Green Tech

Editor's note: This is part of a series of stories about the recession's effect on the tech industry.

On paper, things couldn't be much better for Bruce Jamerson. As CEO of Mascoma, he runs an ethanol company staffed by brilliant scientists, wooed by state governors, and amply funded by General Motors and leading green-tech venture capital firms.

But late last month, he made the painful decision to shed staff in an effort to control costs. Even though Mascoma's a private company, there is no escaping the trickle-down effect of the skidding stock market.

Mascoma CEO Bruce Jamerson

(Credit: Mascoma)

"Because we're not going to have commercial operations for several years, we need to make sure that our cash lasts as long as we can," Jamerson said. "All companies in the clean-tech sector should be considering this."

Many already are. After being lavished with attention and money for years, many green-tech entrepreneurs--the foot soldiers in a hoped-for clean-energy revolution--are being forced to shift into low gear.

The recession and slumping financial markets are choking the flow of money, which is the lifeblood of fledgling green outfits. Meanwhile, lower economic activity is causing fossil fuel prices to plummet, making some green businesses a tougher sell.

Green-tech entrepreneurs do have other options for getting money beyond traditional venture capitalists and angel investors, such as government loans or state grants.

But the same danger signals that Silicon Valley venture capitalists have broadcast to Web start-ups applies to green tech as well.

"There is such compelling logic behind a lot of the technologies, but there is a real hunkering down going on," said Mark Barnett, an attorney at Foley Hoag's clean-tech practice. "If you're a venture capitalist, to give a company more money, you have to believe they can weather the storm...and be one of the first out of the gate when things clear."

From Wall Street to South Dakota
Unlike many people who have jumped into clean tech over the past few years, Mascoma's Jamerson, who's in his early 50s, knows quite a bit about the fuels business and finance.

A year and a half ago, he was president of Sioux Falls, S.D.-based VeraSun, which grew to be one of the biggest ethanol makers in the country. He was chief financial officer until it went public in 2006, when investors' love of ethanol made it a hot stock. (It recently filed for bankruptcy.)

His financing chops come from working on Wall Street, where he engineered investment banking deals for 10 years before abandoning it all to run a boutique investment firm in Oregon.

After being VeraSun president for almost a year, he resigned last February to join a little-known start-up called Mascoma, not bothering to take a vacation day in between jobs.

He was lured to Mascoma--prodded by high-profile investor and board member Vinod Khosla--because of its technology, he says. Using genetically modified microbes, Mascoma promises to make ethanol cost-effectively from non-food feedstocks, like wood chips.

Mascoma CEO Bruce Jamerson at the announcement this summer of a plant to make ethanol from wood chips. Pictured with him on the left is Beth Stanek, General Motors' director of energy and environment policy, and Michigan Governor Jennifer Granholm.

(Credit: Mascoma)

Like many people in the clean-tech business, Jamerson sees his small ethanol firm as part of a larger clean-technology movement to encourage domestic fuel production and reduce greenhouse gas emissions.

He says Mascoma is at the "edge of the wedge," the intersection point of many trends, including high energy prices, climate change, and policies promoting energy security. It's considered one of the front runners in the race to make ethanol from non-food sources.

Caution after a great run
Cracking the nut on cellulosic ethanol is one of the biggest technical hurdles to meeting government renewable fuel mandates and improve the public image of biofuels.

Click for complete special report

"There are a lot of places in the world where the appetite is very strong for this type of product," he said at a Mascoma lab tour in Dartmouth, N.H., where Mascoma was first hatched.

Indeed, on the whole, the company has had a great year. General Motors and Marathon Oil invested in the firm and became strategic partners. Michigan and New York, eager to diversify into renewable energy, have given Mascoma grants to build pilot plants. Technically, Jamerson said that Mascoma's ahead of schedule in meeting its milestones.

But even buoyed by all that optimism, Jamerson and the company's board decided it had to lay off employees, including its president and a number of vice presidents.

"These are hard decisions. The way I'm thinking about it, I'm being conservative with my expenses," he said. "It just so happened that the reductions were skewed toward a couple of senior people."

Rather than have to make more cuts in six months, he decided that it was better to have a cost-reduction plan now. Its plans to build pilot plants in Michigan and New York are not in jeopardy; the cutbacks were made so that the company could continue hitting its goals, Jamerson said.

