A Biofuels and Biobased investment primer: An 18-combination,
8-character system for classifying bio investments
Here’s our investment primer on how to size up the risks and the
rewards and tune them to meet your goals.
And, a system for organizing opportunities.
So, you’re thinking about investing in bio? Here’s the good news –
you’re not alone. Here’s the bad news – you’re not alone.
There are retail, private equity, hedge fund, sovereign wealth,
strategic, grower, VC and institutional investors snooping around
too, and making active investments.
For one thing, carbon’s making a comeback as the economy recovers
and the weather continues to get wilder, whackier and scarier. As
DOE Deputy Chief of Staff Jeff Navin observed, “Just because the
appetite to tackle it went away, didn’t mean the [climate change]
problem went away”.
As investors are discovering, the whole world changes when the rain
doesn’t fall where it used to fall.
Though there are hundreds of companies, you can parse it all down
into some pretty simple categories – in order to measure the rewards
(which, generally speaking, you’ll hear a lot about from the
promoters) against the risks (er, less chatted up).
That’s what we’re going to cover today — with three broad strokes:
stage, stream and degree of novelty. There are only 18 combinations.
They are the first keys to unlocking opportunities.
There are lots of ways to sector out the biobased space. The most
useful way is to divide it, like oil &gas, into upstream,
midstream and downstream. The way these work are a little different,
and here’s how.
In a word, feedstocks – typically crops or
residues. Could be anything as mainstream as year’s corn crop, to
something as exotic as carbon monoxide and water or municipal solid
waste and sludge. A seed company or a grower fits into this
category. More exotically, an algae grower does too. Sometimes, a
polluter does, if there’s a residue in the mix. If you’re invested
in Syngenta, Monsanto or Ceres, you are right here.
These are the processing technologies. Could
be standard fermentation that has been used for centuries to make
alcohols from grain – could be exotic technologies that make
bio-oils and char. They could be owner-operators of projects, or
technology licensors. If you are invested in Solazyme, Gevo,
Renewable Energy Group or Amyris, you fit right here.
These are the molecules themselves – their
distribution into the marketplace.
2 degrees of novelty
There’s known, and there’s novel. For example, gasoline is known,
ethanol is novel (though less so).
Known molecules cause no infrastructure change or change in other
processes. Making renewable diesel or jet fuel is an example.
Novel molecules can be substitutes with new uses, such as using
biofene as a lubricant— or known molecules that have never been
feasible before (e.g. using adipic acid as an intermediate
pre-cursor for nylon 6,6 – which wasn’t economically feasible
Known molecules have equivalent performance. Novel molecules can be
varied – they can perform better, or worse.
3 investment stages
There’s early stage, mid-stage and late-stage. Now, everyone has a
different definition – for instance, late-stage can mean “pre-IPO”
for VC investors. SO, here’s how we look at it.
The proof of concept phase. Not just proving
that, for example, you can train an given organism to secrete a
hydrocarbon. It means — from the first moment of the idea until the
point where, at any scale, the process is shown to work and is
This assumes that results hold up during scale-up, the molecule
performs as expected in an engine or in green chemistry, input and
product prices hold, and that the process bolts into the rest of the
field-to-wheels supply chain as expected).
The point from proof of concept to proof of
Process is proven, economics are known. From
here, it is a a matter of lining up location, customers and capital
in an optimal way. For example, Shell’s Gas-to-Liquids project in
OK, so you’re done. There are 18 different combinations – ranging
from “Early-stage, novel, upstream” (e.g. a jatropha seed developer)
to a “late-stage, known, downstream” (e.g. investing in a fuel
marketer that is distributing, as an offtaker, renewable diesel from
a producer’s sixth commercial plant).
You can use acronyms if you like. You use U, M or D for stream, E, P
or L for stage, and K or N for novelty. In the examples cited above,
you have ENU, and LND. There are just 18 combinations.
Assessing risk and opportunity
From that point, you can start to make some rational investment risk
assessments. It’s helpful to line up opportunities within categories
(like for like), and compare.
For example, early-stage investments tend to be smaller, and riskier
– than later-stage. The “will it work?” factor looms large,
early-on. Later, you have more certainty — and, as a result, less
upside. The more you understand technology and market forces, the
more you will like the early-stage.
Upstream technologies are more fully exposed to the biobased sector,
than midstream and downstream, while the farther you move down the
stream the more you are exposed to a market in a given molecule
(downstream), or the arbitrage between the molecule price and
feedstock price (midstream).
In terms of novelty — for sure, novel technologies have
transformative economics on price as well as cost – known molecules
tend to offer opportunities in terms of cost savings (cheaper
production) or market share shifts (as customers adopt, for example,
equally-priced molecules with attractive carbon attributes).
By contrast, novel technologies can have superior performance, or
can eliminate a step in a chemistry – even if they cost more, they
can offer customers amazing opportunities. But the more novel the
molecule, feedstock or technology, the more important the IP
protection is, and potentially devastating the loss of patent
protection is — speed to market will matter in terms of producing
A real-world example
Let’s take a popular area for investment these days — adding
technology to enable an existing ethanol plant to make biobutanol.
They are currently in proof-stage, making known molecules, and
midstream. Call it a MPK.
So, there you have it. The biobased world of thousands of molecules,
a hundred feedstocks and several dozen technologies, parsed down
into 8 simple letters, and 18 combinations, that you can use to rate
opportunities for risk and reward.
In the retail investing world, in debt-side investing, or in pre-IPO
equity investing — there are companies of all combinations
available. Parse away.
Jim Lane is editor and
publisher of Biofuels Digest and BioInvest Digest
article was originally published. Biofuels Digest is the most widely read Biofuels daily
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