Biofuel Company Files for Bankruptcy

- by Katie Fehren­bach­er, Novem­ber 11, 2014, Gigaom.com

Bio­fu­el com­pa­ny KiOR, which has become a sym­bol of the dif­fi­cul­ties of ven­ture cap­i­tal­ists invest­ing in clean tech­nol­o­gy star­tups, final­ly filed for bank­rupt­cy this week, many months after shut­ting down its bio­fu­el plant and oper­at­ing on fumes, unable to pay its debts. Many, includ­ing myself, have been pre­dict­ing this for awhile and thought it would come a lot soon­er. But affil­i­ates of ear­ly investor and major share­hold­er Vin­od Khosla, as well as Bill Gates (also an investor in Khosla Ven­tures), have been fund­ing the company’s day-to-day oper­a­tions, keep­ing it going through­out the year.

Affil­i­ates of Khosla could end up with the assets of KiOR, as they’ve placed the only bid in the sale process, and if there are no bet­ter offers, KiOR plans to sell the assets to “senior lenders,” which means funds affil­i­at­ed with Khosla. Senior lenders agreed to con­vert $16 mil­lion of senior secured debt into new equi­ty in the deal. KiOR inter­im CFO Christo­pher Artzer said in the fil­ings that after an asset sale or reor­ga­ni­za­tion, KiOR will con­tin­ue research and devel­op­ment efforts on its biocrude devel­op­ment technology.

As of the time of bank­rupt­cy, KiOR had assets of $58.27 mil­lion and debts of $261.31 mil­lion. The com­pa­ny owes $77 mil­lion to Alber­ta Invest­ment Man­age­ment Corp., which is a fund that man­ages bil­lions on behalf of the province of Alber­ta, Cana­da, and is also a lim­it­ed part­ner in Khosla Ven­tures. KiOR owes $159 mil­lion to affil­i­ates of Khosla. It also owes $69.4 mil­lion to the state of Mis­sis­sip­pi for a loan to build the plant in Colum­bus. In addi­tion to Khosla, Gates and the Alber­ta fund, major equi­ty share­hold­ers in KiOR include strug­gling San Fran­cis­co hedge fund Artis Cap­i­tal Man­age­ment, Fron­tier Cap­i­tal Man­age­ment and KiOR Pres­i­dent Fred Can­non himself.

Rollercoaster ride

If you don’t know the back sto­ry of KiOR, I’ll go over it briefly. The Houston,Texas-based com­pa­ny emerged in late 2007 as a joint ven­ture between Khosla Ven­tures and Nether­lands-based bio­fu­el start­up BIOe­CON. Khosla Ven­tures pro­vid­ed the ear­ly rounds of fund­ing and BIOe­CON pro­vid­ed the intel­lec­tu­al prop­er­ty for its “bio­mass cat­alyt­ic crack­ing process,” a ther­mo­chem­i­cal process that’s been used in the oil indus­try for decades but that KiOR is using to pro­duce biocrude from grass, wood and plant waste.

KiOR emerged at a time when Khosla was fund­ing a dozen or so bio­fu­el com­pa­nies. Clean­tech was going through a bub­ble peri­od for ven­ture cap­i­tal invest­ing in 2007 and 2008, with a peak in 2008 of over $4.5 bil­lion invest­ed. While a small hand­ful of the bio­fu­el com­pa­nies that Khosla backed dur­ing this time — includ­ing KiOR, Amyris, and Gevo — man­aged to IPO in the fol­low­ing years, deliv­er­ing the firm a return, most of these com­pa­nies have since strug­gled and lost much of their val­ue. Oth­er com­pa­nies nev­er made it off the ground to an exit, like Range Fuels, which end­ed up shut­ting down its plant.

 Amidst these dozen bio­fu­el bets, KiOR seemed like a ear­ly shin­ing jew­el. In the spring of 2010, at Khosla Venture’s Lim­it­ed Part­ners meet­ing, KiOR’s Pres­i­dent Can­non described KiOR’s tech­nol­o­gy as being able to crunch into sec­onds the mil­lions of years that it takes for nature to turn bio­mass into fos­sil fuels. Can­non showed off the company’s cat­a­lyst — a fine white pow­der in a tiny see-through vial — that he said could turn any bio feed­stock into a liq­uid biocrude with con­sid­er­ably low­er car­bon emis­sions foot­print than fos­sil-fuel based crudes. It was sup­posed to be able to be dropped into the cur­rent oil infrastructure.

The com­pa­ny want­ed to do no less than to dis­place oil for trans­porta­tion. Khosla him­self was con­fi­dent enough in the com­pa­ny at that meet­ing in 2010 that he said KiOR’s com­peti­tors weren’t oth­er bio­fu­el com­pa­nies, but rather the heads of major oil export­ing nations like Venezue­lan pres­i­dent Hugo Chavez and Iran­ian pres­i­dent Mah­moud Ahmadine­jad. KiOR even impressed for­mer Sec­re­tary of State Con­doleez­za Rice to the extent that she joined KiOR’s board in the sum­mer of 2011.

KiOR went pub­lic at $15 per share in the 2011 and was able to raise $137.4 mil­lion. Khosla Ven­tures end­ed up main­tain­ing 55.36 mil­lion shares after the IPO, mak­ing it by far the largest share­hold­er. At the $15 per share IPO price, that share por­tion was worth $830 mil­lion, and when KiOR’s shares lat­er rose to $23.85 per share, that por­tion was worth $1.32 bil­lion. (Read more here on how hedge fund Artis slow­ly and steadi­ly bought up the stock ear­ly on post-IPO.)

