September 7, 2010
BY Bryan Sims
Unquestionably, the financial meltdown of 2008 redefined how biorefining projects will be financed in the future. Traditional avenues of finance––whether private equity drives, bank loans or debt financing––are now virtually nonexistent. Banks are hesitant to loan money to even the most promising projects ready for commercialization. With a limited initial public offering (IPO) market remaining stagnant, the once-potential small investor now sits on money instead of leveraging it in fear of tough times getting tougher.
“The market has come back, but as it has come back it has put a real premium on quality,” says Sam Bemiss, partner at Richmond, Va.-based Ewing Bemiss & Co., an investment banking firm actively engaged in the renewable energy markets. “As investors come back they’ve become much more demanding about the fundamental elements of a complete renewable energy project, to include great technology, great management and so forth. In other words, a locked-in spread between the cost of the raw material and the value of the finished product.”
Startup technology developers, eager to showcase their processes and products but typically in need of seed capital during the pre-development stage, can get caught in the “Valley of Death”-the point at which a company is ready for commercialization but is unable to obtain funding. Meanwhile, availability of capital for high risk projects remains historically low as investors are hesitant to dish out large amounts of long-term capital unsure of return on investment.
“We’ve seen a lot of C round or late fourth-or fifth-round deals for really promising biofuel and biochemical companies where all of the venture investors are prepared to reinvest in another round, but only on the condition that a major strategic industrial partner validate the technology by investing alongside them,” Bemiss observes.
There are several available financing options tailored to specific business plans. One such effective route emerging in the industry is the formation of strategic partnerships and joint ventures.
Madison, Wis.-based Virent Energy Systems Inc. began as a start-up research and technology company in 2002 and focused on the production of hydrogen gas for hydrogen fuel cells. The company has since refocused its business strategy on biofuels and biobased chemicals production, attracting significant funding in the form of government grants and equity investments.
In June, Virent closed on a $46.4 million Series C equity round led by strategic collaborator Royal Dutch Shell with strong participation from Cargill and other existing shareholders, including Honda. The funding will advance Virent’s patented BioForming catalytic process that can produce biogasoline, diesel fuel, jet fuel, and green chemicals and plastics using both food-based and nonfood-based feedstocks such as glucose and sucrose, glycerol, starches, polymers of glucose contained in cellulose, and C5 and C6 sugars. The financing followed a milestone in which Virent announced the successful startup of its 10,000-gallon per year biogasoline production plant in Madison. The investment agreement deepened Virent’s existing R&D collaboration with Shell for the production of biogasoline and diesel fuel. With its new equity stake, Shell also has a seat on Virent’s board.
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According to Virent’s President and CEO Lee Edwards, the breadth of application from its BioForming technology platform-which includes a multitude of products-is what gave his company a significant advantage.
“In this day and age with the uncertainty within existing financial markets over the past several years, we have a very strong set of collaboration partnerships that help the company leverage not just investment in terms of cash but also capabilities that those partners have so that we can really effectively go out and accelerate the deployment, validate the products that we’re manufacturing and also give prospective new investors confidence that they’re in good company,” Edwards tells Biorefining. “There’s a commitment across all of our investor base to see the company proceed to commercialization and have multiple plants built in the next 10 years, to successfully show what the BioForming platform can actually do,” Edwards says.
Since 2002, the company has raised a total of $124 million. “All along we’ve successfully been able to access grant money as the company’s technology platform matures and evolves over time,” Edwards adds. Having a strong intellectual property portfolio for its process technology is an added benefit for Virent’s continued success.
Illinois-based Elevance Renewable Sciences Inc. formed a joint venture with one of the largest agribusiness companies in the world, Wilmar International Ltd., to build a 50 MMgy integrated biorefinery in Surabaya, Indonesia. The project will use Elevance’s proprietary metathesis process technology to produce high-value performance chemicals such as 9-decenoic acid and esters, C18 dicarboxylic acids and esters, as well as advanced biofuels and oleochemicals using a variety of natural oils, including palm, soy, jatropha, algae, animal fats and other waste oils. To be located within Wilmar’s integrated manufacturing complex, now under construction, the commercial-scale manufacturing facility is expected to come online early next year.
