Royalties, milestones and process design packages, up-front and back-end payments and equity stakes: for anyone who’s committed long hours to testing and retesting, tuning or tweaking their advanced biorefining process and feels ready to bring it to the masses, there’s only one thing to know-the language of licensing. Describing a novel technology, all that hard work, down to the last tiny detail, to a prospective licensee doesn’t match up with the tone or terminology required in the licensing business. To successfully negotiate the realm of technology licensing, the applicant must explain to the lender everything from the basics to the need-to-knows, and all of their intricacies. They must walk the walk and talk the talk of the lender.



The Advanced Biofuels Association currently lists a large number of technology providers working to streamline their highly innovative production processes, and if not already, in the coming months and years many of them will make headlines for their accomplishments. Velocys has developed a microchannel FT reactor, LS9 continues to perfect a designer microbe capable of producing biofuel and biomaterials, Virent Energy Systems has created a patented BioForming process to produce renewable fuels and other chemicals, and Qteros has assembled a platform to make cellulosic ethanol using the Q-microbe. These, among many others, are promising companies, but regardless the status of a technology provider or developer, there is one basic concept to remember, according to Qteros’ President and CEO, John McCarthy Jr.



“If you are in the licensing business and your customers are large, global or industrial companies, you have to think like they think, talk like they talk,” he says. “Otherwise, you will be speaking different languages and nothing will happen, regardless what you think you are bringing to the table from a value perspective.”



McCarthy, with years of experience in growing and building technology companies (e.g. Verenium Corp.’s rise), is not alone on his thoughts of “licensing talk.” Paul Spindler, general manager of technology for a joint venture between energy giant Chevron Corp. and forest products producer Weyerhauser, Catchlight Energy LLC, points out the same basic concept that, when ignored, creates a roadblock between the licensor and the licensee. First, Spindler says, a potential licensor needs to understand the market and the customer for its technology. “Many companies with technology fail because they don’t understand their customer,” he says. For those larger companies like the BPs and Chevrons of the world, understanding the company and recognizing what they want to “talk” about is key, as McCarthy points out, but recognizing the proper mode of dialogue is one thing-nailing down exactly what to discuss is another.



    

Something to Talk About

Of all the variables a potential company or biorefinery may want to hear about, the first is quality. “What the licensees are really looking for is, first and foremost, very strong technology,” says Greg Pal, LS9’s vice president of corporate development. The need for a credible and qualified product from the technology applies to both fuel and biobased chemicals. Without it, the result is pretty clear. “You can’t sell the product,” he says.



After quality in both technology and product, think economics. For Pal, it’s a matter of looking at the technology and defining what type of economics a particular technology can enable for the user. As McCarthy explains, for some technology providers, highlighting what the technology will or won’t do is equally important. The Qteros platform works to produce advanced biofuel, but McCarthy notes that his company will get paid “essentially on what we are saving.” Because of the cost-saving factor, illustrating how a process can cut expenses or operate at a lower cost can be a major advantage.



Although it does loom large, money generated or saved isn’t the only variable licensees want to talk about. Biorefiners are manufacturers, and because of that, biorefiners are risk adverse due to the high capital cost, safety and environmental concerns associated with operating a plant, says a source who wished to remain unnamed.  “They (the biorefiners) are obviously looking for technologies that offer an attractive return and competitive advantage,” the source says. “But they want to deal with credible companies that have demonstrated, or have a plan to demonstrate, their technology at a semi-commercial scale.” Along with credibility, add the team’s experience and expertise to the list of talking points. Pal says, apart from experience on the biological side, a provider also needs to explain its expertise at forecasting future challenges because, as the source says, “Many technology companies grossly underestimate the capital costs required to build their technology.”



And, if that isn’t enough, a technology provider had better be able to positively talk about it all: quality of the intellectual property, favorable economics, experience in both science and engineering, and expertise in foreseeing future challenges. “I think what has been learned over the past five or six years from those early stage companies is that you just aren’t going to get any value if you only have, or are only focusing on, one element of the equation,” McCarthy says.





