Hot for cool fuel

Robert Johnsen, managing partner of Biofuels Capital Partners, has long felt convinced that VCs just don’t understand biofuel. So in April, the ethanol entrepreneur launched what is believed to be the first venture fund dedicated entirely to renewable fuels.

“I spent years banging my head against walls talking to people who had capital to provide and didn’t understand the industry requirements—who were always fearing things that never came to pass,” says Johnsen.

Apparently, LPs like what he has to say. Johnsen tells VCJ that he has commitments for more than half of his firm’s inaugural fund, which has a target of $250 million.

Biofuels Capital, which is based in San Francisco and Boston, came to market at an opportune time. VCs invested more than $740 million in 27 different biofuel companies in 2006, according to the Cleantech Venture Network, compared to $110 million for 15 biofuel startups in 2005.

This year, investment has slowed as VCs invested $48 million in ethanol companies during the second quarter, down from $113 million in the same quarter in 2006. But those numbers don’t necessarily mean investors are cooling to the potential of ethanol or alternative fuels, says John Balbach, a managing partner of the Cleantech Venture Network.

“We looked at 2006 as the year of corn ethanol production facilities,” Balbach says. “Those numbers were high because we’re basically looking at large capital assets.”

Johnsen says his firm is considering a variety of opportunities in clean power generation, such as wind power and solar. But the primary focus is biodiesel. “There’s enough of an appetite out there for a dedicated fund like this to warrant the fund size we’re talking about,” he says.

Johnsen is a repeat ethanol entrepreneur. After working with venture-backed Celunol Corp. when he was an investment banker, Johnsen joined the company as CFO and later became its CEO. Celunol developed technology to increase the fuel yield from the carbohydrates in biomass. It raised about $14 million in May 2006 from Braemer Energy Ventures, Charles River Ventures and Rho Ventures, then was sold in February for $154 million to Verenium (Nasdaq: VRNM) (fka Diversa Corp.).

Johnsen went on to co-found and manage Mascoma Corp. in 2005. The Cambridge, Mass.-based company, which is developing technologies to refine cellulosic ethanol, raised $39 million in three rounds last year from Atlas Ventures, Flagship Ventures, General Catalyst Partners, Kholsa Ventures, Kleiner Perkins Caufield & Byers, Pinnacle Ventures and VantagePoint Ventures.

New ethanol technologies—especially those related to cellulosic and algae ethanol—carry both technology risk and project finance risk. A startup first has to overcome the science behind an improvement, then build a facility to test out a new process or technology. “The cleantech markets are different enough that we feel there needs to be some flexibility in the financing,” says Balbach of Cleantech Venture Network. “The blended approaches of venture, project finance and debt work better for cleantech.”

That’s exactly what Johnsen has set out to do. “Our group provides a way of appreciating what needs to be done,” he says. “It’s not just venture capital. It’s not just project finance. It’s both.”

I spent years banging my head against walls talking to people who had capital to provide and didn’t understand the industry requirements.

Robert Johnsen, Managing Partner, Biofuels Capital Partners

Johnsen is joined by Partners Ralph Jefferson and Bob Barton. Jefferson previously worked as an executive at a municipal solid waste-to-ethanol company and the corporate VC arm of a specialty insurance company. Barton was formerly CEO of consultancy and placement firm Catalyst Financial Group, which helps organizations finance energy efficiency, renewable energy, water conservation and other sustainable projects.

FIRM PROFILEBIOFUELS CAPITAL PARTNERS

www.biofuelscapital.com

Founded: 2007

Locations: Boston and San Francisco

Fund target: $250M

Focus: Makes venture and growth capital investments in companies that develop or provide technologies and services to the biofuels industry.

Investments: None so far.

Team: Managing Partner Robert Johnsen; Partners Ralph Jefferson III, Robert Barton and Carlos Pineda.

Source: VCJ reporting