According to CFO Patrick Kelly, Elevance’s low capital profile when entering ventures such as these is what makes the company an attractive partner. “The overall cost of our biorefineries is quite low and so that makes the financing hurdle easier to get over,” Kelly says. “That’s really a key theme in our fundraising and financing efforts.”
Another key component that makes Elevance an attractive partner is the large existing markets that it sells into, along with the suite of outputs its technology platform creates. “We’re an active participant in all of our ventures and we expect to have multiple biorefineries around the globe in the coming years, and creativity around financing those opportunities is a key theme for us,” he says, adding that Elevance is exploring other partnership opportunities globally to co-locate with existing biorefineries.
Federal guaranteed loans offer some of the best funding opportunities in today’s biorefining market. The USDA has created a Biorefinery Assistance Program, and a number of programs are available through the farm bill, the energy bill and the recovery act.
Myriant Technologies LLC, a Massachusetts-based company that specializes in the production of biobased succinic acid, drew from its $50 million grant awarded by the DOE in December 2009 to build a commercial-scale biobased succinic acid facility in Lake Providence, La. The Lake Providence Port Commission and the Louisiana Department of Transportation kicked in an additional $10 million. With a capacity of 30 million pounds per year, the facility is expected to be operational by late next year using local sorghum and carbon dioxide, according to Senior Vice President of Corporate Development Sam McConnell.
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“We face the same capital issues as other early to late-stage technology companies, and that is finding the significant capital required to build the first greenfield plant, which serves as the basis for attracting additional investment,” McConnell says. “We were fortunate enough to have been awarded $60 million in grants for doing just that.”
Myriant is unique compared to a technology developer as it employs a build/own/operate business model. Since it specializes in producing succinic acid and other biobased derivatives, and aims to sell into a $250 million U.S. market, McConnell says the company is actively exploring ways to capitalize on idled or underutilized industrial or biofuel production facilities looking to add another output product for downstream separations.
“For those of us with a build/own/operate mentality, it doesn’t leave you a lot of choices,” McConnell says. “It requires being able to demonstrate a competitive advantage to attract private funding and really a requirement to be as lean on the capital expenditure side as possible.” Although it may provide short-term flexibility, McConnell stresses that one must not exclusively rely on state or federal government funding.
Applying for community and government grants and use of tax-exempt bonds are just a few of the many ways to fill the financial gap. Although prominent in the early to mid 2000s, venture capital has tapered off as a preferred method of financing. According to a report released in June by Lux Research, titled “Navigating Through Scale to Successful Exits: A Compass for Biofuel and Biomaterial Investors,” venture capitalists invested $877 million across 51 deals in 2009 for biobased fuels and materials production, a level of funding representing a 26 percent drop from 2008.
Despite the current short-term challenges, the future of financing biorefining projects remains promising globally. According to a report released in June, titled “The Future of Industrial Biorefineries” authored by the World Economic Forum, the respective sale of end products is estimated at $80 billion for biofuels, $10 billion to $15 billion for biobased bulk chemicals and bioplastics and $65 billion for power and heat by 2030.
Ultimately, however, it comes down to what the financial sector considers a viable technology and/or business model that can compete profitably in the world of conventional fuels and chemicals, which are also subsidized in the market.
“If you’re looking for the ‘Holy Grail,’ it’s somebody who either can lock in a raw material cost over a long period of time at a low level or is more or less agnostic to his feedstock source, and then can produce a range of end products so that he can’t get caught in a bind either, on the input end or the output end,” Bemiss says. “Flexibility on the input end and the output end is a huge selling point, along with a proprietary process around which you can build some sort of IP wall.”
Author: Bryan Sims
Associate Editor, Biorefining
(701) 738-4974
bsims@bbiinternational.com.