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FUELING DEBATE
Venture capitalists raise questions on oil alternatives
San Francisco Chronicle
David R. Baker, Chronicle Staff Writer

Friday, June 9, 2006

A tractor scoops wet-cake, a cornmeal byproduct of the et... A tanker leaves the Tall Corn Ethanol plant in Coon Rapid...



As America faces up to its "oil addiction," Silicon Valley's venture capitalists have joined the hunt for replacements.

They are beginning to pump money into alternative fuels, funding companies whose products could augment or supplant gasoline.

So which fuels are worth the investment?

For many, biofuels are the answer. Ethanol, in particular.

Most modern cars can easily be made to run on ethanol. Many states already blend some into their gasoline to control pollution. Year after year, more states are adopting it.

Ethanol already has a market, with potential for growth. It also has significant political support in Washington. All good things, in the eyes of VCs.

"I would bet on ethanol," said Ajit Nazre, a partner at Kleiner Perkins Caufield & Byers. "If you look at how much we can produce right now, versus how much the market can soak up, there's a supply constraint."

Nazre spoke as part of a panel discussion earlier this week hosted by Silicom Ventures, a group of investors who fund startup companies. Several panelists agreed that, for the short term at least, ethanol has the best growth prospects. They panned hydrogen -- a fuel touted by President Bush, Gov. Arnold Schwarzenegger and others -- as facing too many technical challenges to prove useful anytime soon.

Ethanol is already attracting investment. Kleiner Perkins was among five firms that last month invested a total of $50 million in Altra Inc., a Los Angeles company that produces ethanol and biodiesel.

In other deals, Microsoft Corp. co-founder Bill Gates last year agreed to put $84 million into Pacific Ethanol, a Fresno company building ethanol refineries on the West Coast. Goldman Sachs & Co. last month invested $27 million in a Canadian firm whose technology can make ethanol from corn stalks or switchgrass.

Demand for ethanol has risen sharply in the past year, as many states that used to add the chemical MTBE to their gasoline to fight air pollution switched to ethanol. That pushed up ethanol prices, which in turn contributed to this spring's sharp rise in gasoline prices.

The United States has about 100 ethanol refineries, most of them in the Midwest. An additional 32 are planned or under construction, according to the Renewable Fuels Association.

Ethanol hasn't won over all critics, both among investors and within the energy industry. Some question whether the increased demand will plateau after more refineries are built. Others point out that the United States expressed great interest in ethanol during the 1970s and early 1980s, when gas prices were high, only to lose interest when gas became cheap again.

There's also the question of how it's made. Several participants in the Silicom Ventures panel discussion said the United States' method of making ethanol, using corn as the basic ingredient, is inefficient. Cultivating the corn, harvesting it, transporting it and refining it uses more energy than the corn produces, they said. It also uses a lot of land.

"Are we willing to take land for growing food and use if for growing fuel?" said Tom Baruch, founder of the CMEA Ventures investment firm. "There isn't enough land."

Sugar cane provides far more energy when converted to ethanol than does corn. But the United States lacks a substantial sugar cane industry. And while many researchers are trying to perfect "cellulosic ethanol," making the fuel from crop stubble, woodchips or switchgrass, it still remains more expensive per gallon than corn-based ethanol.

In addition, the Midwestern farm lobby has thrown its considerable weight behind corn-based ethanol, said Timothy Newell, managing director of the DFJ Element venture firm.

"You're seeing a huge push by the farm states," said Newell, who also served in the White House Office of Science and Technology Policy under President Bill Clinton. "Every single presidential candidate will walk through Iowa, and every single presidential candidate will swear fealty to corn ethanol."

E-mail David R. Baker at [e-mail].

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/06/09/BUGORJAV331.DTL&hw=ethanol&sn=00...