Tuesday, December 15, 2015

Vinod Khosla Fast and Loose: A Biofuel Dream Gone Bad

Not my favorite VC.
A major piece by Katie Fehrenbacher at Fortune 
Legendary venture capitalist Vinod Khosla backed a startup called KiOR as part of his ambitious push for green energy. Now KiOR is bankrupt, he and company executives are being sued for fraud, and Khosla’s big biofuel bet is looking increasingly questionable.

Drive a couple of hours northeast of Jackson, Miss.—maneuvering past semitrailers piled with timber on highways lined with dense pine forests—and you’ll reach a sprawling structure of metal pipes and towers.

It’s a factory in the sleepy city of Columbus, Miss., that was briefly able to turn wood chips into a biofuel that could power vehicles more cleanly than oil, using a first-of-its-kind technology that wowed engineers, politicians, and investors.

The plant’s supporters once envisioned it as the embodiment of a clean-energy future. The company that owned it was valued at more than $1.5 billion, and its shares publicly traded. The factory, the first of several planned in the state, was intended to employ hundreds of workers and create new demand for the state’s timber industry.

But on a hot, sunny afternoon in October, the factory is a dead zone. Long weeds have sprouted up around an empty parking lot. No workers are operating any machinery. The plant hasn’t produced any biocrude in close to two years. Days before, a big chunk of the facility was sold for $2.1 million. Another piece was unloaded weeks before that for $1.6 million. The plant, a former paper mill, had cost more than $215 million to buy and convert to green energy production.

The factory was run by a company called KiOR, which was once a symbol of the promise of the next generation of biofuels and the role that Silicon Valley and government could play in incubating clean-energy technology. Its soaring ambitions—and hype—largely stemmed from the imprimatur of Silicon Valley venture capitalist Vinod Khosla and the millions he had invested in it. All told, the company spent more than $600 million. In its brief time in operation, it generated $2.3 million in revenue; when it filed for bankruptcy it listed assets of $58.3 million.

At one time KiOR was an important company for Khosla, whom Fortune called “the most successful venture capitalist of all time” in 2000. He’s a billionaire who moves in rarefied circles; he hosted a dinner for President Barack Obama at his home a few years ago. In 2004 Khosla left the elite venture capital firm Kleiner Perkins Caufield & Byers. He launched Khosla Ventures partly because he wanted to make an outsize bet on clean technology. The next generation of biofuels, made from plants and biowaste (so-called cellulosic materials), which have lower carbon emissions than oil, were a particular passion. Khosla invested hundreds of millions of dollars in about a dozen biofuel and biochemical companies.

His ambitions were audacious. Khosla declared “a war on oil.” As he wrote in 2006, “I believe we can replace most of our gasoline needs in 25 years with biomass.” He dismissed incumbent energy companies in a 2007 interview as not investing heavily in biofuels because they weren’t “used to innovation and the rate of innovation we are likely to see in this business.”

KiOR was a crown jewel in Khosla’s biofuel portfolio. Khosla Ventures held 75% of its voting shares at one point and wagered nearly $160 million, much of it Khosla’s own money. He attracted a constellation of names. Former Secretary of State Condoleezza Rice joined KiOR’s board. Later, tech magnate Bill Gates, who has invested in Khosla’s funds and shares his interest in energy tech, committed millions. Former U.K. Prime Minister Tony Blair joined Khosla Ventures as a senior adviser in 2010, partly to counsel clean-tech startups.

Yet only 2½ years after a gala groundbreaking, KiOR’s Mississippi facility, riddled with problems, stopped producing biofuels. Eleven months after that, in late 2014, the company filed for bankruptcy.
Unlike most failed startups, KiOR hasn’t just shut its doors and disappeared into oblivion. Today recriminations, investigations, and litigation continue to surround it. The Securities and Exchange Commission has been examining whether the company made false statements, including on a critical point: the yield of its biofuel (the amount that can be made per ton of wood chips). Two KiOR executives and Khosla himself are also facing a class action suit alleging that company executives misled investors about production volumes and yield....MUCH MORE