Ignition VC Revs Fuel Startup

Martin Tobias is the first to admit that he is not yet an alternative energy expert, let alone someone who has spent much time debating the merits of soy vs. canola in the production of biodiesel fuel.

But last week, the longtime techie turned venture capitalist was named chairman and CEO of Seattle Biodiesel, in connection with a $2 million Series A funding round that included Tobias and other individual investors.

Tobias will continue to serve on the Cloudmark Inc. and IP Fabrics Inc. boards for Ignition, and remain with the firm to lead select software deals.

“I was not looking for a reason to leave the cozy confines of venture capital,” says Tobias, a onetime Microsoft Corp. developer who founded Loudeye Technologies Corp. before joining Ignition Partners as a venture partner in 2002. “But I really like learning new stuff and this is freaking fun.”

Each of Tobias’ five investments with Ignition has fallen under the Seattle-based firm’s IT umbrella, which is why his initial look into the alternative energy space involved companies with software-related solutions.

After not finding anything of interest, Tobias moved into the ethanol space, but felt the market was too mature for early stage venture capital.

He then discovered biodiesel, a renewable alternative to petroleum-based diesel fuel that can be made from vegetable oils, such as soybean, canola bean and mustard seed. The technology has been used for more than a decade in Europe. Although it still is not the fuel industry standard, it burns cleaner than petroleum, is non-combustible, can mix with petroleum-based diesel and does not result in performance loss.

One major downside is cost. Biodiesel can go for up to $1 more per gallon than petroleum-based diesel, but Tobias thinks that his company has a strategy to make biodiesel price-competitive, if not price-attractive.

Tobias says the company plans to build local refineries that handle locally grown crops, to reduce cost and increase quality. This “distribution” model is a significant shift from the “centralization” model that most biodiesel makers currently employ, in which fuel is processed near where the crops are harvested, and then is delivered to retailers.

Seattle Biodiesel currently imports its main ingredient (soybeans) from Iowa, but is in talks with local farmers to boost the production of canola and/or mustard seed (both of which grow better in Washington than soybeans).

If successful, the company hopes to widen margins that already are expected to generate profitability by year-end.

“We want to build a national company … and be the leading proponent of the regional model because it has applicability everywhere,” Tobias says. “We can do it because we’ve rethought the distribution strategy and the technology itself, including the crushing technology. You cannot take the centralized technology and scale it down.”

Tobias says that Seattle Biodiesel plans to begin work on its next refinery within the next six months, although he declined to say where it would be located.

He insists, however, that the next refinery also will initially rely on non-local crops, because farmers are “conservative” business people who need to see smoke before altering their crop strategies.

Seattle Biodiesel hopes to raise between $12 million to $15 million within the next year to fund expansion, although Tobias says that some project finance dollars might mix in with the equity.