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Khosla Ventures: Biofuels Strategy

Presented By:
Ajit Sengar
Brajesh Malla
Chandramauli Sharma
Kajori Das
Nikhil Dash
Nishanth N
Nishant Shandilya



Reasons for entering clean energy business

Believed that efforts have to go beyond hybridization as an
effective measure for handling global warming
Not a very viable process of carbon reduction as the cost per ton of CO2
emission is quite high as compared to clean tech energy initiatives
Clean energy potential to improve this sector immensely
Technologies needed scalability and relevant price points
Chindia Solutions
Cleantech energy goes through rapid innovation cycles
takes 15 years to build a nuclear power plant and the rate of innovation is too
slow to make it an attractive investment. compared to two years to build a
solar thermal plant and in that time the technology will have improved
further


Khosla Ventures: Biofuels Strategy
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Issues in financing green businesses (1)
Cleantech startups are of little use until and unless they are
operating at a large scale.
Present Situation - VCs invest tens of millions of dollars in the
startup which would in turn develop cheaper and sustainable
technologies. But the VCs are not be in a position to invest the
hundreds of millions of dollars required to scale up the
project.
There is no proper IPO system in place for such cleantech
startups so that they can raise money by going public. There is
also no provision of borrowing the money from banks as the
energy startups are seen as high risk ventures.
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Issues in financing green businesses (2)
Regulations/Government - The energy business is highly regulated by the
governments around the world unlike the high-tech space which largely
operates privately. The success of a cleantech startup is directly
proportional to the amount of subsidies and sops that it receives from the
government. One example is the U.S. government is trying to help
cleantech companies by including the funding for loan in the stimulus
package.
Manpower - The other issues are that are associated with funding
cleantech startups is that such startups find it difficult to attract talented
and committed employees. Therefore, finding investments for such
projects is incredibly hard.
Competition - Cleantech innovations are disruptive in nature and if
successful, will have a dramatic change in the energy space across the
globe. But there is no surety of a tangible end product (Many fuels are
being explored by many different organizations).
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Attack Manageable but Material Problems
Pros
Allows low cost solutions to get the
forefront.
Ensures that the solution makes
substantial contribution and goes
beyond appealing to a niche.
E.g. FFV & thermal CSP
Carbon reduction per mile driven

Cons
Sometimes this disqualifies even
some of the green solutions. E.g.
Hybrid cars



Biodiesel & Solar PV- Manageable
but unlikely to be material
Wind Technology- Issue with storing
it and generating it on demand
renders it as niche solution and
hence immaterial.

Mississippi
Test
Chindia
Test
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Technologies that can achieve unsubsidized market
competitiveness quickly
Pros
Cleantech verticals recognize that
success depends on driving the
efficiencies, innovation and business
models.
Need to compete head on with
traditional technologies.
These factors will spur continual
improvement in price and performance
that make clean tech verticals
competitive over the long run.

Cons
Well-entrenched fossil fuel incumbents:
develop their supply chains and make
incremental innovations to achieve high levels
of efficiency.
E.g. the shale revolution has unlocked large
new supplies of domestic natural gas and
slashed spot market prices to one-fifth of the
peak levels reached in 2008.
Renewable energy must now intensify efforts
to reduce costs to stay competitive.

Invest in technologies that can beat fossil fuel prices within 7-10 years in their target
application on an unsubsidized basis.
Inherently, the solution must be the most economic solution.
Unsubsidized suggests a level playing field.
Provide enough incentives to generate volume and scale on new technologies (i.e. to
get past startup costs), and let the market do the rest.

6
Scalability
Pros
Energy solutions that can
initially supplement but
eventually replace the worlds
usage of fossil fuels.
It allows innovators to check
whether a solution is cheap or
not at a small scale
Cons
A large number of the
potential breakthroughs that
we see rely on a market
niche, and present no
opportunity to ever meet 30-
50-80% of the worlds energy
needs. So do we reject them?
Biodiesel!
Geothermal Power!
Wind!
Hydro Power!


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Manageable startup costs & short innovation cycles
Pros
Acts a watchdog mechanism for
Innovators who dont have large balance
sheets it signals such innovators they
cant build plants if the cost of proof is
too high.
A quicker innovation cycle allows results
(whether good or bad) be available
relatively quickly then quickly iterate
through problems and improvements
E.g. Nuclear Technology VS CSP VS
Cellulosic Ethanol
Long innovation cycle offers significantly
less flexibility as well as higher startup
costs and higher financial risk


Cons
Disqualifies more established
companies on the premise that
they generally avoid risk.
Cost Dimension
Large project financing and
technical risks dont go
together from Wall Streets
perspective, and this alone can
kill a good idea.


