A couple weeks back cellulosic ethanol hopeful Mascoma quietly pulled its IPO after it had filed to go public. It’s safe to say that the abysmal performance of the 2011 crop of biofuels IPOs, that included Solazyme, Gevo and Kior, did not help Mascoma’s chances of finding public money. Gevo’s been a particular stinker, losing over 80 percent of its value, though Kior is down almost 70 percent from its IPO pricing.

My colleague Katie Fehrenbacher has analyzed the various issues related to high levels of risk and companies like Kior. With no revenue at IPO and no significant revenue on the horizon until the company built a capital intensive production facility costing tens of millions, Kior has carried a significant level of risk for a publicly traded company.

I mention the high risk world of biofuel investing and the fact that these companies went to public markets seeking capital because two years after the 2011 class of biofuels IPOs, cleantech investors find themselves in challenges situations where it’s difficult get IPOs done. And without those investors having access to liquidity and returns, late stage companies are having harder times finding capital to push through the commercialization phase of growth.

What happened?

The IPO market all but dried up with just three cleantech IPOs in 2012 and overall cleantech VC dropped by a third. IPOs are critical for venture investors to find liquidity and produce returns, as is significant M&A activity. But IPOs that significantly underperform the market make it harder for other companies in that sector to attract VC or to go public themselves.

Of greatest concern is that as financing for cleantech gets tight, the brightest startups will struggle to find early stage capital and those companies nearing the path to commercialization will find it hard to find scaling capital.

Many of these financing issues are cleantech specific. It’s worth looking at Matthew Nordan’s analysis of the state of cleantech investing but some of the key points he makes are:

• 1) The current value of cleantech funds is about 90 percent of what LPs put into those cleantech specific funds, versus about 123 percent for the overall venture sector.
• 2) The number of cleantech IPOs is lagging and their aftermarket performance is poor.
• 3) Cleantech companies tend to take longer to IPO or get acquired and require more capital to get to profitability than say, internet startups.

IPOs and long term investors

So what to do about the problem? I spoke recently with Mona Defrawi, the founder of Equidity, a startup that has built a platform to connect promising later stage startups with buy side investors. These are the investors who would typically buy IPOs, but who now are getting access to data on later stage startups so they can consider investing in growth companies a couple years pre-IPO at attractive valuations while giving up some liquidity by doing private deals.

Defrawi has some strong opinions about how the overall IPO system is broken, much of which she blames on decimalization, short term trading, Sarbanes Oxley, and the inability to have stable markets post IPOs because there aren’t enough long term investors sticking by companies through an IPO. The net result is a world where it takes close to ten years to go public versus about 5 years in the 90s, something that has a rough impact on venture capital firms that need liquidity and need to show LPs a return. Defrawi put together an infographic to detail her view of the IPO market and to promote Equidity:

Equidity launched its list of 135 GrowthSTARS in February. These are companies that Equidity wants to be the foundation of its list of companies that it can connect with long term investors pre-IPO. Scanning the list, it included a few cleantech names such as Bloom Energy, Opower, oDesk, and BrightSource. Some of the companies on the list, like Opower, I wouldn’t think would have any trouble finding capital given its continued success. Though other names like BrightSource, which specifically has had to ditch its IPO plans as it struggles with the competitive move to solar PV technology, may need capital to survive before it ever reconsiders a public offering.

But regardless of how attractive the various companies on Equidity’s list are, the real point of interest is that Equidity wants to offer up these companies to buy side investors before the IPO, particularly in a world where venture capital has grown somewhat tight.

There are other efforts to increase liquidity pre-IPO from the likes of SecondMarket and AngelList. Equidity is another such effort though it’s trying to do so at a much larger investment size and not with a focus on making a market pre-IPO but on bringing the big public investors into private deals pre-IPO.

And if Equidity is one small step toward making it easier for cleantech companies to get later stage capital and attract investors that will stick with the company post-IPO, that could aid a recovery in the upstream venture capital that’s needed to finance the next generation of cleantech startups.

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Cheap, low-performance lead acid batteries are commonly used to start gas-powered cars — you know, that battery that sometimes goes dead when you leave your lights on. But higher performance, better quality lead acid batteries are also used in devices like forklifts, wheelchairs, and golfcarts. That’s the first market that Gridtential wants to tackle, CEO Christiaan Beekhuis told me in an interview this week. Down the road the company wants to sell its batteries to power grid operators for applications like storage for a solar panel system.

Using a grant from the California Energy Commission, Gridtential was recently able to prove that several aspects of its lead acid battery are superior to the standard lead acid batteries currently on the market. The company’s batteries have twice the energy density (amount of energy they can store per volume) and also can cost between 50 to 90 percent less when used in bulk over time in a battery bank.