The Provider’s Perspective

Knowing what to say means a lot, but when the time comes, knowing what to ask for in exchange for a microchannel reactor, a designer microbe or any other advanced technology, is equally essential. And the same questions must always be answered: to what level do you want to be vertically integrated and in what situations or environments does it make sense? This is not unique to the biorefining industry either, and the answer resides in a combination of factors ranging from manpower, know-how and time. For Qteros, McCarthy is pushing the company in a certain direction because of what he learned during his time at Verenium, working to build a joint venture demonstration plant with BP in Jennings, La., and a commercial plant in Florida.



That direction, which may not apply to every company, is all about avoiding the heavy lifting, or in some sense using manpower and know-how to save time. With Verenium and BP, 100 percent of the focus was to get both plants up and running, he says. The Qteros plan will avoid the construction aspect. “As a licensing model, with the right partners on board, we can simultaneously be working on many projects because we aren’t doing the heavy lifting building and engineering the facility.” But to work on multiple projects means working with outside partners, an aspect of successful technology licensing that Pal and his team from LS9 are also not afraid of.



“Within the value chain of fully commercializing technologies there are four key components: feedstock, traditional or cellulosic; technology, how you convert those feedstocks; production, how do you operate the technology; and finally, sales and distribution,” Pal explains. The LS9 approach reveals a strategy that relies on informed choice based on market availability. According to Pal, the company will focus its efforts on technology and production, and will look to partner on feedstock and sales/distribution. Within the feedstock sector a number of companies exist that are far better in terms of growing feedstock for biofuel production, he says, and in the sales/distribution, the same applies. In both areas, LS9 is looking to partner to avoid wasting time on what they feel they can get fair market value for. 



If a provider is going to partner on a project or in using the technology, it’s no surprise there are key elements to consider as well. For Pal, experience is big, but it’s not everything. “When you go to build a first-of-a-kind facility, having a partner who has some experience with this stuff is helpful, as opposed to someone who is brand new to biotechnology or biorefining,” he says. Along with experience on the engineering side, he also says, in general, “You want to look for people that can help speed up how fast the technology is going to get market.”



McCarthy also mentioned the need for speed when getting a technology to market, but noted the role of a process design package (PDP) as well. Because companies looking to license are thinking in terms of large-scale production, a provider not only needs to give a biological platform with all the requisites and data, he says, but also an engineering package that outlines how the technology can be built or plugged into their own designs. To say the Qteros PDP includes simply intellectual property would be a major misnomer. Its package includes everything from the process description and design, piping and instrumentation diagrams, preliminary process operating manuals, the full utilities requirements all the way to the recipe for the organism. “We and our Engineering Procurement and Construction partner would bring this to a BP, Shell or Chevron,” McCarthy says.



Aside from knowing how far to go in the commercialization process, there is still one major question-how to get paid? The answer is virtually endless. A company can opt to receive an upfront payment calculated by finding the savings from a given process combined with milestone (significant achievement) payments; a backend payment based on process performance; royalties based on a function of free cash flow or revenues, and, in some cases, an equity stake in the company or biorefinery using the technology.



For each option, there are different factors to consider. If a company wants to implement a technology but wants to see it in action first, then a provider would be warranted to charge a double fee on the backend payment plan. If the company is young, a startup new to an industry, McCarthy says to avoid royalty payments based on free cash flow, but if the company has been involved for a long time, then he would feel more comfortable with the free cash flow revenues because that company “would know how to operate.”



The perspective from Pal is much like that of Qteros in the way he views his company’s approach to financing. For LS9, Pal says, “We view technology licensing fee plans as somewhat of a continuum as opposed to a one-size-fits-all scenario.” Like Pal’s view, the Qteros perspective seems similar, and in the realm of technology licensing, it sounds pretty good. McCarthy says, “If there is X of tens, if not hundreds, of millions of dollars that a technology platform can bring to a production facility over a 20-year period of time, then there are various ways for us to get economic value.”



Author: Luke Geiver

Associate Editor, Biorefining

(701) 738-4944

lgeiver@bbiinternational.com