The perils of cleantech investing: KiOR and the long-term, high-risk view

1. Summary

One of the difficulties with investing in early-stage cleantech startups is that oftentimes the investors need to take a very long-term view of the companies they back: Many startups won’t mature into commercial firms for years. This is particularly difficult when technologies are risky — even speculative.

Next-gen biofuel company KiOR is a prime example of this long-term, high-risk phenomenon. In 2011, then four-year-old KiOR was one of the few standout examples of what could be possible for a cleantech exit. While the IPO market for most cleantech companies was truly “weak” in 2011, as the researchers at the Cleantech Group put it (there were about half the number of cleantech IPOs in 2011 as 2010), KiOR held an IPO in the summer of 2011, which was a blockbuster win for the company’s investors back then on paper.

Valley venture firm Khosla Ventures, San Francisco hedge fund Artis Capital Management and Alberta-based fund Alberta Investment Management were some of the largest shareholders at GigaOM Pro pro.gigaom.com the time of KiOR’s IPO. Khosla Ventures itself held around 72 percent of the voting power of KiOR at the time of the IPO. Khosla Ventures founder and partner Vinod Khosla told the Economic Times of India in Nov. 2011 — five months after the IPO — that KiOR and its IPO represented a 50-times return on the firm’s investment. A few months earlier, in Sept. 2011, Khosla had told a conference audience that his firm’s biofuel portfolio contained about $1 billion in “liquid profits” — tradable, public shares — thanks to several of the biofuel companies that his firm backed that had gone public in 2010 and 2011.

Having successes like these to point to can make it that much easier for a venture firm to raise future funds. Khosla Ventures announced that it had raised another $1 billion fund in Oct. 2011, and it also announced that it wasn’t changing its strategy away from investing in early-stage cleantech startups. I have also heard that bankers for KiOR’s IPO have used KiOR as an example of the success of the biofuel IPO market.

And that’s all well and good. But the reality is that the liquidity of KiOR’s IPO could be locked up for a long time, potentially many years down the road, until — and if — the company scales up and meets expectations. Next-gen biofuel companies can be very risky in general (look what happened to Range Fuels —
more on that firm later), and KiOR is currently in a precommercial stage (it makes no revenues or profits yet). The company will require more funding to scale up its biocrude production (which could involve issuing more shares and diluting investors), and in the short term, the company’s stock could tank if the investors sell a substantial amount of their shares. How do the company’s early prime investors eventually get the money out? They wait and hope.