Khosla Ventures: Investing in Ethanol September 19, 2007 Chris AbadMikhail Khleblaov Shadi Sedghi An-Chi Tsou

Khosla Ventures: Investing in Ethanol

September 19, 2007

Chris Abad Mikhail Khleblaov

Shadi Sedghi An-Chi Tsou

http://www.hybridfuels.ca/

Khosla Ventures Background

• Company Focus– Significant/innovative technologies– Seed to late-stage investments– Breaking up monopolies- large markets– Investment of general partners’ capital

• Interest in Ethanol– 2006 production facilities: $1.50-2/gal to

$10/gal– Social interest

Comparative Risks of Fuel Technologies

10

RISK: Oil vs. Hydrogen vs. Ethanol

LowLow-High?Very HighEnvironmental Cost

LowVery HighVery LowImplementation Risk

LowHighVery HighInterest Group Opposition

LowHigh?Political Difficulty

LowVery highNATime to Impact

LowVery HighVery LowTechnology Risk

LowVery HighLowInfrastructure Cost

LowHigh?Med=HighCost per Mile

LowLowHighEnergy Security Risk

BiofuelsHydrogenOil

Source: www.koshlaventures.com

CO2 emissions from alternative fuels

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Gasoline

Ethanol (Corn Coal)

Ethanol (Today)

Ethanol (Corn NG)

Ethanol (Corn Wet Grains)

Ethanol (Corn No-Till)

Ethanol (Corn Biomass)

Ethanol (Cellulose)

Ethanol (Corn Biomass CCD)

Ethanol (Cellulose CCD)

Fig: Carbon Emissions per mile driven of various fuels (Source: NRDC)

CO2 Emissions from Alternative Fuels

Ethanol

• Commonly produced by fermentation, through yeast

• Yield sugar extraction

• Advantages over gasoline– Alleviates shortages– More cost effective– Environment-friendly

http://www.indycar.com/tech/images/ethanol.jpg

Value Chain of Ethanol Production

Raw MaterialProduction

EthanolManufacturing

Marketing,Sales &

Distribution

Retail

Corn

Sugar

Plant Cells

Corn-milling

Fermentation

CelluloseBreakdown

Transportation

Storage

EthanolByproducts

Auto Manufacturers

Political Ties

Non-market Environment

Where should Khosla invest?

Creation of Ethanol• High source of

significant technology– Corn fractionation– Enzyme-based process– Cellulose and

Hydrolysis

• Large Market Opportunity

– Gasoline prices increase

– Demand for gas is steady

Where should Khosla invest?

Getting Raw Materials• Switch Grass

– No fertilization; 12 feet tall– Bransby - 100 gallons per ton– Skeptics – 96 gallons per ton– Potential for improving cellulose

breakdown process

• Corn– Abundant source in the US; 43%

worldwide– Much research in the break down of Corn

Porter’s 5 Forces

Rivalry- Oil companies

Barriers to Entry- Government tariffs

- Need for large volumes- Large capital requirement

Threat of Substitutes-Products not in food chain- Cheaper options (ligno cellulosic)

Supplier Power- Raw material production

- Food industry competition

Buyer Power-Demand for alt. energy

- Vertical integration threat- High bargaining power

What ventures should Khosla avoid?

• Distribution and transportation– American politics

• Tarrifs: $0.54/gallon till 2009– http://www.renewableenergyaccess.com/rea/

news/story?id=46863

• Protected American ethanol production

– Opponents• Lower dependence on gas• Ethanol production in Brazil

How to Invest

• Kieretsu-style, parallel investments

• Competitive– Energy sources (yeast

variants, enzymes)– Ethanol creation (corn

milling, feedstocks, sugar, etc.)

• Comparative– U.S. corn production

http://www.greentechnolog.com/ethanole85/

Value-Chain Coordination

• Clusters– Lower

transportation costs– Improve

communication

• Form key alliances– Farmers– Auto manufacturers

http://www.usfarmsinc.com/images/us_ethanol_prod06_zoom.GIF

Innovation• Ethanol Production

– Energy sources– Corn processing/milling

techniques– Corn production– Cellulose production

• Viability for investment– Energy sources- scientific

breakthroughs, gov’t investment

http://www.greentechnolog.com/2006/04/switchgrass_biofuel_green_ener.html

Future of Ethanol Technologies

Source: www.koshlaventures.com

The Future of Ethanol

• Potential as additive/alternative to gasoline– Flexible Fuel Vehicles

• Highly complex political, economical concerns– Capital– Environmental

http://blog.wired.com/cars/images/2007/06/20/ethanol_fuel_pump.jpg

Thank you!

Any questions?