An LS9 spokesperson, as well as company investors, told me on Wednesday that the company is not shutting down. An article in Biofuels Digest on Wednesday reported that LS9 has been struggling, would soon see its staff disperse and could shut down. That article has now been changed to reflect the switch in leadership and de-emphasize the previous assertion that it could shut down.

No doubt it’s a difficult environment for biofuel startups right now. Finding venture capitalists to put more money into capital intensive biofuel production was hard in 2012, and will likely be equally hard in 2013.

Ls9 restructured its business in the fourth quarter of 2012, which led to a reduction in staff, said a company spokesperson. But the company is moving forward with its current size, says the spokesperson. The company would not release the number of its employees or the amount of staff reduced. LS9 started up a demonstration facility in Florida in late 2012, and opened an office in Sao Paulo, Brazil in the Summer of 2011.

LS9 uses a genetically modified version of e.coli bacteria to make diesel and other green chemicals and fuels. LS9 has raised at least $75 million from venture capitalists including Flagship Ventures, Khosla Ventures, Lightspeed Ventures, Chevron Technology Ventures, and BlackRock.

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Report author Andrew Soare interviewed more than 300 executives for the report, and finds that startups in the field have started to distinguish themselves as winners or losers in terms of larger rounds of investment and corporate partnerships. At the same time, startups are changing their game plans to better fit the difficult market, shifting focus to specialty chemicals and postponing plans for mass-producing biofuels that will have to compete against oil on price.

So who’s on top? As with its report last year on the biofuel sector, Lux pulls together data on revenue per employee, patents, performance metrics, production capacity and the like to place contenders in terms of maturity and potential. Winners in both categories included net-generation biofuel stock market bellwether Amyris, cellulosic waste-to-isobutanol startup Gevo, algae-to-fuel startup Solazyme, long-time cellulosic ethanol developers Mascoma and Poet, and two startups making succinic acid and butanol — U.S.-Canadian firm BioAmber (formerly DNP Green Technology) and China’s Cathay Biotechnologies.

As for low-ranking companies, Lux didn’t pull punches, putting some dozen little-known names in its immature, unpromising quadrant, indicating the judgment that they’re “highly risky as investment, licensing, partnership, or merger and acquisition target(s).” Those included two “caution” warnings for U.K.-based ethanol producer TMO Renewables and French biocatalyst developer Proteus.

Many of the top-ranking startups have deep partnerships with established players in the field. Cellulosic ethanol maker Mascoma just got $50 million from oil refining giant Valero to build a plant in Michigan, along with an agreement to buy the fuel from it. Amyris has backing from French oil giant Total and P&G, Gevo has letters of intent from Total subsidiary Total Petrochemicals and United Air Lines, and Solazyme has investment from Chevron and a partnership with European food and consumer products giant Unilever.

They’re not alone, of course. Craig Venter’s Synthetic Genomics got $300 million from ExxonMobil for algae biofuel research, LS9 has backing from Chevron and products giant Procter & Gamble, and Codexis has pharmaceutical partnerships and a piece of Shell’s massive Brazilian biofuel partnership.

The Lux report breaks down startups according to technologies: fermentation, gasification, synthetic biology, chemical processes, crop enhancement, and algae processes. Some headline-level conclusions include:

• Fermentation’s digestion is improving. Companies like TetraVitae and Genomatica are engineering organisms that can eat more and more feedstocks and pump out more and more valuable chemicals, like succinic acid and butanol. Companies emerging from the biotechnology sector like Amyris and Verdezyne are also producing interesting new chemicals.
• Gasification is good for waste. It looks like heat beats bugs for converting trash into useful hydrocarbons. Even though that uses a lot more energy, it could be worth its while if startups can squeeze efficiencies out of the process. And remember that trash doesn’t cost anything — in fact, processors can usually get paid by the ton for taking it off the hands of government and private trash management authorities.
• Algae hasn’t proven anything yet. Lux says that only a handful of algae-based biofuel startups will survive — the report singles out Solazyme and Algenol — amidst a host of competitors that haven’t solved the key problems of harvesting and processing algae in a cost-effective manner.

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Image courtesy of Argonne National Laboratory via Creative Commons license.

