Billionaire Vinod Khosla’s big dreams for biofuels fail to catch fire

Source: By Steven Mufson, Washington Post • Posted: Monday, December 1, 2014

Just over a year ago, billionaire venture capitalist Vinod Khosla was bubbling with optimism about one of his latest investments: KiOR, a biofuel outfit he said would turn wood chips into hydrocarbons that could be poured straight into a refinery, pipeline or vehicle.

The KiOR refinery in Columbus, Miss., was “an amazing facility,” Khosla gushed. “It is exactly the same as what nature does, but nature takes a million years and we take a few minutes,” Khosla said in a November 2013 e-mail to The Washington Post. In a “60 Minutes” interview broadcast in January, Khosla boasted of the company’s “magic catalyst.”

Now, however, the spell has been broken. On Nov. 10, KiOR filed for bankruptcy, leaving behind 2,067 creditors, including the state of Mississippi, which had given KiOR a $75 million, 20-year, no-interest loan after the company assured officials that it would invest $500 million in the plant and create 1,000 jobs by December 2015.

During its short life, KiOR lost money on every gallon it produced; costs ran $5 to $10 a gallon even without counting the cost of building the plant, according to biofuel industry analysts. According to court papers, KiOR’s revenue totaled just $2.25 million; losses amounted to $629.3 million. Even injections of money from Khosla ($85 million) and Bill Gates ($15 million) in October 2013 could not stave off bankruptcy.

Shareholders — including Khosla Ventures, which had a 28 percent stake — absorbed the blow. The stock peaked at more than $20 a share in September 2011, giving it a market value of $1.7 billion. At the time of the bankruptcy, KiOR stock closed at 2.5 cents a share, essentially worthless.

Separate class-action lawsuits brought by shareholders accuse KiOR executives of misleading investors. “Our case is that the company was not being truthful about the realities at the Columbus facility,” said Phillip Kim, an attorney at the Rosen law firm representing the plaintiffs. “It was characterizing problems as start-up issues, whereas the facility had design and systemic issues.”

The Securities and Exchange Commission issued subpoenas to KiOR in January and July seeking information about progress at the Columbus plant, according to KiOR filings.

Upbeat on clean energy

The demise of KiOR isn’t just another bust in the energy landscape.

Khosla is one of the gods of high-tech venture capital. He was a co-founder of Sun Microsystems. And like many other venture capital entrepreneurs who struck it rich in technology, Khosla has set about applying his insight and financial skills to foster clean technology that could help slow climate change.

He came to Washington to preach about the virtues of American ingenuity and technology.

“The combination of brilliant ideas and entrepreneurial spirit should lead us to a safer and more secure future,” he said in prepared testimony on Sept. 25, 2007, at the Senate Committee on Environment and Public Works. Talking about climate change, he said that “America’s scientists and technologists, powered by new ideas and the energy of America’s entrepreneurs, are best equipped to solve this problem.”

Many of the Silicon Valley technology successes were built on “Moore’s law,” named for Intel co-founder Gordon Moore, who noted that the number of transistors on an integrated circuit doubles every two years — driving up capabilities at stable or lower prices. Could that law apply to biofuels?

Swept up by that sort of optimism, Congress passed a law mandating refiners to mix 16 billion gallons a year of advanced cellulosic biofuels into the motor fuel pool by 2022, even though no one was producing commercial quantities yet.

Khosla also dabbled in politics, emerging in the nexus of Silicon Valley and the energy and political worlds. A supporter of Democrats, Khosla in 2012 gave $1 million to Priorities USA Action, a super PAC that backed President Obama’s reelection campaign. In June 2013, Khosla hosted Obama at a $32,400-a-plate fundraising dinner at his palatial Portola Valley home; Khosla called Obama “amazingly adept” at energy issues. The money went to the Democratic Senatorial Campaign Committee; Khosla, his wife and their four children (two of them students) each gave $32,400, according to the Center for Responsive Politics.

As a generous donor to Democrats, Khosla relished the political irony that the company had former secretary of state Condoleezza Rice on its board and Republican Haley Barbour, then Mississippi’s governor, in its cheering section.

But like many other high-tech venture capitalists who have tried to master clean energy, Khosla has had his share of defeats. He backed Coskata, which said it could produce ethanol from corn husks, municipal trash or other biomass. The company, which had a $250 million loan guarantee from the Agriculture Department, never made commercial volumes and in 2012 switched to burning natural gas, which was cheaper than wood.

Khosla also backed Range Fuels, which closed its Georgia wood-chip-to-ethanol plant in late 2011, after getting $46.3 million of a $76 million Energy Department grant and half of an $80 million loan from the Agriculture Department, according to a Bloomberg News report. He later said he abandoned the venture after deciding that KiOR possessed a superior process.

“One thing about technology is that there’s always a win, place and show, and everyone else goes under,” Khosla said in an e-mail late last year. He said his firm had invested in a half-dozen biofuel technologies and had been approached about funding many more.


Some oil industry veterans think Khosla was overconfident. Producing motor fuel cheap and plentiful enough to have a meaningful impact on the nation’s fuel mix has proven intractable.

Khosla “felt that with the Silicon Valley can-do attitude he could come in and show the oil industry how to do this,” said Robert Rapier, a chemical engineer who has worked for ConocoPhillips and is now head of the alternative fuels division of Advanced Green Innovations. “He cites Moore’s law. That’s his bible.” But Rapier, who writes a respected blog called R-Squared, adds that “the oil industry has been at this for 100 years, including what KiOR tried to do.”

In KiOR, Khosla thought he had a winner — one that would produce hydrocarbons, not ethanol, which is corrosive and thus requires special rail cars or car engines.