After achieving this milestone Gridtential recently raised a seed financing round of a little over $1 million led by The Roda Group, an investor in Berkeley, Calif. that has also backed startups in energy like algae fuel maker Solazyme and Internet firms like Ask.com. The company plans to raise more money down the road as it gets closer to commercialization.

IT machines

One of Gridtential’s core innovations is that it’s using manufacturing processes from the semiconductor and hard disk drive industry. Traditional lead acid batteries are made using lead plates with the active battery material pasted or printed onto the plate, which can make the layers thick and over time they can become detached from the plate. Gridtential is using the modern manufacturing techniques of the IT industry to create a thin layer of active material and have it bonded to the plate.

Beekhuis tells me that the manufacturing process makes the battery more robust (lasts longer), have a lot thinner active layer, and also makes for a lighter battery. The thin layer also means that the battery can charge and discharge with a higher efficiency, so it loses less energy to heat. In addition the Gridtential battery can be charged and discharged more than a regular battery, and can be charged and discharged to 80 percent of its capacity. In contrast basic lead acid batteries are more commonly charged and discharged closer to 40 to 50 percent of their capacity in order to make them last longer.

Golf cart battery

Beekhuis joined Gridtential in 2011 to help the team commercialize the technology. Previously he founded solar software company Fat Spaniel, which was sold to solar inverter maker Power-One.

Gridtential was founded by Peter Borden and Michele Klein back in 2010, and both entrepreneurs hail from Applied Materials. Borden developed solar manufacturing processes for Applied, and joined Applied after the chip manufacturing giant bought a processing company he founded. Klein developed energy storage technologies at Santa Clara University, and was a Senior Director at Applied Materials’ venture arm. Gridtential has just a handful of employees currently.

The startup, which is based in San Jose, Calif., plans to use the recently raised seed round to build, install and test alpha units of its batteries in real world settings. Commercial deployments aren’t expected until 2016.

Eventually when Gridtential wants to deploy its batteries commercially, the company can be fabless and can work with IT manufacturers on production. That means scaling up the technology can be a lot less expensive than building their own custom machines. For example, Gridtential has been working with Intevac, which is a major supplier of hard disk drive surfaces, on producing battery plates.

Other companies that are also using IT machines for production include thermoelectrics maker Alphabet Energy, and battery companies Imprint Energy and Seeo. In a year when funding for energy startups is very constrained, many of the new technologies that will emerge from the cleantech world will have to be built on standard low cost machines.

Still, building a battery startup from scratch is a very difficult thing to do. Another startup developing a better lead acid battery called Firefly Energy, which had raised funding from Khosla Ventures and the Quercus Trust, went bankrupt a couple years ago.

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The players

One of the companies that’s the farthest along is Solazyme, a South San Francisco-based company that went public in the spring of 2011. Solazyme was one of the first firms to focus on the alternative chemicals and personal care markets, developing a small but steady revenue stream as it braced itself for the difficulty of churning out its algae oil at a scale and cost that can compete with oil for transportation.

But Solazyme is now at the brink of ramping up its algae oil for fuel, too. This week the company said that its Brazilian joint venture with food processing giant Bunge — called Solazyme Bunge Produtos Renováveis — has received approval for a $120 million loan from the Brazilian Development Bank to build out its first commercial-scale algae fuel factory in Brazil. The factory is already under construction (it started in the summer of 2012) next to Bunge’s sugarcane mill in São Paulo (it uses sugar for a feedstock). Solazyme hopes it will be ready to go by the fourth quarter of 2013. Initially it will produce 100,000 metric tons per year, but eventually by 2016 it’s supposed to make 300,000 metric tons annually.

Solazyme also plans to reach commercial scale of its algae fuel in the U.S. soon, using a factory in Clinton, Iowa owned by agriculture giant ADM. That plant is supposed to make 20,000 metric tons of algae oil per year in early 2014, and eventually 100,000 metric tons per year. It also has its own smaller scale development factory in Peoria, Illinois.

Sapphire Energy is another company that is looking to cross through the so-called Valley of Death from low volume production to commercial scale that can one day compete with oil. The company has a 2,200-acre algae growing farm in Columbus, New Mexico, which has 70 ponds, each the size of a football field, as well as a refinery on site. The New Mexico refinery reportedly started producing oil in low volumes last summer and by 2014 is supposed to be able to make 1.5 million gallons of algae crude per year, and 10,000 barrels a day by 2018.

Sapphire and Solazyme are attacking the algae oil industry with different approaches. Solazyme grows its algae in closed fermentation tanks, while Sapphire is growing it in the open air on large plots of land. Open air ponds could theoretically be cheaper, but they face the problem of making sure they don’t get contaminated and disturbed by outside elements.