Not every green-tech entrepreneur is in the same boat. Companies that need late-stage funding, to finance a solar manufacturing plant or biofuel refinery, are perhaps in the toughest spot.

Businesses that focus on energy efficiency, for instance, stand to do well as companies look to save money, whereas biofuels like ethanol are more closely linked to falling prices of gasoline.

But it's the disarray of the financial markets that has Jamerson most concerned. Mascoma had planned to go public in the next two years, but that's a lot less certain these days.

"That window has been closed for now and with institutional investors being more cautious, we need to be cautious," Jamerson said. "We need to get through this period of time."

Next in the series: Survival of the fittest for IT companies

Biofuel start-up Mascoma has laid off a handful of employees, including President Colin South and other executives.

The total number of eliminated positions was between 5 and 10, CEO Bruce Jamerson said Friday.

Mascoma is one of few well-funded companies that have developed technology to make cellulosic ethanol from nonfood feedstocks. General Motors and refiner Marathon Oil are investors.

Click on the image to see a photo gallery of Mascoma's lab, where scientists are engineering microbes to produce ethanol.

(Credit: Mascoma)

Jamerson said Mascoma continues to hit its technology and business milestones. But he and the board felt that it was prudent to cut costs, including personnel.

Because of the upheaval in the capital markets, Mascoma cannot go public to raise additional funds, and institutional investors are being more cautious now. So the company is positioning itself to hold on to cash as long as possible.

"I'm trying to get ahead of this," Jamerson said. "I don't want to find out that in six months, things are more challenging. Then when you make cost reductions, it's even harder."

The company raised $61 million in equity earlier this year. It has also gotten Department of Energy grants, and money from New York and Michigan, to build its first pilot facilities.

The state grants are not in jeopardy, Jamerson said. "I met with the governor of Michigan the other day. It's a priority for them. It will create a lot of jobs in northern Michigan," he said.

The clean-tech sector overall is feeling the effects of the financial-market turmoil. Public companies, such as solar providers, have seen their stock prices drop. Firms looking to raise late-stage financing or project financing to commercialize their technology are also facing difficulty, according to investors and entrepreneurs.

Ethanol producers that use corn as a feedstock are suffering from a significant drop in corn prices since earlier this year. VeraSun declared bankruptcy, and Pacific Ethanol reported a significant third-quarter loss earlier this week.

LEBANON, N.H.--Mascoma is a biotech firm engineering its way into the energy business.

At its core is a staff of brainy Phds with expertise in microbial technology and cellulosic ethanol. But rather than design pharmaceuticals or crop seeds, Mascoma scientists are researching ways to make a cheaper fuel.

Its part of an industry-wide race to make ethanol from non-food sources, such as wood chips and grasses, at commercial scale.

Click on the image to see a photo gallery of Mascoma's lab. This image shows how a micro-organism is attracted to cellulose. Mascoma is genetically engineering an organism to metabolize cellulose and make ethanol.

(Credit: Mascoma)

If done right, cellulosic ethanol promises to be far better than the current feedstock--corn--from a commercial and environmental standpoint.

There are many techniques for making cellulosic ethanol, including gasification or multi-step processes that use enzymes and yeasts. But Mascoma is among only a handful pursuing its particular microbial technology path, its scientists say.

Mascoma's goal is to streamline the process by genetically engineering a microorganism that can metabolize cellulose and produce ethanol in a single step. That will cut out the need for adding costly enzymes, its scientists say.

Scientists scour the earth for naturally occurring bacteria and other microorganisms and bring them to their lab. There, Mascoma employees try to isolate certain characteristics, such as rapidly metabolizing cellulose.

Then they genetically combine those traits in a single microorganism to convert pretreated plant matter into ethanol.

The company has a pilot plant that uses wood chips to make ethanol in Rome, New York. Five to 20 metric tons of wood chips or other feedstock yield 100,000 to 500,000 gallons of ethanol per year.

A commercial-scale plant in Michigan using wood chips as a feedstock is scheduled to be operating in 2012. Eventually, it hopes to make ethanol at $1.50 a gallon, according to company executives.

Making of a supermicrobe
On Friday, Mascoma, which was founded by Dartmouth College professors, hosted a tour of its labs, housed in the Dartmouth Regional Technology Center (up the road from Mascoma Lake).