The company was formed in 2007 to convert waste biomass into fuels and chemicals by using catalytic pyrolysis, or cracking, a concept invented and explored by a Dutch company called BIOeCON.

KiOR built a pilot plant and then on New Year’s Day 2010 launched construction of a demonstration plant capable of producing 15 barrels of oil a day. The company said that its research produced 70 patents and more than 2,000 other intellectual property claims. Alberta Investment Management Corp. and San Francisco hedge fund Artis Capital Management provided additional financing.

Ready to build a commercial-size facility, Khosla Ventures arranged meetings with three southeastern governors before choosing a location. Within a weekend, the company Web site says, KiOR had picked Mississippi thanks to Barbour’s offer of help. The company still owes the state $69.5 million.

The company and Khosla had skeptics — some were in-house.

Paul O’Connor, then a KiOR director, said in a 2012 technology assessment that the yields from the KiOR process had “not improved considerably over the past two years.” In August 2014, he submitted a letter of resignation, saying that he had been “shocked” by the lack of progress and that the company had disregarded his recommendation to take a “drastically different approach.”

According to the shareholders’ class-action suit, the conveyer system for feeding wood chips into the Columbus plant frequently jammed, and KiOR bought new blades for turning wood into chips, but they were the wrong size. In addition, tar would build up in a portion of the plant for treating the feedstock. The plaintiffs quote a confidential witness as saying “the whole damn thing was a design issue. It was hastily put together and they were trying to make it run.”

Rapier said that the process that KiOR was using wasn’t fundamentally new. Pyrolysis heats organic materials to high temperatures to produce oil. But in contrast to what Khosla said, Rapier said the pyrolysis oil would not be ready to be pumped into the existing oil infrastructure. Moreover, he said, the Columbus plant relied on natural gas, a fossil fuel.

“In order to be used as transportation fuel, these compounds require further upgrading, and less than 40 percent of the mass of the pyrolysis oil is converted to gasoline or diesel,” Rapier said. “The yields are very poor. The majority of it ends up as carbon dioxide and water.” And that meant higher costs that were unsustainable.

Rapier says the fundamental flaw was, in part, a larger cultural issue.

“Failure in business is to be expected, and we certainly need visionaries who push the boundaries of new technology,” he said. But, he wrote online, “while I strongly support the development of advanced biofuels, Vinod Khosla has done a lot of harm to the sector by overpromising on various technologies and then failing to deliver. This leads to public perception that advanced biofuels are a boondoggle.”

Slow progress elsewhere

Does this mean the advanced biofuels business is kaput? Not necessarily.

This is the same biofuels business that President George W. Bush promoted in his 2006 State of the Union address, where he vowed to fund research into ethanol produced “not just from corn, but from wood chips and stalks and switch grass.”

Although Khosla’s track record is mixed, some big companies — including DuPont, corn ethanol giant POET and the Spanish energy conglomerate Abengoa — are close to commercial-scale cellulosic ethanol production. What they will produce will be tiny drops compared with the energy thirst of the entire country, but it represents a start.

“We are more than happy,” said Manuel Sánchez Ortega, Abengoa’s chief executive, in an October interview after the formal opening of the company’s Hugoton, Kan., plant. “This technology is going to be massively applied worldwide.” He said he hoped the plant would reach full capacity in February.

When asked during a 2013 interview about whether Khosla’s problems would plague the larger companies, Jan Koninckx, DuPont’s global business director for biorefineries, said “as DuPont, we’ve done this before. We’re not a start-up.” He said new plants “require dotting the I’s and crossing the T’s on the supply chain. This is not a dot-com or something like that.”

DuPont’s plant in Nevada, Iowa, is still under construction. POET opened a plant in Emmetsburg, Iowa, in September.

So far, the total output is still less than a rounding error in the oil business.

Khosla did not respond to three e-mails in recent months as KiOR floundered. But he defended his track record in January after a critical broadcast on CBS’s “60 Minutes” focused on loans and guarantees from the federal government.

He said that contrary to the CBS assertions, he had invested “substantially less” than a billion dollars of his own money into clean tech and that he manages “a balanced portfolio” whose returns “are significantly above the venture capital average,” with successes like View, a dynamic glass company, and Lightsail, an energy storage firm.

“At Khosla Ventures, we invest in companies that have high failure probabilities, but the wins far outweigh the losses,” he said. “We expect 50 percent of our portfolio companies to make money and today, our overall clean tech portfolio is profitable.”

At KiOR, he spread investment among three different funds and his own personal money, and he has loans and promissory notes that give him a favored position in the bankruptcy.

Yet it is Khosla’s willingness to risk and lose so much of his own money and his funds’ money that suggests he is a true believer. “New industries are created by entrepreneurs who don’t necessarily have subject matter expertise when they get started, yet they are still responsible for most of the innovation we see in society,” Khosla wrote in response to the CBS piece. “Did Google know much about media? Or Amazon about commerce? Tesla about cars? SpaceX about rockets? EBay about classifieds? What did I know about computing when I started Sun Microsystems? We should celebrate these entrepreneurs, not pillory them for fighting entrenched incumbent industries that have political influence and money.”

But for now, KiOR is stuck in bankruptcy. It retained Guggenheim Partners to sell the company. But Khosla Ventures, which is both a creditor and a shareholder, might be the best, or only, bidder, in an apparent effort to hang on to KiOR’s patents and keep research going in Pasadena, Tex.

As for the other creditors, especially the state of Mississippi, the promise of a new industry has vaporized — KiOR’s only proven act of magic.