So what’s hap­pened since then? KiOR was unable to scale up its biocrude pro­duc­tion process at its plant on time and on bud­get and with­out com­pli­ca­tions. At first the process seemed promis­ing, and at the end of 2012 KiOR actu­al­ly hit a major mile­stone and start­ed pro­duc­ing its biocrude at its facil­i­ty in Colum­bus, Mis­sis­sip­pi. Can­non said in an earn­ings call that year that the upcom­ing planned ship­ments would be “the world’s first cel­lu­losic gaso­line and diesel fuel products.”

But by the sum­mer of 2013 it was clear that KiOR wasn’t reach­ing any­where close to the vol­umes at the fac­to­ry that it want­ed. It dis­closed in an earn­ings state­ment that it had pro­duced 75 per­cent less biocrude than it had fore­cast­ed. Turns out, it hadn’t achieved a steady state of pro­duc­tion and it was hav­ing some sig­nif­i­cant prob­lems with qual­i­ty, with effi­cien­cy and with bot­tle­necks in the plant.

Investor law­suits fol­lowed and the SEC began inves­ti­gat­ing the progress of the Mis­sis­sip­pi plant. Con­doleez­za Rice — who nev­er played a role in the com­pa­ny — resigned at the end of 2013. Oth­er key exec­u­tives start­ed leav­ing, too, like the pre­vi­ous CFO, who left abrupt­ly at the end of 2013.

At the begin­ning of 2014, KiOR idled the plant it had spent so much time and mon­ey build­ing. With­out any rev­enues com­ing in, KiOR’s debts start­ed to mount and it start­ed to be in dan­ger of miss­ing loan pay­ments. Its stock plum­met­ed to under $1 per share lat­er in 2014 and it was in dan­ger of being delist­ed from the NASDAQ (it has since been noti­fied of delist­ing). More recent­ly, Paul O’Connor, an ear­ly inven­tor of the tech­nol­o­gy and a board mem­ber, resigned from work­ing with the com­pa­ny and wrote a let­ter accus­ing the man­age­ment team of mismanagement.

Lessons learned

As some Val­ley-backed ener­gy com­pa­nies like SolarCi­ty, Tes­la and Opow­er have start­ed to get trac­tion and have made their investors mon­ey, KiOR’s sto­ry remains yet anoth­er cau­tion­ary tale for entre­pre­neurs and investors try­ing to inno­vate in a dif­fi­cult mar­ket. Bio­fu­el star­tups look­ing to pro­duce next-gen­er­a­tion fuels using plant waste (instead of corn and soy­beans) have proven to be incred­i­bly dif­fi­cult to scale up. Almost none have sur­vived the so-called “val­ley of death” from small scale pro­duc­tion to large scale com­mer­cial­iza­tion at the low price point need­ed to com­pete with oil.

O’Connor says in his let­ter that it was less a tech issue and more a man­age­ment issue around ignor­ing prob­lems with scal­ing up:

Over the years there have been sev­er­al warn­ing sig­nals (inter­nal & exter­nal), one of which as I men­tioned in the fore­go­ing has been my own tech­nol­o­gy audit report in March/April of 2011. Notwith­stand­ing these warn­ings KiOR’s MT [man­age­ment team] con­tin­ued on their set course. In mean time every­one else hoped for the best.

Anoth­er les­son is for states and the fed­er­al gov­ern­ment to know just how risky these invest­ments are, even if they could bring jobs to impov­er­ished regions. KiOR still owes the state of Mis­sis­sip­pi mon­ey. Range Fuels, anoth­er Khosla-backed com­pa­ny, was award­ed about $90 mil­lion in fed­er­al and state grants and loan guar­an­tees before it closed down its plant. Tax­pay­er dol­lars, espe­cial­ly on the state lev­el, prob­a­bly shouldn’t be used for these types of high-risk bio­fu­el pro­duc­tion experiments.

Ven­ture cap­i­tal­ists have already learned the les­son of how dif­fi­cult this space is to invest in. VC invest­ments in clean­tech in 2014 are far below what they were in bub­ble years like 2008.

Mod­el S elec­tric sedan, at the Hawthorne Air­port Octo­ber 09, 2014 in Hawthorne, Cal­i­for­nia. (Pho­to by Kevork Djansezian/Getty Images)

KiOR’s bank­rupt­cy is unfor­tu­nate; it means job loss­es — 70 peo­ple worked there at the end — and it means KiOR’s promise of low car­bon fuels will prob­a­bly nev­er be real­ized. It’s also sig­nif­i­cant mon­ey lost for all the oth­er long­time believ­ers in this com­pa­ny, and yes, prob­a­bly tax­pay­ers, too. But hope­ful­ly this cau­tion­ary tale can help lead to smarter invest­ments in the sec­tor in the future.

Tru­ly dis­rup­tive inno­va­tion in the ener­gy sec­tor is exceed­ing­ly rare. Tes­la Motors is one of the only com­pa­nies that has man­age­ment to get by and find any type of success.

But per­haps the biggest loss to come from KiOR’s fall is that future entre­pre­neurs and investors will be less will­ing to take these types of big risks. As Bill Gates once said, the world needs these “crazy ener­gy entre­pre­neurs” to solve big prob­lems and fight cli­mate change. If there’s enough tales of woe, like KiOR’s, it will dis­cour­age these future inno­va­tors, and that could be the biggest loss of all.