Algae grows in biofuels sector

Five years ago, Harrison Dillon was looking to fund a startup using genetically engineered algae to produce biofuel, but the investors he pitched were baffled.

“The energy VCs were fascinated, but they said: ‘We don’t do biotech,’” recalls Dillon, co-founder and CTO of Solazyme Inc. “Because we were before our time, the traditional biotech VCs didn’t know what to do with us, either.”

Today, it’s a different story. Dillon says he now gets unsolicited calls from new investment funds every week, asking if the company is seeking funding.

Solazyme, a South San Francisco-based developer of microbial processes to produce oil from plant material, is not actively raising capital at the moment. The company has raised about $20 million in grants, equity and debt financing, including a $9 million infusion last year from Harris & Harris and Roda Group.

The change in investors’ attitude shouldn’t come as a shocker considering VCs have a newfound fascination with all things cleantech. Biofuel today is big business. And companies using algae to produce biodiesel and ethanol fuel are attracting venture capitalists like green blooms to a pond surface.

Over the past year, venture funds have invested in at least five companies developing technologies that utilize algae to convert feedstocks to fuel. Other venture-backed companies are looking at algae-based processes as one of several methods to produce fuel. Venture investors, meanwhile, are eagerly scouting new deals.

“We are extremely hot on all kinds of algae-based biofuels,” says Wal van Lierop, CEO of Chrysalix Energy. He says that in best case scenarios “the energy content in algae-based biofuels is a few hundred times larger than in corn-based ethanol.”

Partners at Vancouver, British Columbia-based venture fund Chrysalix have several algae-related startups under due diligence, although the firm has not yet made an investment in the space.

Other VCs and angels have ventured substantial sums. In addition to Solazyme, three other companies with algae featuring prominently in their biofuel business models have raised rounds in the last year: GreenFuel Technologies, BioFuelBox and LiveFuels.

GreenFuel Technologies, based in Cambridge, Mass., develops algae bioreactor systems that can convert the carbon dioxide in smokestack gases into biofuels. The company has raised $24 million to date, including a $6 million round in September by Draper Fisher Jurvetson (DFJ), Polaris Venture Partners and Access Venture Partners.

San Jose, Calif.-based BioFuelBox raised $9.5 million from DFJ and Element Partners (formerly DFJ Element) in October. The company develops technology for producing biodiesel from feedstocks including algae.

LiveFuels closed on $10 million in May 2007 in a Series A led by David Gelbaum of the Quercus Trust, which has made donations to environmental groups such as the Sierra Club. LiveFuels is the result of an alliance between U.S. labs and scientists dedicated to transforming algae into biocrude by 2010. The effort is led by Sandia National Laboratories.

Other biofuel producers are looking at algae as one of several production methods. Venture-backed Imperium Renewables says that it has produced algal-based biodiesel in its Seattle R&D facility and conducts ongoing testing and research of algal oil from a variety of providers. The company is participating in a biofuels competition, sponsored by the Defense Advanced Research Projects Agency, which is aimed at producing military grade jet fuel for less than $3 a gallon using algae oil as feedstock.

Conceivably, algae farms could produce 10,000 to 15,000 gallons of fuel per acre, says Michael Weaver, CEO of Bionavitas, a startup developing technology for high volume production of micro-algae. (An acre of corn, by contrast, typically yields fewer than 400 gallons.)

Weaver says self-shading is the fundamental reason today’s production methods aren’t producing higher volumes of algae, which uses light energy to create biomass. As algae blooms, it becomes self-shading and light can only penetrate a few centimeters deep.

Recent funding recipients predict that much higher volume, lower cost production methods will be viable in a few years. LiveFuels’ stated goal is to produce biocrude for less than $60 a barrel by 2010.

Solazyme’s Dillon also says he expects that within two or three years the company will be able produce fuel that is cost-competitive with oil. Weaver predicts it will take at least five years before consumers see massive volumes of biofuels produced from algae. He’s shooting for yields of up to 4,000 gallons per acre over the next few years.