It also announced that investor General Motors' director of Global Energy Systems, Andreas M. Lippert, has joined Mascoma's scientific board. GM invested in Mascoma's $61 million series C round in May of this year, along with refiner Marathon Oil.

Lippert says that its investment in Mascoma and another ethanol company Coskata are meant to accelerate development of cost-effective cellulosic ethanol.

He said Mascoma's consolidated bioprocessing technology is an attempt at a breakthrough, compared to other processes. But it's not purely theoretical.

"This is within sight. We know how to do the genetic engineering--they are actively working towards that now. So there is some technical development that's needed but it's not a miracle we're waiting for," Lippert said.

Lippert said GM expects that industrial-scale cellulosic ethanol will begin flowing around 2011. Government mandates are set so that corn ethanol will level off around 2015 to be replaced by "advanced" biofuels, such as cellulosic ethanol.

Ethanol being produced now is blended with gasoline at 10 percent concentration. But for cellulosic ethanol to make a bigger impact on gasoline consumption, there needs to be a build-out of fueling stations for E85, a blend of 85 percent ethanol, Lippert said.

There are about 1,700 E85 stations in the U.S. right now, only about 1 percent of the total. To absorb that anticipated boost in ethanol, Mascoma and GM are assuming that there will be construction of more E85 stations and flex-fuel vehicles that can run on gas or E85.

"There are big hills and little hills," said Lee Lynd, Mascoma's co-founder and chief science officer. "In the scheme of things, this is a little hill."

Lynd said the company does not expect problems to arise from its genetically modified organisms. He said that any effects could be tested and that it will be used in a controlled environment.

After a rash of negative publicity, biofuels backers say that advanced technologies will reshape the industry, making ethanol from sustainably grown sources cost-effective within a few years.

General Motors on Friday convened a panel of experts from cutting-edge ethanol companies that described different technologies--acid hydrolysis, specialty microbes, and genetically engineered energy crops--which they say will bring back biofuels' faded luster.

The key technology transition, already under way, is shifting from corn to other feedstocks for making ethanol from plant cellulose. With the right technologies and policies in place, the U.S. could meet one-third of its transportation fuel needs by 2030, said Candace Wheeler, a technical fellow at GM's research and development center.

The near-term projection is that, once ongoing plant construction is completed, ethanol will supply almost 10 percent of the U.S. gasoline demand, according to the Renewable Fuels Association. Nearly all of that will come from corn.

Wheeler said that the "low-hanging fruit" feedstock for cellulosic ethanol is wood chips and other agriculture wastes. But to get to one-third of demand, long-promised ethanol feedstocks such as fast-growing grasses need to enter the ethanol picture.

"To really get a significant impact...you are going to have to use purposely grown energy crops," she said. "It's really a timing issue. With improvements in technology and economics, these things will be real in the very near future."

Backlash
After a period of government support and rapid investment, a biofuels backlash kicked into gear last year, with people questioning the environmental and economic benefits.

One concern is that farmland diverted to grow energy crops has contributed to higher food prices. Some U.S. senators, including John McCain, have called for repealing the existing biofuels mandates; European political leaders have also reconsidered its policies.

Also, corn ethanol emits roughly the same amount of greenhouse gases as gasoline, according to studies. Ethanol's impact on air quality is being studied by academics. GM has commissioned a study on this issue as well, Wheeler said.

Researchers say that cellulosic ethanol can lower greenhouse gas emissions significantly and that grasses, such as miscanthus and switchgrass, can be used to make ethanol on marginal crop lands.

However, cellulosic ethanol has yet to be produced on a commercial scale at competitive prices.

That will change once genetically optimized energy crops begin to be harvested, predicted Richard Hamilton, CEO of Ceres. The company uses genomics to analyze plant genes and breed grasses and fast-growing trees like poplar, willow, and eucalyptus.

"We need energy crops to get the industry to scale," Hamilton said during the conference call of panel speakers. "Within the next years, we are going to see competitive production costs. Cellulosic biofuels will be very cost-competitive with oil or other sources of biofuels."

Ceres' first sorghum and switchgrass seed products, sold under the Blade Bioenergy Crops brand, will be available this fall and planted next spring, he said. They are bred to be drought-resistant and grow rapidly.

