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Venture Capitalists Look to Green Businesses for Boom

May 29, 2008 at 6:25 PM EST
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A recent surge in investments by venture capitalists in eco-friendly businesses is possibly triggering a boom in green and clean technology. Analysts report on the green market and its ability to make money while saving oil.
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SPENCER MICHELS, NewsHour correspondent: The slimy green algae that swirls and bubbles in a lab in the fringes of California’s Silicon Valley is being turned into an oil that its makers believe can fuel cars, trucks, airplanes, and other vehicles with diesel engines.

Harrison Dillon, a scientist and the president of Solazyme, says his company can make oil by manipulating algae genes.

HARRISON DILLON, Solazyme president: Most of the oil that comes out of the ground is from fossilized algae. And that’s a process that takes hundreds of millions of years to geologically compress plant material, particularly algae, to make oil, petroleum.

And what we do at Solazyme is use biotechnology to take that 100-million-year process and compress it into the course of a few days.

SPENCER MICHELS: Solazyme achieves that by using fast-growing plants that absorb carbon out of the air to spur the growth of its algae. When the algae oil is burned as fuel, the CO2 emitted is about equal to that taken out of the air, making it almost carbon-neutral.

The company is already running some cars on algae fuel.

HARRISON DILLON: The main reason that we know it’s going to work is because we’ve already made fuels that meet existing fuel standards and that run cars.

This is a vial of oil that’s very, very similar to light, sweet crude that comes out of the ground. And we’ve taken those oils and turned them into transportation fuels and powered cars.

SPENCER MICHELS: Within three years, Solazyme expects to produce fuel on a large scale that will be cheaper than gasoline. They say start-up costs for algae oil are less than they would be drilling for oil.

Solazyme is one of hundreds of expanding young companies, many here in Northern California, hoping to show a profit by developing what is called green or clean technology.

Venture capitalists, despite a time of economic downturn, see large potential profits in green tech, like these investors who were checking out Solazyme.

Algae in tank, good for business

SPENCER MICHELS: So far, Solazyme has raised $25 million. Investors poured about $5 billion into green tech last year, nearly half in Silicon Valley.

That interest is a huge change from just a few years ago, says Harrison Dillon.

HARRISON DILLON: Five years ago, we could not find a single venture capital firm that had ever heard of the concept of a biofuel.

SPENCER MICHELS: Watching these developments closely from his Menlo Park offices is Vinod Khosla, an Indian-born venture capitalist who made a fortune co-founding Sun Microsystems. Khosla, an engineer by training, has invested in more than 45 green businesses.

VINOD KHOSLA, venture capitalist: It's a massive opportunity. There's no doubt in my mind, over the next 25 years, how we drive, how we build our houses, how we fly, how we build our buildings will all change.

SPENCER MICHELS: Khosla said it's a risky business financing untried revolutionary technologies, but the fact that biofuels like algae will become cheaper than oil, especially as gas prices rise, is a big plus for investors.

VINOD KHOSLA: We assume there's a high failure rate and we want to invest in the technologies that are high risk, so it's OK to fail. But when we succeed, it better be worth succeeding.

We'd better have very large dislocations with these technologies. We don't need a fuel that's cleaner. We need a fuel that happens to be cleaner, but at half the price of oil. And that's very likely in the next three years.

SPENCER MICHELS: Among Khosla Ventures' investments is Ausra, a solar company where Robert Fishman is the CEO.

ROBERT FISHMAN, CEO, Ausra: Show you our latest in pipe coatings.

A different sort of solar power

SPENCER MICHELS: Ausra is one of a half-dozen companies that is trying to build thermal solar power, which is quite different from photovoltaic solar, commonly used on household rooftops.

ROBERT FISHMAN: We take a number of small mirrors using computer software to drive them and focus on a series of pipes to make steam, which drives a steam turbine. It's a low-tech solution, but it's very cost-effective to do it that way.

SPENCER MICHELS: Ausra's secret sauce is a material they found to store the sun's heat so it can produce electricity when the sun is not out.

ROBERT FISHMAN: Well, we can't do much about the sun going down every night, but what we can do is to collect extra energy during the daytime, and store it, and use it to extend our operating hours into the evening and at night.

SPENCER MICHELS: Such a system is already in use in Australia, and another is being built in Nevada for a California utility and should be generating power in 2010.

Looking ahead environmentally and economically, venture capitalist Khosla contends that eliminating those emissions is a simple reality.

VINOD KHOSLA: The world is now sensitive to carbon emissions, which means, no matter what the price, coal and oil can't be part of the equation 25 years out. We need a cap on carbon emissions.

SPENCER MICHELS: Ausra has raised $75 million so far, but Fishman figures he'll need $200 million, since there's a lot of hardware involved. That's a lot of money even for venture capitalists who are used to investing in less expensive software and information technology projects.

Despite the slow economy, Fishman says there are plenty of people who want to invest in solar.

ROBERT FISHMAN: Everybody I think knows that this is going to be the hottest part of the power market for the next 10 years and probably the hottest part of the renewal energy market. And there's a lot of smart money that wants in at this point in the game.

More technology than money around

SPENCER MICHELS: But not every green-tech company is getting the money it needs, says Adeo Ressi. He runs a Web site called thefunded.com, which allows businesspeople to rate and discuss venture capitalists.

ADEO RESSI, TheFunded.com: There are a lot of great ideas by a lot of great visionaries, and they cannot find the capital to get their ideas off the ground.

The venture capitalists are now looking to invest in the winners that they made investments in already rather than seeding new companies to get off the ground.

SPENCER MICHELS: That's borne out on a decommissioned Air Force base in Sacramento where a number of green-tech start-ups are housed in what they call an "incubator," most of them cash-hungry.

Here, new entrepreneurs, like a carbon sequestration firm, can learn how to start and fund a business from more experienced mentors.

ENTREPRENEUR: What other kind of resources do you feel that you need to help launch your business and develop your business further?

SPENCER MICHELS: Down the hall, Verdi Development wants funding to experiment with construction blocks that use less cement than standard cinder blocks and provide more insulation.

At the renewable energy testing center, scientists are trying to measure the efficiency of new forms of fuel. Most funding at this start-up comes from the U.S. Department of Energy, rather than venture capitalists, who, company president Dennis Schuetzle says, are risk-averse.

DENNIS SCHUETZLE, Renewable Energy Institute International: They want to pretty much guarantee that all this is going to work. And there are a lot of issues. There still is a lot of technology that has to be developed.

SPENCER MICHELS: Adeo Ressi thinks investment in the green-tech boom is already slowing down.

ADEO RESSI: Venture capital's enthusiasm wanes over time, especially with industries and sectors, and that's starting to happen now.

SPENCER MICHELS: Still, Khosla says the green- or clean-tech revolution is well under way.

VINOD KHOSLA: It's an economic boom. It's probably the largest economic opportunity we've seen in a long time, maybe ever. But there are also likely to be bubbles, but it won't change the rate of development of the basic technologies.

SPENCER MICHELS: Khosla says many of those green technologies will need more than venture capital. They'll require additional financing and a few years of tax credits from the government, especially in a down economy. But, he says, the transformation to a clean-tech era has already begun.