Another company working on algae fuel is Synthetic Genomics, which is the brainchild of genomics guru Craig Venter. Venter beat the U.S. government at being the first to sequence the human genome, and also led his team in recent years to be the first to make the world’s first synthetic bacterial cell, called the first artificial life form by many. The researchers built a synthetic chromosome and inserted it into a living bacterial cell, where it took over the cell and became an entirely new life form.

Synthetic Genomics was able to score a massive, potentially $600 million, development deal with Exxon. Last spring, Synthetic Genomics bought a 81 acre site in the Imperial Valley, near the Salton Sea, and it plans to scale up and test its algae strains there with 42 open ponds.

The costs

Scaling up all these new factories and farms take a colossal amount of money. But they’re needed because the algae oil needs to be produced at a huge scale to get it cheap enough to compete with oil.

The costs no doubt take a toll on these pioneers. Solazyme’s net losses are growing, and the company lost $58.52 million for the nine months ended September 2012, up from a $38.32 million net loss for the same time the year prior. The company will not likely be profitable for years, and it’s helping fund its production deal with ADM with equity. This week Solazyme said that it intends to sell $100 million worth of notes to help it build its projects.

Sapphire Energy raised at least $300 million from venture capitalists and investors like Cascade Investment, which is owned by Bill Gates. Good thing Sapphire got that money in the bank, because few venture capitalists these days are willing to put in hundreds of millions of dollars into such infrastructure for clean power projects. Sapphire also got $50 million in stimulus funding and a $54.4 million federal loan guarantee.

Synthetic Genomics has its potentially $600 million development deal with Exxon, though I’m not sure the status of that currently. Venter has said that biofuels made from algae that will be able to scale, and compete with oil, will have to be synthesized and will not come from nature. The Exxon deal was originally to research naturally occurring algae cells only (not synthetic ones), but Venter hopes Exxon will come around to funding the research based on synthetic algae cells.

Who knows if algae fuel will ever get there — if Venter is right, it’ll have to be a completey new type of synthetic super microbe that delivers algae oil as efficiently as possible. But 2013 is a year in which these three algae fuel players look to scale, and will spend a lot of money to get there.

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Algae fuel has long been discussed as a viable biofuel alternative to gas and diesel, but until now no companies have been making it in bulk and selling it to regular car drivers. The month-long program is meant to test consumers’ responses to the alternative fuel, and the algae fuel will be sold at the same price as diesel at these locations. Algae fuel is generally currently more expensive than diesel.

The so-called Soladiesel uses a 20 percent blend of the algae oil, and can deliver a 20 percent reduction in carbon emissions, a 30 percent reduction in particulates, and a 10 percent reduction in THC.

After nine-years, an IPO and $125 million in venture funding, Solazyme finally broke into biofuels in a more commercial way this Summer by beginning construction on a biofuel plant in Brazil through a joint venture with Bunge. The plant is supposed to be operational in the fourth quarter of 2013, but Solazyme has been producing it on a smaller scale for awhile.

Solazyme engineers efficient algal strains and grows its designer algae in fermentation tanks without sunlight by feeding it sugar. Then, using existing industrial equipment, it extracts the oil. Solazyme has long maintained that it has wanted to commercialize its fuel technology in the 2013 time frame, with a production cost target of $60 to $80 per barrel. Seems like it’s getting there.

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The first phase of the farm now has algae ponds and processing equipment spread across about 100 acres about 1/8 of a mile — that includes sizes of 1.1-acre pond and a 2.2-acre pond. Eventually the entire farm is supposed to spread across 300 acres and make 1.5 million gallons of the algae biofuel per year. Five-year-old Sapphire says it’s already harvested 21 million gallons of algae through the farm and the facility is supposed to be done and producing 100 barrels of algae biofuel a day by the end of 2014.

This first portion of the farm took a year to build, used 634 full time construction workers, and required $85 million from Sapphire, backed by a USDA loan guarantee, as well as a $50 million grant from the Department of Energy.

The rest of the farm will require a lot more money. Sapphire is raising another $144 million from investors, including agriculture company Monsanto. Sapphire has already raised $300 million from investors including Bill Gates’ investment firm Cascade Investment as well as the public funds.

Sapphire has had a relationship with Monsanto for at least a year. Monsanto wants access to Sapphire’s genetic research technology to use it for its own agricultural development. Using Sapphire’s genetic technology, Monsanto says it can isolate traits in algae (like high yields and stress traits) that could be used to tweak its other crops. Monsanto’s CTO Robb Fraley said in a release last year that algae is an “excellent discovery tool,” for agricultural genetic research.

