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Khosla Invests Still More In Biofuels: HCL CleanTech

Venture capitalist Vinod Khosla has made yet another bet in the struggling biofuels sector. Despite already having almost one-third of his portfolio companies in the space, his VC firm has invested an undisclosed amount in HCL CleanTech, a new startup in the cellulosic biofuels industry. Tel Aviv, Israel-based HCL, founded by two Israeli industrial chemical scientists, said the funding will be used to continue R&D and to build a pilot plant at an undisclosed location in the U.S. to be completed in 2010.

HCL has developed a technology for making sugars from cellulosic biomass using concentrated hydrochloric acid. These sugars can then be fermented into biofuels like ethanol and biodiesel. The company said in a statement that this process allows for the use of a large variety of feedstocks (agricultural waste, grasses, sewage treatment waste) with very little water that is “completely self sufficient energetically.”

Eran Baniel, HCL’s CEO, said that the company will at least initially look to both produce biofuel itself and license the technology to manufacturers. “We have ongoing discussions with large and small U.S. companies who have very exciting fermentation technologies,” Baniel wrote in an email. “With some it will probably be licensing; with the others it may be more like joint ventures.”

Khosla has already invested in at least these 10 biofuel startups (and more since then), from corn-based ethanol maker Cilion Goshen to synthetic biology company LS9 to cellulosic ethanol maker Coskata. He has so many investments in the space that his portfolio companies have competed for things like which one will be the first to make it to commercial production, as well as raising additional funds from biofuel-focused investors.

But the biofuel industry is now reeling from a classic but brutal squeeze: Feedstock costs have risen while the price that producers can get on the market for their fuels has declined. In 2008 there were dozens of startups looking to produce cellulosic ethanol from non-food crops and plant waste. But with the credit crunch and profit squeeze, now only a few startups are producing the next-gen fuel on a pilot scale, and plans for commercial production have been pushed to next year or later.

The delayed business plans will mean startups are slower to ramp up revenue. Many will need more money than first expected from investors to stay afloat. That may be one reason why Khosla, who launched his VC firm with his own fortune amassed from his time at Sun Microsystems, is reportedly now looking to raise $750 million in new funds from limited partners.

HCL should be counting its blessings for having been able to raise money to build a pilot plant. Some industry observers are saying that the only way to build any factories today is through government loan guarantees or grants. Bill Roe, CEO of cellulosic frontrunner Coskata, which is backed by General Motors and Khosla, said in March that his company is waiting for a loan guarantee from the Department of Energy to build its first commercial-scale plant, and that the plant is stalled until then.

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