Research, Process, Testing—Repeat

Is there a science to financing science?
By Robert Bailey | January 09, 2012

Call me a heretic, but biofuel is not a near-term substitute for petroleum. Recent shale oil discoveries, efficient drilling technologies, and a boon of natural gas have moved the U.S. to energy positive for the first time in 65 years. This is no time, however, to stop. Biofuels and earth science are identifying critical renewable sources and methods of obtaining both fuel products and food.

As in any bold challenge to old thinking, the biofuels industry is running into resistance to funding. The Valley of Death is where concepts lie in finance limbo between proven results and funding to commercialize. Investors like to fit science into their world. Wrong fit puts pre-commercial science in a gridlock where economic innovation and scientific growth stagnate. It happened with the first American power generation, but the inventors figured out the solution. In 1884 Thomas Edison’s partner, Elihu Thompson, said, “The Dynamo is not the system, nor the regulator, nor the lamp, nor the lines and switches, but the whole entity must be compared with another entity, under conditions which represent real, out-and-out commercial usage” (from Maury Klein’s “The Power Makers”). Edison and his partners realized they were working toward a complete solution. Educating the public and policymakers on practical aspects of electrical energy was a distraction, but it piqued investor interest. Sound familiar? It should. Today’s hurdles are similar.

The success incentives in science and finance are somewhat different today. Private equity, hedge funds, and venture capital resources may or may not be knowledgeable about specific process technologies. Near-term profit projection tickles most investors’ interests more. Biofuel operations require monitoring and ongoing improvement throughout the system if the enterprise is to commercialize and grow. This is simply Edison’s own science in business balancing act, updated—knowledge in money.

To prepare our “science clients” for financing, we review three stages: research, process and testing. We call the fourth the “shampoo step,” repeat. The logic behind each is straightforward. Research: scientists and investors exhaustively study and probe their materials. Process: the scientific process carefully monitors the process steps; investors use management models to gauge whether their money is achieving the objectives. Testing: peer review is often a step in commercializing scientific findings; the investor necessarily reviews customers’ preferences and buying patterns.

The scientific process is exacting. The investment management process, while somewhat less exacting, is critical to commercial and financial success. Getting understanding of the relationship between them is mandatory. Randy Komisar, partner at Kleiner Perkins Caulfield Byers, advises innovators to create a management dashboard. In “Getting to Plan B,” he describes it as a necessity “to constantly iterate to find a path that will work.”

With the exception of Vinod Khosla and John Doerr, funders are not fond of experimentation. To scientists, however, it’s the secret sauce to their next-generation business. One scientist and client told me, “It’s amazing how creative you get when you don’t have money.”

A few months ago, I introduced two clients into a conversation about combining their respective science and technology, for business reasons. One has an algal process. The other is a Midwestern multifeedstock biofuels producer. They had individually worked through the research, process and testing stages. Both have exceptional business plans and credentials. The joint venture idea came from the dashboard I conceived for them.

The repeat stage led us to indexing the cost of variable feedstocks against the algal oil; offsetting variable commodity costs may enable us to closely manage operating profits of each business. Only by turning the mathematical and scientific problems upside down did we arrive at this business concept. We are no Einsteins, but our imaginations should begin to payoff for investors in a quarter of the original time. This idea was also derived out of a science lesson from Michio Kaku, a founder of string theory and author of “Physics of the Future.” Recently he spoke about the recession and the limits of zero-sum thinking. His reference was primarily directed at politicians. Science doesn’t work that way, said Kaku. “Science makes more pie.” In one real-life situation, my own on-paper calculations suggest that our investors may find their rewards highly satisfying, and lucrative.
Author: Robert Bailey
Biofuel Financing Advisor/Broker, Trusted Advisory
(646) 472-5213