Dineen says the new funds, which bring the company’s total to $75 million to date, will go towards fulfilling deals with its partners, like Procter and Gamble, building out its demonstration facility in Florida, establishing business in Brazil, and launching two or three new chemicals. Down the road, Dineen says he sees either a Series E round and/or a potential IPO to help the company raise enough funds to reach commercialization.

LS9 has a “one-step” fermentation process it says eliminates the need for additional chemicals and industrial processes. Earlier this year, the company said it developed a microbe that can produce advanced biofuels directly from cellulosic biomass, like woodchips, and the research was done in conjunction with the University of California at Berkeley and the Department of Energy’s Joint BioEnergy Institute.

The startup currently operates a 1,000-liter pilot plant in South San Francisco, Calif., that produces vehicle-ready diesel from so-called first generation feedstock like sugarcane. But the long-term goal of LS9 is to produce biofuels and chemicals using cellulosic feedstock (energy crops, plant waste, etc), which the company says would reduce the total, life-cycle greenhouse gas emissions of its products.

LS9 is one of a handful of startups and big companies that are using synthetic biology to produce biofuels, including Craig Venter’s company Synthetic Genomics, Amyris, and Gevo.

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U.S. Patent #7,794,969, AKA “Methods and Compositions for the Recombinant Biosynthesis of n-Alkanes,” covers the Cambridge, Mass.-based startup’s process to engineer “photosynthetic microorganisms for the direct synthesis of diesel molecules.” While other biofuel startups are using genetically engineered organisms to convert  sugar into drop-in fuels (see Amyris and Solazyme for examples), Joule says its organisms need only sunlight, water and carbon dioxide — a fact that’s key to its low-cost claims.

Joule’s “helioculture” systems — glass containers of algae and water laid out in a manner similar to solar panels, with pipes to take the resulting biofuel to storage tanks — are meant to be modular and scalable, CEO Bill Sims told us last year. Unlike many other algae biofuel efforts that rely on harvesting and processing the algae to make fuel or other products, Joule’s microorganisms keep pumping out fuel in a continuous process. Craig Venter’s startup Synthetic Genomics is working on engineering algae to do someting similar, and has a $300 million research project underway with oil giant ExxonMobil.

Joule’s pilot project in Leander, Texas is now producing ethanol, rather than diesel, and can produce up to 10,000 gallons per acre per year, though Joule said it’s shooting for 15,000 gallons per acre. As for its diesel product, Joule plans to start pilot production by year’s end and open a commercial plant in 2012.

Joule raised a $30 million series B round in April, adding to the “substantially less than $50 million” CEO Bill Sims said the company had raised as of July 2009, when it came out of stealth. The company was founded in 2007 at the Flagship Venture Labs, an arm of Cambridge-based Flagship Ventures.

Joule’s claims have been greeted with some skepticism by biofuel industry analysts, no doubt making the new patent — along with another on “Hyperphotosynthetic Organisms” approved on August 31, and Joule’s numerous other patent filings — interesting nighttime reading for its biofuel competitors.

Joule’s claim of being able to produce 15,000 gallons of diesel per acre is particularly aggressive. Henrik Scheller, director of cell wall biosynthesis at Lawrence Berkeley National Laboratory’s Joint BioEnergy Institute, has said that algae growing in sunlight can reasonably produce about 4,385 gallons of fuel per acre per year, and that’s by harvesting and processing the algae itself. Joule declined our interview request on Tuesday — we’re curious to hear how the company addresses questions about its high-volume, low-cost claims.

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The move — first reported via anonymous sources by Greentech Media last month —makes sense, given the startup’s strengths. Alameda, Calif.-based Aurora’s main technological advantage lies in the work they’ve done to selectively breed strains of algae. Those strains are higher in omega-3 fatty acids than most, and can also out-grow typical strains by a factor of two to one in pilot ponds in Florida and Mexico, CEO Gregg Bafalis tells me. Otherwise, the company is using technologies that have been around for decades: open raceway ponds, well-known algae harvesting crushing techniques, conversion into omega-3 EPA for pharmaceuticals and high-protein feed for fish farms and other purposes.