Multiple technology paths
Right now, most ethanol production is going to the pumps in the form of a 10 percent blend with gasoline. Flex-fuel cars can run E85, a mix of 85 percent ethanol and gasoline, which is available at only about 1 percent of U.S. filling stations.

GM has committed to making half of its fleet flex-fuel capable by 2012. To prime the pump for E85, it has invested in two ethanol start-ups which are among the most favored to bring cellulosic ethanol to market.

Mascoma, spun out of Dartmouth College, is designing an ethanol-producing microbe that it says will lower the cost of ethanol production by cutting out the traditional step of using enzymes to make sugars.

Another GM investment is Coskata, which uses a combination of gasification and microbes to turn carbon-carrying feedstocks, including agricultural and forestry wastes or even trash, into ethanol at $1 a gallon.

Municipal waste can produce 20 billion of gallons of ethanol per year near city centers where the fuel is consumed, said Arnold Klann, CEO of BlueFire Ethanol, who spoke on the conference call. Earlier this year, an executive from Coskata estimated that municipal solid waste could yield about 8 billion gallons per year.

BlueFire recently received permits to begin construction of a trash-to-ethanol plant in Lancaster, Calif., that is expected to produce ethanol at $1 per gallon by September, Klann said. Its plans call for a 17 million-gallon-per-year facility next year and then 55 million-gallon-per-year plants after that.

After pretreating incoming trash, the company's concentrated acid hydrolysis process sprays the trash with sulfuric acid which turns the starchy materials into sugars that are then fermented into ethanol.

The remaining lignin material is burned to partly fuel the operation, meeting 100 percent of its steam requirements and 70 percent of its electricity needs, according to Klann. Using landfill also reduces landfill methane, a potent greenhouse gas, he added.

Company representatives on the conference call said that they need continued supportive government policies, notably loan guarantees, to scale up their operations.

Although these panel speakers were bullish on the future of biofuels, the question of whether the U.S. could grow enough biomass to make one-third of its fuel is still not completely resolved.

An oft-cited 2005 Department of Energy and Department of Agriculture study, nicknamed the "billion ton study" (PDF), concluded that 1.3 billion tons of biomass could be harvested sustainably each year in the U.S. by midcentury, which would meet about one-third of U.S. fuel consumption.

Wheeler said GM-commissioned research done at the University of Toronto reached similar conclusions. She added that the author of the billion-ton study plans to do a follow-on report with updated data.

In a step toward maturing the cellulosic ethanol business, Mascoma officially announced on Tuesday $61 million in third-round funding, which includes participation from Marathon Oil and General Motors.

Marathon Oil, a gas and oil refiner, will put $10 million into Mascoma to help construct a plant and to further develop the company's proprietary microbe that streamlines the process of turning wood chips or agricultural waste into ethanol.

Lee Lynd, founder of Mascoma, works at an experimental ethanol facility. Click on the image to see other alternative fuels under development.

(Credit: Mascoma)

GM's decision to invest in Mascoma--the second cellulosic ethanol company with which it has partnered--was disclosed last week. GM's amount, however, is under wraps.

As previously reported, Mascoma's third-round funding also includes the participation of existing investors Khosla Ventures, Flagship Ventures, Atlas Venture, General Catalyst Partners, Kleiner Perkins Caufield & Byers, Pinnacle Ventures, and Vantage Point Venture Partners.

Mascoma, one of the best-financed cellulosic ethanol start-ups, has raised $100 million in equity investments and received over $100 million in state and federal grants.

Marathon Oil, the fourth-largest gas and oil refiner in the U.S., has invested in two other ethanol manufacturing plants. By the middle of this year, Marathon Oil will open its own facilities to blend the ethanol with gasoline, the primary use for ethanol at this point.

There are only about 14,000 stations, mostly in the Midwest, that can pump E85, a blend of gasoline and 85 percent ethanol. But the majority of ethanol consumed today is used as an additive to gasoline, at lower concentrations than E85.

There's a race among a number of new companies to build a plant that can demonstrate the ability to make cost-effective ethanol on a commercial scale. Mascoma, Range Fuels, and Coskata have all announced plans to have such plants operating by next year.

General Motors is opening its pocketbook to get ethanol to the pumps and into its cars.

