The Algae Solution: maybe this would be a good investment?

Guido Radaelli's rented house in the Berkeley Hills commands sweeping vistas of the San Francisco Bay. But the sparse furnishings inside hint at his status as a recent grad student. Last year, Radaelli made a peculiar addition to the décor. In a loft overlooking the living room, he installed four large fish tanks filled with a pale green liquid. Since then, Radaelli has tended to the tanks like a sick child, taking samples and checking temperature and pH levels several times a day.

"It's a challenging relationship," admits Radaelli. But, he hopes, a lucrative one as well.

The tanks contain modified algae strains which Radaelli claims could offer a solution to America's, and the world's, fossil fuel crisis. That's because the unicellular green goo produces up to half its weight in oil. Harvesting that oil has been the dream of alternative energy researchers for decades.

The make-shift laboratory is the brainchild of Radaelli and two grad school friends who founded Aurora Biofuels in 2006. Aurora CEO Matt Caspari has an M.B.A., chief scientist Burt Vick earned a Ph.D. in biochemistry, and Radaelli studied petroleum engineering in his native Italy and business at Berkeley.

Aurora is one of dozens of start-up companies rushing into northern California's booming clean-tech sector. Ten years ago, ambitious innovators like the Aurora guys were getting rich in the Internet or biotech sectors. But today, with oil prices soaring and global warming a looming reality, alternative energy is all the rage. And the Bay Area and Silicon Valley are at the epicenter of this new investors' frenzy. It's a green rush.


Aurora chief scientist Burt Vick and Noventi partner James Horn. Photo by Michael Montgomery
"Our business is about making money," says James Horn, a partner in the Silicon Valley venture firm Noventi, which is investing heavily in so-called clean tech. "And one of the drivers that we saw in Silicon Valley was that there was this migration of engineering talent and entrepreneurial talent moving into the clean tech space. California as a state has always been a leader in technology innovation. It's just that we're applying our skills and our talent in new areas."

Alternative energy, which is just one part of the clean tech sector, has seen a flood of new investors like Horn. Globally, more than $70 billion went into renewable energy in 2006, according to the United Nations.

"The energy business ... is a $6 trillion market," says Horn. "It is such a vast market that there really is sufficient potential to justify the investments that are going into the market right now. And again, we are very early on in this process."

What are BioFuels?

The two most common types of biofuels are ethanol and biodiesel. Ethanol is an alcohol, the same as in beer and wine (although ethanol used as a fuel is modified to make it undrinkable). It is made by fermenting any biomass high in carbohydrates through a process similar to beer brewing.

Today, ethanol is made from starches and sugars, but scientists are developing technology to allow it to be made from cellulose and hemicellulose, the fibrous material that makes up the bulk of most plant matter. Ethanol is mostly used as a blending agent with gasoline to increase octane and cut down carbon monoxide and other smog-causing emissions.

Biodiesel is made by combining alcohol (usually methanol) with vegetable oil, animal fat, or recycled cooking grease. It can be used as an additive (typically 20 percent) to reduce vehicle emissions or in its pure form as a renewable alternative fuel for diesel engines.
Helping fuel the world with humble algae oil is not as farfetched as it may sound. Some 100 years ago, Rudolf Diesel designed his first engines to run on peanut oil (as well as coal dust). Today, bio-fuels made from soy and corn are a booming business. But there's growing concern that tapping food stocks as a source for renewable energy could backfire. Corn and soy use valuable farmland and freshwater. Increasing demand for ethanol is driving up the price of corn. This in turn raises food prices.

However, algae doesn't need soil and thrives in wastewater. All it needs to grow are sunlight and carbon dioxide. Algal oil can be harvested and converted into bio-diesel; the algae's carbohydrate content can be fermented into ethanol. Both are much cleaner-burning fuels than conventional diesel or gasoline. What's more, bio-fuels derived from plants like algae are considered "carbon neutral." While burning fossil fuels releases CO2 that was trapped underground for millennia, the CO2 released from burning bio-fuels was just pulled out of the air as the plants grew. So, according to proponents, bio-fuels are simply recycling the same gases over and over.