But while Aurora had first hoped to take its better-growing algae straight to biofuels, it’s decided that the technology for doing so is “really at least several years out,” Bafalis told me. Monday’s shift has been presaged by big changes in the company, with CFO Joe Geesmand and CEO and former Shell veteran Robert Walsh leaving in February, and the company raising $15 million and appointing new CFO Scott McDonald in March. Bafalis, a veteran of both the traditional energy industry and biofuel startup Green Earth Fuels, joined the company in June.

“I’m familiar with biofuels and living off of government subsidies,” he said. “When I joined this company I was concerned with building a business on fundamentals that could stand on their own.” The company hopes to have its first demo facility in Australia, which will use CO2 from natural gas and fertilizer plants to grow algae in eight 1-acre ponds, operating by year’s end, and plans to get to commercial scale by the first quarter of 2013, Bafalis said. While the company does hope to see biofuel made from its algae in the future, that’s off the table for current commercialization plans, Balfalis said.

It’s a hard fact that no algae biofuel company can claim cost-competitive production to date. The key challenges lie in cost-effective ways to harvest the algae from water, and convert it into fats for conversion to fuel, without using more energy at higher cost than you’d yield from the final fuel product.

Other algae startups have targeted markets outside fuel to get started. Solazyme, which has technology for growing algae in the dark by feeding it sugar, has been working to adapt its algae oils for consumer products giant Unilever to replace palm oil, and last week said it had received an undisclosed investment from the consumer products giant. The insight isn’t limited to algae-based biofuels. Khosla Ventures-backed LS9 has a deal to produce industrial chemicals for Procter and Gamble, even as it has continued to claim breakthroughs in turning cellulosic materials into fuels.

These smaller markets could help biofuel companies in their challenge to compete with the fossil fuel industry on its own terms. Not only must biofuels compete with their fossil fuel equivalents, they also have to be able to scale production to the billions of gallons. Without that kind of scalability, most algae biofuel companies are just “playing” with their investors money, according to Craig Venter, whose Synthetic Genomics is in a $600 million algae biofuel research program with ExxonMobil.

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Codexis CEO Alan Shaw spoke to us Wednesday, and while he couldn’t say just how the deal would impact the company’s short-term financial picture, he did say that Codexis would be working on converting 100 percent of the sugarcane plant — the one-third that’s sugar, and the rest of the cellulosic material that’s left over — into biodiesel through a direct fermentation process. Just what share of the overall venture’s production might come from Codexis technology in the coming years he couldn’t specify.

Still, Codexis is “already significantly engaged” in the Brazilian project (an MOU was signed in February), and expects to have its technology working there next year, Shaw said.  While Shell has turned over its 16-pecent stake in the Redwood City, Calif.-based company to the yet-to-be-named venture, it and other investors (Chevron, Pfizer, General Electric) are holding onto their Codexis stock, he added.

“This joint venture is very much about Shell’s future,” Shaw said. Indeed, Shell says it will invest $2 billion in the project, and will retain rights to buy back Cosan’s half in ten years. The new joint venture is expected to add some 2 billion liters (528 million gallons) of annual production capacity to Cosan’s already existing 18 billion liters (4.75 billion gallons) per year in ethanol sales, and Shell and Cosan together have 4,500 gas stations to sell the fuel.

Shell has had a 3-year partnership with Codexis, and accounted for 76 percent of its revenues in 2009. Codexis was one of the first biofuel startups to link its fortunes so publicly to Big Oil, but it has since been followed by others. IPO candidate Amyris has a partnership with French oil giant Total; Chevron has invested in LS9 and Solazyme as well as in Codexis; and Exxon is in a $600 million partnership with Craig Venter’s Synthetic Genomics to genetically engineer algae for biofuel. Other biofuel startups are inking deals with agriculture giants: Gevo, the Khosla Ventures-backed cellulosic ethanol company that filed for an IPO this month, has a partnership with Cargill.

Shaw said he believes Codexis is ahead of its competitors in getting its technology into the massive refining, transport and distribution networks needed to bring biofuels to market at a scale that matters. “This joint venture is real, it’s happening today, one of the world’s largest oil companies has put its weight behind it,” he said.

Shell also turned over its stake in Canadian biofuel company Iogen Energy, which will also be part of the new joint venture. Codexis is working with that company to turn wheat straw into ethanol, in what Shaw dubbed a “North American solution” to match Brazil’s interest in cellulosic sugarcane waste for fuel.