Because the New Mexico farm is outside, and exposed to the environment, in a couple months Sapphire will move into using a variety of algae that will respond and perform as well during the winter months. In contrast other companies like Solazyme use closed tanks to grow algae so the algae is not effected by the environment.

Solazyme has also recently been moving aggressively into the biofuel market, after making specialty chemicals, personal care products and food for years.

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Elevance has been planning on pursuing a potentially $100 million IPO, and first filed its S-1 back in September of 2011. Since then, though, a variety of clean energy companies have delayed or ditched their IPO plans. In just this quarter, three clean energy IPOs — from Luca Technologies, BrightSource Energy, and Enerkem — were withdrawn.

Biofuel companies have struggled this year, too. Amyris announced recently that it will shutter or scale down production at two of its three facilities.

Still, biochemical and biofuel companies that have developed valuable intellectual property seem to be able to keep raising money and making deals. Algae oil maker Solazyme has finally moved into biofuels in a big way, and algae fuel maker Sapphire Energy recently announced it is raising another $144 million.

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The factory, Solazyme’s first large one, is being built next to Bunge’s sugarcane factory in the Moema region of Sao Paulo, Brazil, and is supposed to be operational in the fourth quarter of 2013. Bunge is providing the sugar stock and Solazyme is utilizing its sugar to oil production technology. The plant will produce 30 million gallons of Solazyme’s algae-based oil a year, and the oil will be used in both the specialty chemical and fuel markets — applications like a sustainable alternative to palm oil for use in various products.

Solazyme went public last year, at $18 per share, and raised $198 million in the process. Today Solazyme  is trading at $13.67, and generated $13.56 million in revenues for the most recent quarter, up from $7.74 million for the same quarter the year prior. At the same time the company lost $16.78 million, a greater loss than the $7.29 million loss from the quarter the year earlier. Solazyme engineers efficient algal strains and grows its designer algae in fermentation tanks without sunlight by feeding it sugar. Then, using existing industrial equipment, it extracts the oil.

The fuel market has been daunting to companies like Solazyme, because to compete in the fuel market the biofuel product needs to be able to be competitive with oil on cost and scale. Most biofuel makers just aren’t there yet and haven’t been able to achieve these economies of scale. As GigaOM Pro analyst Adam Lesser pointed out (subscription required), Amyris recently decided to scale back its biofuels production in favor of manufacturing the specialty (and higher margin) chemical squalene.

The specialty chemical market is a smaller market than fuels, but specialty chemicals can be sold for a higher price. Specialty chemicals are things like polymers that make up plastics or substrates for pharmaceutical manufacturing. OPX Biotechnologies is an example of a startup focused on bio-chemicals like bio-acrylic.

But now Solazyme is tackling biofuels head-on, and mitigating some of this risk through its joint venture. Solazyme has long maintained that it wanted to commercialize its fuel technology in the 2013 time frame, with a production cost target of $60 to $80 per barrel. Seems like it’s almost there.

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Braemar starting raising this fund last year, which I reported on via an SEC filing back then. Braemar has had a few successful exits, including lithium ion battery company A123 Systems, which went public back in 2009, algae fuel company Solazyme, which went public in 2011, and EnerNOC, the demand response player that was one of the first next-gen energy companies to go public.

Other companies that Braemar has backed include nuclear fusion company General Fusion, ultracapacitor maker Ioxus, solar company Stion, and virtual power plant company Viridity Energy. Braemar’s managers say collectively they’ve invested in over 60 companies in energy tech and have delivered more than 20 exits.

A spokesperson for the firm says it focuses on energy technologies, which are “not to be confused with cleantech.” Somewhere along the way cleantech became a dirty word for venture firms and limited partners. Braemar thinks its focus is a value add and a spokesperson says: “LP’s are seeking to invest in specialist funds given the volatility of the market.”

Braemar is unusual in the VC community. A significant portion of the general venture capital firms that got into cleantech investing a few years ago have now pulled back after not having much success. Investors like Kleiner Perkins, Draper Fisher Jurvetson and Index Ventures have pulled back on investing in cleantech. That trend has led many to wonder how the next-generation of early-stage cleantech startups will be able to do research, grow and scale.

Limited partners in Braemar’s fund include: MassMutual, Alpinvest Partners, Morgan Stanley Alternative Investments, Macquarie, GIC Special Investments (the Government of Singapore), Munich Re, HarbourVest, the State of Rhode Island, RIT (Rothschild Investment Trust), Invesco on behalf of the California State Teachers’ Retirement System (CalSTRS), and utility AEP (American Electric Power).

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