The engine, called the X2, will be available as a beta prototype for outside testing by the first quarter of 2013. The engine is able to achieve more than 50 percent efficiency under typical operating modes, while typical diesel engines usually achieve less than 20 percent efficiency.

The X2 is a new type of engine architecture, based on a rotary engine. LiquidPiston CEO and President Alexander Shklonik told met in an interview that this new version of the rotary engine is more flexible and can thus be more efficient when optimized in the right way. The engine is smaller, lighter, and cheaper, with ten times fewer parts, than current diesel engines on the market, says Shklonik.

Shklonik told me in a phone interview that the first applications for the engine won’t be the mainstream automotive industry, but will be industries like defense, long haul trucks, plug-in vehicle range extenders, and other more niche markets. LiquidPiston has raised $12.3 million so far, and tells me that it’s looking to raise another $20 million later this year. The company has around 12 employees.

Other startups that have developed more fuel efficient engines include EcoMotors, Pinnacle Engines, and IRIS Engines. More efficient engines will be used in both the next-generation of cars sold in developing countries, and also countries like the U.S. that have new fuel efficiency standards. The Obama administration passed the CAFE standards, which require a fuel efficiency of 54.5 miles per gallon by 2025.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

LiquidPiston

The son, an MIT-trained computer scientist named Alec Shkolnik, is LiquidPiston’s president and chief executive. The father, Nikolay Sholnik, is a physicist who previously worked in clean energy development and now serves as LiquidPiston’s chief technology officer. Over the last four years the pair have built a proof-of-concept engine, have put together a six-person team at their Bloomfield, Conn. headquarters, and have also attracted $6.5 million in venture capital, including $5 million announced last week.

LiquidPiston is one company among a raft of VC-backed startups working to make the internal combustion engine more efficient, often with a business plan that involves licensing technology rather than manufacturing engines. Venture capitalist Vinod Khosla has argued that these innovations could be implemented with much less cost compared to developing all-electric vehicles, while helping to reduce fuel consumption and emissions.

Like startup IRIS Engines, LiquidPiston is eying the nascent market for range-extending engines in plug-in vehicles (such as General Motors’ Chevy Volt) as an early opportunity for the company. LiquidPiston also plans to target auxiliary power units and generator sets as entry points to the commercial market. “That’s not to say we can’t scale up later,” said Shkolnik, but he recognizes that “automotive and trucks are very conservative markets.”

So far, LiquidPiston’s tale is one of persistence. Nikolay Shkolnik had been mulling thermodynamic efficiency, or the amount of work that an engine produces from a given amount of fuel, “for 30 years,” Alec Shkolnik said. But it wasn’t until Shkolnik began his PhD studies at MIT that he began to appreciate his father’s ideas. In 2004 they joined with a couple MBA candidates to vie for the $50,000 prize in MIT’s entrepreneurship competition. They won $10,000 as runners up in the competition. That was enough to cover LiquidPiston’s first patent application.

More importantly, the competition also introduced the Shkolniks to William Frezza, a partner at venture capital firm Adams Capital Management. As LiquidPiston’s mentor in the MIT competition, Frezza told Shkolnik that if the startup “every had a term sheet on the table,” he would take a look and weigh in on whether it was a good deal. By 2007, LiquidPiston did have a term sheet for a proposed investment by Northwater Capital. Frezza took a look, Shkolnik recalled, and decided that Adams Capital “wanted in.”

At a basic level, internal combustion engines generate movement through the rapid expansion of gas from burning fuel. LiquidPison’s engine, similar to a Diesel engine cycle, has fuel injected into the combustion chamber, where it ignites automatically. Rather than being allowed to immediately expand, however, the mixture is kept at constant volume as the fuel and gas burn, similar to the Otto cycle used in a conventional gas engine.

LiquidPiston claims that its mix-and-match approach eliminates inefficiency found in the traditional cycles. The company’s so-called High Efficiency Hybrid Cycle, can use both diesel and gas, and can deliver 74 percent thermodynamic efficiency, in theory. In practice, the team is hoping to achieve something “in the 50s,” said Shkolnik, compared to about 30 percent for many diesel engines and even less for gas engines.

Initially, said Shkolnik, the idea was to use liquid as the piston. “Every year the design got simpler and simpler,” he said, to the point where the company’s current design has only three moving parts. “We’re married to the thermodynamics,” Shkolnik said, “but not to any particular engine design.”

LiquidPiston says its latest prototype, called M2.5, is the first naturally aspirated (not turbocharged or supercharged) rotary engine to fire on both gasoline and diesel fuels. According to Alec Shkolnik, the 20-horsepower prototype weighs about 90 pounds. But it’s basically “a large block of steel” at this stage. With further development and focus on optimizing for less weight, Shkolnik said LiquidPiston aims to build a 40-horsepower diesel engine weighing just 75-90 pounds, compared to a typical engine weighing more than four times that amount.

With its latest financing round, LiquidPiston is now set to hunker down for about two years of engineering, according to Shkolnik. The company plans to build several more prototypes, hire four more people, and ready a design for delivery to potential strategic partners, taking its concept on the long journey from a theory played out in a block of steel to a competitive product.

Related research on GigaOM Pro (subscription required):

• How to Break Into The Energy Storage Market
• How EV Battery Startups Can Cross the Valley of Death
• Why Google Android’s Electric Vehicle Deal With GM Matters