Beyond its partnerships with Pfizer and other pharmaceutical companies, other projects underway for Codexis include carbon capture, and Shaw said the company expected to announce a “big brother partner” in that field some time this year.

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The Broomfileld, Colo.-based startup is showing the world that it really can make that leap to commercialization. After all, it’s gotten hefty venture capital and government funding since it announced in 2007 an ambitious plan to one day produce 1 billion gallons of cellulosic ethanol per year. But the company has a long way to go to cross the billion-gallon mark.

Range Fuels, backed by Khosla Ventures, Passport Capital and others, is producing methanol from what it calls the initial phase of its first commercial plant near Soperton, Ga. Phase 1 of the plant has an annual capacity of “less than 10 million gallons,” said company CEO David Aldous in an email. How the company will allocate the capacity to produce methanol and ethanol “will depend on the relative economics of ethanol and methanol in the marketplace,” he said. The company has set a goal of expanding its capacity of the same plant to 60 million gallons per year, with construction set to start next summer.

Range Fuels broke ground on its Georgia plant in 2007 and said at the time that the first phase of the plant would have a capacity of 20 million gallons per year.

The company is selling the methanol to a biodiesel producer, said Aldous, who declined to disclose the producer’s name.

Many biofuel companies have struggled to meet their initial deadlines for delivering fuel that could either blend with or completely replace gasoline or diesel. Challenges have been both technical and financial. Figuring out the right process to convert plants or green wastes into fuels isn’t a simple task, particularly with the goal to make fuels price-competitive with gasoline.  Plus, the recession hit just when some of these companies were trying to raise millions of dollars to build their first commercial plants.

The company uses high heat, pressure and steam to convert biomass into a synthesis gas of hydrogen and carbon monoxide. The syngas is then processed into alcohols that can be separated and refined to produce different types of biofuels. Many of its competitors, on the other hand, use enzymes or other catalysts to break down the plant materials and turn them into sugar before fermenting it into fuel.

Other biofuel starts also are using the syngas process. Fulcrum BioEnergy, for example, announced last September it was able to make ethanol from landfill wastes. Although it demonstrated it could make it happen, commercial production at its plant near Reno won’t begin until next year, according to the Pleasanton, Calif.-based Fulcrum.

Range Fuels has discussed publicly its ethanol plans for several years now, but it only recently made clear that it would be churning out methanol first. Biofuel blogger Robert Rapier penned a post critical of Range Fuels’ decision to add methanol to its production plan. Methanol, Range Fuels said, can be turned into biodiesel to power cars, heaters or fuel cells. Its feedstock will first come from timber operations, but it also wants to make fuel with plants such as miscanthus and switchgrass.

Update: Robert Rapier emailed us to clarify that his criticism of Range was not about their decision to add methanol to the mix, per se, but rather he says what the company is delivering is at a far greater taxpayer cost and at a much later date than what they initially hyped.

Range Fuels’ decision to make products other than ethanol isn’t unusual in the biofuel world. Companies such as Solazyme, BlueFire Ethanol (who just changed its name to BlueFire Renewables) and LS9 all have lined up or pursued opportunities to sell various compounds, for products such as soaps and sugars, that come from their processes of converting plants or biomass into chemicals, including fuels. Some of these products will generate revenues a lot sooner than transportation fuels can.

Range Fuels snagged an $80 million loan guarantee from the U .S. Department of Agriculture to help build the first commercial plant. Back in 2007, the company also announced that it would receive a $76 million grant from the U.S. Department of Energy for building the same factory, and it was supposed to complete the first phase of the factory — at 20 million gallons per year — by the end of 2008. In April 2008, the company said it had raised more than $100 million in equity to help fund the factory, but the first phase’s completion was pushed back to 2009. Along the way, the company replaced its CEO, a former executive at Apple, with Aldous, who came from Royal Dutch Shell.

The company was trying to raise $80 million in debt (in connection with the USDA loan guarantee) for its Soperton plant earlier this year, according to its February filing with the Securities and Exchange Commission. Aldous declined to disclose the cost of building the plant.