That's not all. Aurora claims to have developed and patented (together with Berkeley plant biologist Anastasios Melis) a technology that dramatically boosts algae's photosynthetic power to 100 times that of soy and other crops. It's a very profitable calculation considering the amount of diesel burned in America's transportation sector.

"We consume 60 billion gallons of diesel fuel every year," says Aurora CEO Matt Caspari. "So if our technology does what we are claiming it can do, it's a major opportunity and it's attractive for venture capital investors."

But it's not just the lure of profits that pulled the Aurora team into alternative energy.

"This is the type of business that has a double bottom line," says Burt Vick. "Not only [is it] very healthy from a financial standpoint, but also from a social and environmental point of view as well."

A key ingredient for any successful startup is attracting the right investors. But in a booming market, competition for investment dollars is fierce.

"The odds aren't with you to get venture financing," Matt Caspari tells us. "Once you get venture financing, the odds aren't with you that it will be at all successful. And even the successful ones, you hear the company's sold for $100 million. Well, how much do the entrepreneurs really own?"

To get ahead of the competition, and get Aurora's name in lights, the company entered one of the world's premier business plan competitions, the Intel/Berkeley Challenge. The annual Intel Challenge, as most people call it, is a bracing three-day competition that pits young companies from America against teams from around the globe.

In recent years, clean tech proposals have dominated top business plan competitions. On the first day of the Intel Challenge, Matt Caspari mulls over Aurora's prospects as he surveys teams from Russia and China.

"A lot of people who have done well in their careers are saying, 'What do I want to do next?'" he says. "They see energy in the news and they don't like the reliance on fossil fuels in the Middle East; they don't like high prices; they don't like the environmental impacts. So, a lot of people with political clout and capital are trying to solve this problem. Fortunately for us and the other entrepreneurs here, they're looking to some of the top universities around the world to try to find people who are willing to do the hard work day in and day out to make it happen."


Marianne Wu, a partner at Mohr Davidow Ventures and a judge at the Intel/Berkeley Challenge.
Photo: Bruce Cook/Lester Center
A major attraction of business plan competitions is hob-nobbing with the judges. At the Intel Challenge, many judges are investors from Silicon Valley's leading venture capital firms who pick the winners and scout out possible deals. One of the judges at this year's competition is Marianne Wu, a partner at Mohr Davidow Ventures. Wu has already been talking about a deal with Aurora.

"The area that they're focused on, which is algae as a feed stock for bio-fuel, is one that we have great interest in," Wu says. "Energy is the fundamental driver behind daily activity, behind industrial growth, behind our commercial infrastructure."

At the competition, teams make short pitches and are grilled by judges in small, wood-paneled meeting rooms. On day two, Aurora passes into the semi-finals where the team makes the pitch before four judges, including Marianne Wu.

Guido Radaelli opens in gravely accented English. "We are Aurora BioFuels. And we are doing something magic. We are turning wastewater into bio-diesel using our proprietary super-algae."

Company CEO Caspari sketches out the big picture.

"We're all aware of extremely high oil prices, geopolitical issues that are tied in with our dependence on fossil fuels that has resulted in subsidies and mandates on the federal and state level," he says. "Adding to that environmental concerns and it's really a perfect environment for alternative energy and bio diesel. The market itself is new and rapidly expanding. We had a production of 20 million gallons of bio-diesel in 2004. Last year, production was 75 million gallons."

But, he adds, "The problem with bio-diesel today is that it mostly comes from agricultural crops. Agricultural crops are expensive. They have better uses than being burned for fuel. Our method allows us to produce vast quantities of bio-fuel cheaply."

Aurora asked us not to reveal proprietary information discussed in private meetings with judges, but in an earlier public gathering at Berkeley, the Aurora team gave clues about their business plan.

"The heart of this business, we call it our secret sauce, is our biotechnology," Caspari told the audience. He explained that the "secret sauce" was derived from a strain of algae "whose bio-yields are three times higher than what occur naturally."

