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

[[{"type":"media","view_mode":"media_large","fid":"309","attributes":{"alt":"","class":"media-image","style":"width: 333px; height: 220px; margin: 3px 10px; float: left;"}}]]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.