it works at scale—where the economics start to get interesting. So a lot of players are saying, ‘We’ll develop the first one or two projects ourselves, get them up and running, and demonstrate the technology works.’ The challenge is that many of these projects are $80 million to $300 million projects. And a venture capital firm will not fund that. Even if they could, the economics just don’t make sense on an all-equity basis.
So these companies have to go out and demonstrate their technology at commercial scale, and they need a source of capital to build it that drives appropriate returns to the equity holders.
X: Clearly the U.S. government is playing a key role here. How much have they committed, or said they’ll commit to this?
JD: Unfortunately, the round that is closing here on May 10, they have $463 million of available loan funding.
X: Why is that unfortunate?
JD: Because they have to go through the re-appropriation process again in the 2012 farm bill. So the money runs out after this application, unless Congress acts.
X: Can you think of an example where this financing mechanism has been put to work on a local biofuel refinery?
JD: No, not one locally. Not yet.
X: Why do you think this structure makes sense for both parties, the startup and the investors?
JD: The startup basically gets low-cost capital, on a non-recourse basis. If for whatever reason the project goes back, they don’t have to put out of pocket any more than they have invested in equity. So they get non-recourse financing to help finance an unproven technology.
The investors can buy bonds based on their risk appetite.
X: Are the entrepreneurs you talk to becoming more savvy about this sort of thing, that they need to tap private equity sources beyond VC?
JD: They are becoming more savvy about the need for low-cost project financing to commercialize their technology. They realize the USDA and other loan guarantee programs are out there. The Department of Energy has a loan guarantee program that some companies can access. Some foreign governments do it as well, depending on where the technology is from. So there are government sources that can help these projects through the Valley of Death.