Back at the competition, Aurora's pitch ends smoothly. The judges give the team a round of applause. In the halls of Berkeley's Haas School of Business, home to the Intel Challenge, Aurora is generating buzz. Dan Lankford, a judge and partner at Wavepoint Ventures, tells us bio-fuel companies like Aurora could offer consumers, businesses and municipalities a simple way to reduce carbon emissions.

"There's no question," says Lankford, "that from a venture capital standpoint, the whole issue of global warming and [reducing] carbon emissions has become a very interesting space. This is real business, real money, with very draconian consequences for people who don't meet the standards."

Lankford tells us he's impressed with Aurora's business plan.

"In order to have any value at all, you have to have a big enough market," he says. "So you have to solve a need. You have to address, as we often say, somebody's pain. You have to make the pain go away. Two of the biggest problems we're trying to solve in society today, one is energy, the other's environmental. Aurora addresses both."

At the evening awards ceremony, each team gives a one-minute "elevator pitch," a rapid-fire monologue set in an imaginary elevator ride with an investor. When the first-place winner is announced, Aurora Biofuels name flashes across a large screen. Matt Caspari and his partners stroll to the stage in fashionable black suits to collect the $25,000 winning check.

Investors, including Noventi's James Horn, take notice of Aurora's success at Berkeley.

"Winning the competition clearly means a lot about the viability of their idea. So it kind of started the ball rolling for us," he says. Soon after, Horn's firm Noventi agrees to fund Aurora.
The idea of getting fuel from aquatic plants has existed for decades. But it seems to take an emergency to push America away from petroleum. A generation ago, the United States was facing another energy crisis brought on by the OPEC oil embargo. Oil prices quadrupled. The federal government sought to counter the OPEC cartel and solve wrenching energy shortages. The most ambitious effort to tackle the crisis was announced by Jimmy Carter in 1979.

"The energy crisis is real. It is worldwide. It is a clear and present danger to our nation," Carter said in a major televised address.

Carter outlined plans to cut oil imports and boost domestic production and energy conservation. He also charted a third path. Today we call it "green energy."

"To give us energy security," Carter said, "I am asking for the most massive peacetime commitment of funds and resources in our nation's history to develop America's own alternative sources of fuel."

President Carter invested millions in new government research centers like NREL, the National Renewable Energy Laboratory in Golden, Colo. As part of NREL's Aquatic Species Program, researchers spent 20 years studying micro-organisms like algae. They were startled by algae's capacity to produce oil.


Al Darzins, a senior manager at the National Renewable Energy Laboratory in Golden, Colorado.
"It's amazing," says Al Darzins, a senior manager at NREL.

Given the right conditions, Darzins says algae could double its volume overnight. And unlike other sources, such as soy or corn, algae can be harvested day after day.

"If you could actually generate an algae strain that produces lots of oil, you could use this oil for a variety of bio-fuels," Darzins says. Including "fuel for ships and trains, jet fuel and even green gasoline."

"There is no other resource that comes even close in magnitude to the potential for making oil," says John Sheehan, an NREL energy analyst who worked in the aquatic species program. One of algae's great strengths, Sheehan recently told the journal Popular Mechanics, is its ability to grow robustly in brackish water. NREL's research initially focused on identifying natural algal strains that were then tested in outdoor pools in New Mexico, where much of the groundwater is saline and unsuitable for other forms of agriculture.

The government's alternative energy initiative was strong while oil prices stayed high. But in the early 1990s, the cost of crude oil plunged. So did interest in alternative fuels that were not cost-effective against petroleum. In 1996 the Department of Energy shut down the aquatic species program.

But just before work stopped, NREL researchers made an important breakthrough. Using new techniques, the scientists discovered it might be possible to boost algae's capacity to produce oil through genetic engineering. While NREL didn't actually produce oil from these strains, the work provided a road map for others to follow.

"Before then, people really had not been able to do any genetic transformation, that is the introduction of new genetic material into these organisms," Al Darzins says. "NREL at the time found methods of getting foreign genes into some of the strains they were working with. That serves as the basis for what a lot of people are going to be doing in the future."

