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Why Venture Capitalists are Bullish on Biofuels

<p>James Woolsey and Vinod Khosla are among many VCs placing bets on a growing number of biofuels startups that are working to move the U.S. to domestic, low-carbon energy production.</p>

What should we do with corn?

Shove it into cows that become fatty, high-cholesterol meat that contributes to heart disease? Turn it into cheap sugars that make people fat or sick?

Or use it to produce biofuels that will help reduce the U.S.'s dependence on Middle East oil, improve our balance of payments and create jobs instead of funding terrorists?

That's a loaded question, of course, but that's the way that James Woolsey, the former head of the CIA who is now a venture capitalist, put it to a friendly audience of biotech executives.

The biofuels industry has been subject to "propaganda" and "false narratives," he said

Putting a new twist on the food-vs.-fuel debate, Woolsey argued that there's plenty of acreage to grow corn and, in any event, that corn is better used as a biofuel to replace oil than it is to make "cheap junk food" so that the "grocery manufacturers association can make more money making our children obese."

"We need to go on the attack," he declared.

No wonder he's been called a "green hawk."

Woolsey, a partner at VantagePoint Venture Partners, and Vinod Khosla, the venture capitalist and relentless advocate of biofuels, spoke today to BIO's World Congress on Industrial Biotechnology and Bioprocessing at the National Harbor convention center, just across the Potomac from Washington, D.C.

WoolseyPortraitWoolsey's a lawyer and a Washington veteran who has worked for Republican and Democratic presidents, so he focused on the politics and economics of biofuels and bioplastics. Silicon Valley-based Khosla, who was trained as an engineer, presented slides packed with dense chemical diagrams and formulas.

Both argued that the biotech industry can find ways to use agricultural products and advanced chemistry to create new fuels and feedstocks that will compete with and gradually replace petroleum-based products.

Woolsey, who drives an electric car, talked briefly about electricity, arguing on behalf of distributed rather than centralized power generation. He described today's transmission grid as "very, very troubling structure" because it is vulnerable to blackouts, hackers and terrorism.

"If we could gravitate -- not jump, but move over time -- to a much more distributed electric grid, towards micro and mini-grids, we would have a much more secure and much more resilient electrical structure," he said. That would also create opportunities for small-scale biomass generation.

Mostly, though, he focused on the economic and security risks of the U.S. dependence on OPEC oil. "We're borrowing about $1 billion a day just to import oil," he said.

We can't drill our way out of the problem, he said, and nor can we expect the energy and climate bills pending in Congress, which will put a price on carbon emissions, to take care of the problem. "A $25 a ton price for CO2 in a cap and trade system adds about 25 cents a gallon to the price of gasoline," he said, not enough to have a big impact.

Instead, he called for open standards that will require new vehicles to operate not just on gasoline but on ethanol or methanol. In Brazil, he noted, most cars on the road can use gasoline or ethanol, which allows competition to flourish. (Lowering tariff barriers to Brazilian sugar cane would help, too.) "If we were close to being as decisive and focused as the Brazilians, we would have done this some time ago," he said.

405px-Vinod_Khosla_Web_2.0_Conference-1.For his part, Khosla identified a range of private startup companies that are exploring different technologies to produce biofuels. Khosla Ventures has backed, among others, Amyris (which has filed to go public), Kior, New Zealand-based Lanza Tech, Coskata (whose investors include General Motors, TOTAL and the Blackstone Group), Range Fuels, HCL Clean Tech, Mascoma, bio-butanol maker Gevo and LS9. Here's a great diagram of all of Khosla's expansive clean tech portfolio.

Any one of them, or others, could generate a breakthrough, he said.

"You will not see incremental improvements, as most people assume," Khosla said. "There will be a few black swans -- rare, extreme impact and retrospectively predictable events."

Segetis, Draths and Reluceo, meanwhile, are all so-called green chemistry companies, developing bio-based materials.

As Khosla acknowledge, all these startups face challenges as they try to develop supply chains with ample feedstocks, bring down their production costs and raise the money they need to get to scale. "These technologies have moved along fairly well, but the financial world has gone backward," he said.

But Khosla, who made a fortune investing in software and Internet startups, sounded optimistic. Clean tech startups like First Solar and Soraa already have leapfrogged bigger companies like Shell, BP and Phillips in such technologies as solar PV and LED lights.

"Almost all innovation comes out of small companies," Khosla said.

True enough, but they will have to get big fast to play a major role in dealing with the climate and energy crisis. Senior Writer Marc Gunther is a longtime journalist and speaker whose focus is business and sustainability. Marc maintains a blog at You can follow him on Twitter @marcGunther.

Photo CC-licensed by Flickr user marfis75.

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