The auto giant on Thursday announced a partnership and an undisclosed investment in cellulosic-ethanol company Mascoma. The Cambridge, Mass.-based start-up is developing a biochemical approach to converting wood chips and agricultural wastes into ethanol.

It's GM's second investment in a cellulosic ethanol company. Earlier this year, it formed a partnership and took a stake in Coskata, which will be testing its fuel at GM facilities.

For GM, the investments are part of its strategy to prime the pump for ethanol that can power its FlexFuel autos, which run on either gasoline or E85, an ethanol-gasoline blend.

There are about 14,000 E85 stations in the United States, a tiny fraction of the total, which is a problem for GM. It says there are 7 million flex-fuel vehicles in the States, 3 million of which are made by GM.

The ethanol investments are also technology hedges for GM. Coskata promises to be able to make ethanol at $1 per gallon out of a range of nonfood materials, in a process that combines gasification and a chemical reactions.

Mascoma, meanwhile, is creating specialty microbes that can break down nonfood plant matter into sugars that are fermented into ethanol. It is in the process of building a couple of ethanol demonstration facilities in New York, as it develops its next-generation technology. Mascoma is said to have raised a third venture capital round worth $50 million, and it has been granted more than $60 million in state and federal research grants.

GM Chief Executive Rick Wagoner on Thursday announced the partnership with Mascoma in San Francisco, where he touted the company's efforts to address global warming with alternative technologies.

To make ethanol, you want to make vinegar first, according to ZeaChem.

The biofuel start-up, which has moved from Colorado to Silicon Valley, says it has come up with a method of making cellulosic ethanol that results in close to 40 percent more fuel per ton of wood chips than competing processes. By 2010 or so, the company hopes to be producing ethanol commercially for 80 cents a gallon at wholesale. That could translate to anywhere from $1.10 to $1.50 at the pump, depending on a host of factors.

How does it work? Most cellulosic ethanol producers convert cellulose into ethanol in somewhat of a direct manner. Wood is separated into three principle ingredients--cellulose, hemicellulose, and lignin. The cellulose and hemicellulose are then converted into alcohol through biological fermentation (for instance, microbes and enzymes) or thermochemical engineering, which can also be combined with biological fermentation.

Click here for the ZeaChem video.

Mascoma, which was spun out of Dartmouth, is one of the more notable biological companies, while Range Fuels, which uses a process akin to the coal-to-liquids process, is known for thermochemical conversion. The alcohol harvested from fermentation is then concentrated through distillation.

Traditional fermentation and thermochemical processing, however, typically give off carbon dioxide as a byproduct, according to James Imbler, CEO of ZeaChem. It's why beer has bubbles.

ZeaChem takes an indirect route. After separating the cellulose, hemicellulose, and lignin, it employs a microbe to convert cellulose and hemicellulose--which can account for 61 percent of the material in wood--into acetic acid, the signature ingredient of vinegar, rather than alcohol. The conversion into acetic acid does not give off carbon dioxide, leaving more carbon in the fuel.

Meanwhile, the company cooks the lignin to extract hydrogen. The hydrogen is subsequently combined with the acetic acid to produce ethanol. Two-thirds of the energy in the ethanol comes from the acetic acid, while one-third comes from the added hydrogen, said Imbler, which is similar to the ratio of initial molecules from the wood. In a sense, the company is blowing apart wood and reforming it as an alcohol.

Using that extra carbon adds up. ZeaChem's process results in 160 gallons of liquid per bone dry ton of raw material, says Imbler. Corn ethanol producers can get 100 gallons per ton. Other cellulosic producers get 115 gallons per ton, ZeaChem claims.

Like nearly everyone else in the cellulosic ethanol business, ZeaChem hasn't proven its method works on a large scale yet. The company has shown lab results and is mapping out plans for 100 million-gallon-a-year processing facilities. (See a video of a tour of their labs here.) Other cellulosic companies will also likely tout higher gallons per ton figures than ZeaChem gives them credit for. (We contacted some, but have not heard back yet. We'll update you when we do.)

What to do with the waste?
Most cellulosic ethanol processes, however, do leave a lot of waste products. Mascoma's CEO Bruce Jamerson told CNET News.com last year that 30 percent to 40 percent of the plant material can remain after fuel is made--one of the challenges is figuring out what to do with the leftovers.