Internet
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Technologies that have declining cost with scale-
trajectory
Pros
Khosla Ventures attempt to imagine what
energy will look like in 10 or 15 years.
They focus on what the technology could
do and might be able to do in the future.
Invest in technologies that offer the
opportunities for multiple breakthroughs.
Tech. optimists: big problem= big
opportunity.
Often it is just a question of focusing
attention and resources.
Bet on Black Swan events: outlier, impact
and retrospective.

Cons
US$250 billion has already been invested in the
renewable verticals, but it still seems that a
quantum leap is required at some point.
We still havent seen capital flows in large enough
amounts b/c none of the renewable verticals have
been done at scale.
So, would the private sector be interested in
investing in the latter stages of the evolutionary
stair-step?
Uncertainty: Will the innovation ecosystem
further build the platform that Khosla Ventures
have initiated?


Need a series of steps, each building upon the previous and each justifiable on its own
economic merits.
Evolutionary stair step: With biofuels, corn ethanol provides the initial starting point; it is vital
in priming the infrastructure for the production, storage, and distribution of biofuels on a
large stage.
As the biomass ecosystem develops, costs decline as technology matures.

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Start a later-stage investment fund for scaling their
bio-fuels ventures?
Yes, he should develop new large fund.
Required skills and contacts are fundamentally different for scale ventures.
He can hire the required skills from market.
operational experience inside companies, not just M.B.A.s, and technical
expertise, two qualities he said were all too rare in Silicon Valley these days.
Gideon Yu, former chief financial officer at Facebook, and James Kim, who ran
the clean-tech practice at the venture firm CMEA.
Join with
oil majors or
sovereign funds in countries like Singapore, Kuwait and China
Project financing
Other large private equities
Timing & Valuation for carrying forward series A to next phase.
10 Khosla Ventures: Biofuels Strategy
What has Khosla ventures done to be successful to
date (September 2008)?
First mover opportunity
His venture fund i.e. own money, own vision and intense involvement in
researching each opportunity.
Khosla did not have analyst because he believed in doing own research.
Khosla ventures emphasized on hiring right human capital
Khosla ventures wants to establish new industrial processes for producing
commodities at cost that are equal to or less than the cost of well-established
processes.
Not worried of financing for scaling from laboratory to commercial scale
plants
Khosla is prospecting technology wildcatting for fertile segments. (5 team
members & 45 investments in 4 years)
Three segment in biofuel
Corn/sugar fuel
Cellulosic fuel
Future fuel

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What will make Khosla Ventures Successful in
future?
BioFuel Advantages Drawbacks
First
Generation
Use Conventional Technology
Ease of Extraction
Established Supply Chain
Perusal through Proven
technology like Flex Engines etc

Low Average Yield of 600 Gallons
per Acre approx
Fuel Demand will Lead Food Prices
& create Shortage
Limited Scalability & Dependence
crop farm for input
High Dependence on Subsidy
Second
Generation
Non food Crops as raw Materials
Can take care of non food disposal
Manageable Start-up costs
High Scalability
High Yield @ 1200 Gallons per
Acre approx
Raw Material Problems
Multiple Technologies that need to
converge
Moderate Dependence on Subsidy
Third
Generation
Very High Yield @ 2000 Gallons
per Acre
Lowest environmental
dependence
Truly Black Swan in nature
Very Nascent Stage of technical
development
High Investment Costs
Technological Wildcatting

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What will make Khosla Ventures Successful in
future?
Future Strategy of Khosla Fuels post the above comparison
would be,
Spin off First Generation Ventures at the right timing &
valuation
Invest more heavily into Second Generation Fuels. Enter
Series B & Series C investment portfolios
Lend Support & Credence to the variety of Third Generation.
Divert investment from First Generation Divestitures
Encourage Technical Competition amongst 2
nd
and 3
rd

generation entities

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What should Khosla Ventures do now?


14 Khosla Ventures: Biofuels Strategy
What should Khosla Ventures do now?
Increase focus on Cellulosic Ethanol ( Second Generation)
Develop real estate model for above especially feed in inputs
& supply chain
Develop well crafted Series C funding model( Project
Financing, Sovereign Funds etc.)
Exit from non performing assets in First Generation Portfolio
Continue aggressive push for regulatory support


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Thank
You
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