Since the initial public offerings of the first tranche of second generation biofuel companies in the spring of 2010, the performance of the stocks has been staggeringly poor. The five higher-profile biofuel companies (Codexis, Amyris, Gevo, Solazyme and KiOR) that went public over a 14-month span from April 2010 have experienced stock price declines averaging nearly -74 percent. In addition, at least another three companies (Mascoma, Coskata, and Enerkem) have filed for IPOs but did not complete the transactions due to the usual scapegoat of “market conditions”. Although these companies are probably not well known to the average investor, they are meaningful enterprises that have received substantial backing from some deep pocketed institutions. Some of the backers of these start-ups are Khosla Ventures, Kleiner Perkins Caufield & Byers, Total SA, Royal Dutch Shell, Virgin Green Fund, and Temasek (the investment arm of the Singapore Government).
So what went wrong? And is there any hope for these companies? There are a number of reasons for the poor stock performance. First, there has been a general apathy toward anything related to clean tech since the first biofuel IPO in April 2010 as evidenced by the approximately -55 percent decline in the Wilderhill Clean Energy Index over the same period. Second, there have been a couple of companies, notably Codexis and Amyris, which have missed some key development milestones, raising questions about the viability of their specific technologies. And third, many of these companies simply came to market too soon as they were still at a pre-revenue stage, had unproven technologies and needed additional capital to reach full commercial scale. The resulting stock sell-offs have made additional capital raises difficult and has led most investors to avoid the sector like the plague. The high correlation among the biofuel names also indicates that investors have not yet determined which companies, if any, will succeed.
But there is hope on the horizon and the lack of investor differentiation across the companies could lead to significant opportunities. 2013 is the year when the proverbial rubber meets the road. Many of these companies have reached the stage where scale up to commercial volumes is imminent and the associated revenue ramp will be a major catalyst. In recent weeks, specific company announcements have been indicative of the progress: KiOR opened their first commercial scale plant at the end of 2012 that converts wood chips to gasoline through a thermo-chemical process; and Solazyme has announced a joint venture with a subsidiary of Bunge to operate a commercial facility that uses its patented algae to convert starch to tailored oils used in everything from food to fuels.
The biofuel sector is not dead, just underappreciated. As in the world of biotech, not all companies or technologies will succeed. But 2013 will provide proof that for some of the companies the production of oils and fuels from sugars, wood and other cellulosic sources is not merely a fantastical tale of alchemy. The catalysts are near on the horizon. The significant revenue growth over the next couple of years will bring attention back to the biofuel sector.
Rob is Co- Portfolio Manager of the Essex GEOS (Global Environmental Opportunities Strategy). Rob earned a BA in Economics from Boston College and an MS in Accounting from Northeastern.