The fact that ZeaChem does seem to know what to do with its leftovers makes the process interesting. Fuel, Imbler asserts, is a commodity. In a commodity market, suppliers can't control the price, he said. Thus, the only way to survive is to adopt efficient processes and keep raw material costs low.

How come this company came up with it? It's a cross pollination between biological and thermochemical know-how. The founders, biochemists, came from Coors while the rest of the bulk of the management team comes out of the petrochemical industry.

Unlike some other ethanol start-ups, ZeaChem won't try to rely on garbage or waste products for feedstocks. It is cutting deals with poplar tree farmers to buy trees. The company's processing plants will be located near existing poplar farms that themselves are located near rivers for easier shipping.

The company employs one species of microbe to perform the conversion process. It's a fairly common species that required no genetic modification and can be found in manure, the guts of termites, and other lovely places.

"Anything that falls on the ground it will eat," said co-founder Dan Verser.

Verser further added that similar microbes can be used to produce different types of fuel. If the ethanol market doesn't take off, ZeaChem can switch to butanol or some other fuel--just like you might change an ingredient in salad dressing.

Mascoma, which makes ethanol from wood chips and agricultural wastes, has raised an additional $50 million, according to a published report.

PEHub, citing a regulatory filing, reported Thursday that the Cambridge, Mass.-based company took in $30 million in equity and $20 million in debt.

The financing was led by General Catalyst Partners, and included existing investors Khosla Ventures, Atlas Venture, Flagship Ventures, Kleiner Perkins, Pinnacle Ventures, and VantagePoint Venture Partners.

Spun off from Dartmouth College, Mascoma is among the wave of new companies trying to convert biomass, other than corn, into the liquid fuel ethanol. Its technology uses special enzymes to break down cellulose into sugar before fermentation. Its goal is to condense that two-step conversion into one.

Like many clean-tech start-ups, Mascoma is moving from technology development to commercialization, which is very capital-intensive. It has broken ground on demonstration plants that should be operating later this year.

To get out of the labs and move toward profitability, many new energy and fuel companies need to raise a substantial amounts of money, on the order of $50 million or more, to demonstrate that their products can be made economically.

Mascoma has already raised $40 million in venture funding and gotten state grants from Michigan, New York, and Tennessee.

The superheroes of venture capital haven't exactly had a completely smooth year in green tech.

Kleiner Perkins Caufield & Byers wasn't the first VC firm to get into green tech. Nth Power, NGEN Partners, Draper Fisher Jurvetson and Mohr Davidow Ventures got there first, but Kleiner brought a lot of attention and prestige into the field, and helped push green tech toward the top of the VC agenda in the second half of 2004.

The firm also began to put money into a lot of companies with a pretty good amount of fanfare. John Doerr even cried in public at the TED conference to show his commitment.

This year, though, came with its rough patches.

For one thing, some of the firm's portfolio companies suffered setbacks. Thin-film solar-panel maker Miasole had to delay production and swap CEOs. Rumors that the company laid off 40 employees was confirmed by three former Miasole employees, according to Greentech Media. The Web site also said founder Dave Pearce may have left the company.

Similarly, supersecretive EEStor (another portfolio company) delayed production. Board member and Dell alum Mort Topfer also left the board, according to reports.

Mascoma, the cellulosic-ethanol maker, fared better. It landed grants with Michigan and Tennessee to build plants in those states, but its first plant, in New York, will come on line about a year late.

Conversely, Kleiner's name has been absent from the big success stories. EnerNoc and Comverge both launched IPOs this year. In solar, Suntech Power Holdings and First Solar saw tremendous growth. None of these are Kleiner companies.

Other companies outside the firm's portfolio had delays too. Tesla Motors put off its car and switched CEOs as well. But this is Kleiner Perkins we're talking about here.

In the 650 area code, people instinctively genuflect at the mere sound of the name. When Al Gore joined the firm a few weeks ago, it was national news, though many wondered what he would exactly bring to the table. The firm gets praised for its foresight on a regular basis, so it's fair (in my book, at least) to harp on the setbacks.

Still, the firm's portfolio does contain a number of strong companies: Mascoma, Amyris Biotechnologies, Ausra, GreatPoint Energy. And the firm commands billions of dollars, while I shop at Target.

Next year could easily be a completely different story.