The news broke earlier this week that Khosla Ventures had placed another chip on the biofuels roulette table, this time betting on the Cambridge startup Ethos, which aims to become a player in Latin American ethanol production. The investment follows more than 10 other bets that Khosla has made on biofuels over the last couple of years, from synthetic biology companies like LS9 to old-school corn ethanol producer Cilion.
Ethos is still largely in stealth mode, disclosing the bios — but not the names — of its executives. Its CEO/CFO comes from InterGen, where he was the head of global project finance. (We’re trying to confirm exactly who the mystery man is). Other members of the company’s executive team are said to have held various positions in Central America and Columbia.
The heart of biofuels production in Latin America has long been Brazil, primarily because of the company’s enormous sugarcane industry. Sugarcane can be turned into ethanol much more cheaply than corn, and as the Ethos web site stresses several times, “sugarcane-based ethanol is the only commercially available biofuel that is less expensive than current gasoline without any new technology development or government subsidies.” Of course, sugarcane-based ethanol is subject to sugar price fluctuations, which could intensify with increased sugar-based ethanol production.
Back in 1975, Brazil’s U.S.-backed dictatorship promulgated a wide-ranging pro-ethanol program that resulted in large numbers of ethanol-powered cars and ethanol stations by the late 1980s. The government wanted to wean itself off of foreign oil and also help insulate its major cash crop – sugar – from fluctuations in world sugar prices. But falling oil prices in the 90s, which helped push gasoline prices to $1 a gallon here in the States, scuttled the plan as Brazilian drivers went back to gasoline-powered vehicles.
More recently, flex-fuel cars, which incorporate minor adjustments that let them run on gasoline or ethanol, mean that Brazilian drivers no longer face the same dilemma.
With the national market well-established, Brazilian and foreign companies are looking to produce ethanol from Brazilian sugar for export. These companies see two major plays. One is in the move by the government, which is turning over large amounts of production from nationally controlled enterprises to private companies. As the patriarch of a Brazilian energy conglomerate, Maurilio Biagi, put it in 2007, “Until last year, 3.4 percent of the sector was denationalized. In 10 years half will no longer be Brazilian.” Like most deregulations, companies with capital are looking to snatch up state enterprises at below-market prices.
The second, interrelated big play is entering the U.S. market, which should be the largest biofuels market in the world. As it stands, the U.S. is already the largest importer of Brazilian ethanol. In 2006, we brought in 3.3 billion liters of ethanol from Brazil. But there is a major hurdle for foreign biofuel producers: the U.S. slaps a 54-cent-per-gallon tariff on their products. This tariff protects corn growers, but also keeps biofuel prices artificially high. If that tariff were to go away, it would be an absolute bonanza for sugarcane feestock ethanol producers. Though that seems unlikely, given Khosla’s shotgun biofuel investing strategy, it probably makes sense to have a horse in the sugarcane ethanol derby.