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LS9 aims to produce biofuels and renewable chemicals to replace conventional petroleum-based products, and the company said this breakthrough will enable it to do this at lower costs. Biofuels ultimately will need to compete against conventional fuels on the open market, and any technological advancement that lowers production costs should make LS9 more competitive.

The startup currently operates a 1,000-liter pilot plant in South San Francisco, Calif., that produces vehicle-ready diesel from so-called first generation feedstock like sugarcane. But the long-term goal of LS9 is to produce biofuels and chemicals using cellulosic feedstock (energy crops, plant waste, etc), which the company says would reduce the total, life-cycle greenhouse gas emissions of its products.

Last year, CEO Bill Haywood said LS9 has been in the process of building a demonstration plant that it aims to complete this year. Spokesman Jon Ballesteros told us today that the company is on track to have the demo facility up and running in the “earlier part of this year.” Ballesteros wouldn’t say how large that facility would be, but Haywood previously told Earth2Tech that it would have an annual capacity of 2.5 million gallons.

Last September, LS9 raised $25 million in a third round of funding from oil giant Chevron’s venture capital arm and others, though the round was less than the $75 million-$100 million the company was asking for earlier in the year. But some critics have questioned the environmental benefits of biofuels that rely on any land-based plants, and recently venture capitalists have focused more on algae-based fuel startups such as Solazyme and Solix Biofuels.

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While having a big oil backer is a good sign for a young startup, LS9′s round was markedly smaller than the $65 million the company was seeking back in February and well below the $75-$100 million it had hoped to raise last October.

The smaller round could indicate sluggish investor interest in biofuels other than algae-based fuels. After more than a year of slim venture capital funding for biofuels — as feedstock costs rose, biofuel prices fell and critics raised questions about biofuels’ green cred — we saw a bump in deals this summer, although mostly for algae-based startups, such as Synthetic Genomics, Solix Biofuels and Solazyme. At least one exception has been LS9 competitor Amyris Biotechnologies, which in August raised $24.7 million of what it hopes will be a $62 million round.

The smaller round also could suggest a strategy change that might require less cash. Aside from fuel, LS9 in May announced it is developing technology to make sustainable chemicals in a partnership with Proctor & Gamble.

LS9 started up a 1,000-liter pilot plant in South San Francisco last year and is building a 2.5-million-gallon demonstration plant expected to be completed next year. Aside from CTTV, LS9 also got renewed backing from its existing investors, Flagship Ventures, Khosla Ventures and Lightspeed Venture Partners.

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LS9 started up its first plant, a 1,000-liter pilot plant in its hometown of South San Francisco, Calif., back in September. The company is already producing vehicle-ready, ultra-clean diesel from the plant, although at this point, most of it is being used for testing and development, said spokesperson Jon Ballesteros.

LS9 is also planning to raise a smaller third round of funding than it previously said it was seeking. CEO Haywood said LS9 plans to raise around $65 million, which it will use to build the demonstration plant and reach commercial production, vs. the $75 million-$100 million he said the company was looking to raise back in October.

LS9 which raised $15 million in its second round of funding in 2007, plans to tap its internal investors for the money, and may also take funds from strategic partners or new follow-on partners, Haywood said. LS9′s current investors include Lightspeed Venture Partners, Flagship Ventures and Khosla Ventures.

But the round isn’t a sure thing, according to Ballesteros, who said the company might end up getting money from strategic partners and existing investors instead of completing a formal venture round. “We’re working on strategic partnerships and they are going to be imminent, and we already have commitments from internal funders and some follow-ons, so we don’t really know if we will need to go for a full-blown raise,” he said. “We’re looking for some sense of that and exactly what we will be needing in the second half of this year.”

In any case, the company isn’t planning to take on any debt financing until at least 2011, and it may be able to avoid it all together, Haywood said. “By then, we hope to have a strategic relationship with someone with deeper pockets,” he said. LS9 hopes to start commercial production by 2012 and then plans to build a dozen or more plants to reach a capacity of 1 billion barrels.

The company also is considering the possibility of buying distressed assets — such as defunct biofuel plants — to reduce its cost of adding capacity, Haywood said, although he added that most of the equipment at those plants aren’t applicable to LS9′s technology.

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