Outlook 2012: Taking 2G Technology to Task

Jason Matlof, partner, Battery Ventures
By Kris Bevill | November 15, 2011

Finding investment dollars for second-generation biofuels has been challenging for all, so EPM sought out a venture capitalist to share his perspective on the industry. For a technology developer, the biggest selling point when seeking investors might be that the business model does not require hundreds of millions of dollars to build a production facility. The company’s success is beholden to someone else building the facility to use that technology, however, and, until they build it, the company is unable to prove its own technology and reap the licensing benefits of having a proven, successful process. 

This is the situation of many technology developers in the cellulosic ethanol industry, including, until earlier this year, Massachusetts-based Qteros Inc., developers of a technology platform centered on what it calls the Q microbe—a microorganism with a love for all things biomass and a natural ability to produce ethanol. This little bug has attracted the attention of multiple investors and last January Qteros announced a strategic partnership with global engineering firm Praj Industries Ltd. to commercialize cellulosic ethanol facilities using Qteros technology within the next two years. Through the partnership, Qteros is expected to finally have the steel in the ground with which to promote its capabilities.

Jason Matlof, a partner at venture capital firm Battery Ventures and leader of the company’s cleantech team, is a member of the board at Qteros and was also the company’s first institutional investor. He declined to specify how large Battery Venture’s stake in Qteros is, but he is passionate about promoting the company and its potential for return on investment. “We as a firm are fundamentally opposed to investing in companies that require many hundreds of millions of dollars to get to commercial scale,” he says. “There’s not enough equity in the venture capital world to fund those types of businesses. So you have to figure out a model that works. Qteros has done that in that they’re licensing like a biotech company would do to a big pharmaceuticals company.”

Financing continues to be a major hold-up in the commercialization of second-generation ethanol, and Matlof says Battery Venture’s team is always on the lookout for new opportunities, but they have to meet a few strict criteria. As mentioned, the firm refuses to invest in building facilities. Secondly, once the firm places its bets on a certain technology, it won’t play with a competing company. “We don’t ever invest in conflicting, competitive players,” Matlof says. “Most people do. And we just won’t do an investment where there’s not a presumption that you can build a company to get it to profitability and exit on traditional capital investment dollars, which are $25 million to $75 million typically. That is an absolute sacrosanct requirement.”

If you can meet those criteria, there is one other major stipulation to Battery Ventures’ biofuels investment policy that may trip you up: the firm has a strict “no sugar allowed” rule. “As much as the market ebbs and flows in the short term, the long-term market for producing biofuels from waste biomass is an enormous market opportunity,” Matlof says. “Anything that’s using biomass as a feedstock is very interesting, but at the same time, we’re not going to invest in technologies that use sugar as a feedstock. I just think that’s a fool’s errand.”

Oh, and one more thing. If your company’s business model is based on projects being built only in the U.S., your chances of attracting big investors are probably slim. “The reality is that the market is international,” Matlof says. “That’s where the biomass is. We don’t have nearly as much biomass as in the tropic regions. The real opportunity is outside of the U.S. and the lack of Congressional incentives with any teeth is ensuring that’s the case.” 

Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine
(701) 540-6846
kbevill@bbiinternational.com