Today, NREL is hoping to create new algae strains through genetic engineering, as part of an ambitious collaboration with private companies. Aurora's Matt Caspari will be watching closely. A lot of his company's work is based on the government's pioneering research.




The Heat of Competition

Flush with investment funding, Aurora moves its team and fish tanks into spacious, glass-enclosed offices in an industrial park perched on the east side of the San Francisco Bay.

But as the company prepares to hire more staff and step up operations, competition moves in on its home turf. A number of other small California start-ups announce plans to gear up algae-to-bio-fuel programs. Then oil giant British Petroleum announces it will invest $500 million in an alternative energy research center on the U.C. Berkeley campus. Elsewhere, Boeing, Virgin Atlantic and the Department of Defense also say they are studying ways to produce fuel from algae and other plants. It was daunting competition for three guys and their fish tanks.

As he reviews his company's successful launch, Matt Caspari spies storm clouds on the horizon.

"I'm not just worried about little start-ups," he tells us. "I'm worried about big companies too, because they can pour potentially as much or more money into an idea and put a lot of smart people to work on it. And the one advantage you have over a big company as a small entrepreneurial start-up is you can move really fast and make decisions really quickly. So, I feel a huge pressure to get results."

Aurora's chief investor James Horn says results may not be around the corner, but that's part of the adventure for early-stage venture capital firms.

"Aurora was a very raw company at the first conversation," he says. "It was effectively three guys with a plan on how to create a new energy supply for a growing world. But it was not a stretch to think that we could adapt algae to produce bio-diesel. So we made the investment. And it may take longer than we expect, but we're risk-takers by nature and we believe there is a chance to be successful here."

How do investors measure success in clean tech? It's clearly about making a profit. But for James Horn, saving the world from global warming is a welcome benefit.

"Using algae is effectively carbon neutral, it's not competing for food stocks, it's not competing for scarce water," Horn says. "In many ways, it is kind of the ultimate solution for powering our cars. You know, 18 months ago, I never thought I would be investing in an algae company."

Horn tells us Aurora's success depends on its secret, oil-boosting technology developed at Berkeley. Government scientist Al Darzins cautions that Aurora's claims seem impressive, at least on paper.

"But have they actually proven that?" he asks. "I suspect it's theoretical at this point and maybe [based on] some small-scale lab stuff that they've done and they extrapolate. But let's take that organism out of the lab and let's see what it does in the environment."

Scaling up lab experiments in large, outdoor settings is the biggest challenge facing Aurora and many other alternative energy pioneers.

"You're talking about hundreds or thousands of acres of algae growth," says CEO Matt Caspari. "So it's money and time to scale that up."

"They are trying to do something on a very large scale which hasn't been done before," says James Horn. "There are a number of hurdles that we haven't even addressed yet and that we won't be able to address until we can actually test it."

With more hurdles ahead, scientists are projecting it may take five years or more before fuel derived from algae is widely available. But one company in New Zealand is already marketing a new diesel blend. Five percent is from refined algae oil.

Alternative energy - whether from solar, wind or even algae - is no longer a tale of science fiction or distant dreams. That's obvious. Just look at the billions of dollars flowing into the market to back new, earth-friendly products such as green credits cards and bio-fuels. Investors insist intense competition in this green marketplace is no passing fad.

"Energy is the number one driver in the world," says James Horn. "And if we can migrate to alternative energy supplies, it can be an enormous industry both in California and worldwide."

Marianne Wu says, "It's a much more fundamental change that we're going through. So, it's not some little blip that it's hot today and tomorrow it's going to be some next hot thing."

The marketplace can deliver wealth of course, but it's hardly been eco-friendly up to now. More than 150 years ago, the California gold rush produced riches for some people, but environmental devastation and hardships for many others. And the gold rush wound down in just a few years. It will be up to contemporary consumers and eco-entrepreneurs and their shareholders to see that today's green rush evolves from an economic frenzy to a fundamental planet-saving change.
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