. Battelle Ventures, an independent $220 million fund whose sole limited partner is Battelle Memorial Institute (Battelle), and Braemar Energy Ventures together provided Proterro with $5 million in seed financing, which, as Kasdin explains, the funding was granted more on what Proterro didn’t have rather than what it did.
“One of the innovations that we came up with at Battelle Ventures,” she says, “was that if we identify a platform at the laboratories, it was probably a better course to think about this virtual company route to meet certain milestones in terms of the company’s commercialization development, before starting to add a lot of internal resources.” The key to the virtual concept, as Kasdin says, is to minimize the costs related to building up management teams, leasing office space, lab space and new equipment. “The other part,” she says, “is that taking these early-stage technology developments to commercialization are a very risky process. Some just don’t work out.”
Instead of sacrificing capital on lab equipment or office supplies, Battelle Ventures has found a way to leverage its resources and make a company such as Proterro possible. Battelle manages six of the U.S. DOE’s national laboratories, and Kasdin says the virtual approach used at Proterro has taken advantage of that relationship.
In 2006, Kasdin began looking for an answer to many of the biofuel dilemmas of today regarding feedstock, transport and process methods. After examining the entire landscape, including what other VCs and the U.S. DOE were investing in, she put together a presentation to take to all of the labs managed by Battelle. After linking up with Proterro’s current CTO John Aikens in an effort to evaluate the latest technology at the labs, Kasdin and Aikens eventually arrived at the same conclusion. The answer they were looking for, however, was not in any of the labs. Their idea, and the foundation of Proterro’s technology, was to create a feedstock that could cut out the growing, harvesting and transport issues seen today by other energy crops.
“What if there was a way to circumvent all that,” Kasdin says the two contemplated, “and just go from sunlight, carbon dioxide and water, directly to simple sugar.” Apparently there was a way, but to develop the idea into a reality, Kasdin had to utilize Battelle Ventures’ experience with the virtual model.
“We leveraged other people’s capital at other labs to actually demonstrate the viability of the technology,” she says, by subcontracting certain Proterro-based work out to engineers and scientists already working at a lab. “It’s like sponsored research,” she explains. “We are paying them to do our project as part of their responsibilities.” The nice part about the whole approach, according to Kasdin, is the help you get at the lab. “You can get some very high level, senior, brilliant scientist and engineers” who have access to “wonderful capital investment that, typically, the government has already paid for.” Proterro pays for the access, but does it in a way that is much more capital efficient than recreating all those tools needed in small startups.
Now, as Proterro stands on the brink of exiting the virtual model, Kasdin explains the next step to making it all work. In a typical model, the first CEO will act more as a project manager, but eventually, as Kasdin predicts will happen for her role, the first CEO will be replaced by another, better-suited business person. Proterro will eventually get to a point where someone who has business connections in the biofuels and biobased chemical world is needed, she says. “We are going to reach a point at Proterro when we would benefit from having somebody that comes out of the biofuels industry.”
A Perfect Partner
If the Proterro approach to building a startup to become a prominent force in the biofuels industry represents the virtual or nontraditional method, CoolPlanet Biofuels is the exact opposite. The company, which is developing a thermal processor to convert biomass into multiple gas streams for catalytic upgrading to conventional fuel components, all of which can be integrated into a transportable modular shipping container each producing roughly 1 MMgy, is already backed by North Bridge Venture Partners, and recently partnered with GE Energy Financial Services as well. While Kasdin touts Proterro’s approach, there’s no doubt that Ricardo Angel, senior vice president of GE Energy Financial Services, is sold on the CoolPlanet process to the degree, in fact, that he has earmarked the startup as an investment. “If and when the company needs more capital,” he says, “we will put more capital in there.” And there's more to winning Angel's confidence than backing. Angel says, “From our end, we always like to think that we are a group that is different than other VC groups. We add value and we do add capital like others do, but in addition to that, we can leverage the GE platform overall.” GE boasts nearly 3,000 PhD’s, experts and research facilities to leverage, all together with “a lot of money,” according to Angel.
As the company evolves, Angel says, GE understands very well what it takes to scale up the process of commercialization, and, what it takes to integrate different systems. GE Energy Financial Services, one of five arms of GE, can add different forms of capital to CoolPlanet through credit finance, project finance or through working capital, Angel says. “Not too many people can bring that to these types of companies.”
The joint venture between CoolPlanetBiofuels and Angel’s GE team may sound like a perfect match for CoolPlanet, but as the numbers Angel presents show, working with a team like GE’s might be difficult. “Over time our group probably looks at more than 1,000 companies or businesses a year,” he says, “and out of that, we usually do good work with probably 30 companies, and each year we probably invest in around six companies.” So, if a company is looking for additional funding, is the best path the one that leads to a perfect partner like GE Energy Financial Services, or is it the one that ends up with a virtual approach championed by Battelle Ventures?
Angel says his team invests in tech-based companies that have breakthrough potential in a large market. As for Kasdin, the virtual approach is well-suited for taking certain nascent technologies out of the lab. To determine the right investments, Angel says they look at all the components of a company as a whole, and one particular variable will not typically set a company apart. “It’s not a simple equation where you have 20 percent for management, 20 percent for technology, or 20 percent for market” to determine the value of a company, he says. In the end, GE usually invests $2 million to $5 million per project, and prefers to come in on the second round of funding. Investing in a series A round has happened before, he says, but it’s more of an anomaly.
Fortunately, even if the two companies’ growth plans are different, one going bare bones just to get out of the lab, the other utilizing the vast resources of a major energy company, there is one similarity between both, and it has to do with winning. The phrase has been used before but it bears repeating. Both Kasdin and Angel stressed one idea: that in the advanced biofuels spectrum, there is room for multiple winners. “We would be happy to invest in a few additional players,” Angel says. Kasdin adds that “there is huge market potential” for new processes. Regardless of the model used to get from potential to reality, however, Angel says this about the current state of the industry, “We are seeing a good amount of opportunities right now. I think this is the right environment to invest.”
Author: Luke Geiver
Associate Editor, Biorefining