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At first glance, LanzaTech’s plan to use bacterial fermentation to convert waste gas emissions into bio-ethanol doesn’t seem all that different from the waste-to-biofuel processes developed by other startups, like SequesCO and GreenFuel Technologies.

Trap a large quantity of emissions from a power plant, pipe them to algae or bacteria contained in either a pond or bioreactor, add a few nutrients and voila! You now have a ready supply of biofuels. Unlike its competitors, however, Auckland, New Zealand-based LanzaTech proposes using carbon monoxide as its primary feedstock, instead of CO2. Even at this early stage, it has already received the blessing of Khosla Ventures — to the tune of $3.5 million.

The company’s goal is to turn emission-intensive industries like steel and rubber — basically any industry that produces hydrogen and carbon monoxide emissions — into low cost, high volume producers of ethanol by retrofitting them with its proprietary fermentation process. Its brand of ethanol would replace up to 90 percent of a car’s gasoline supply and would not require any engine modifications.

While LanzaTech has remained mum on the details, one can speculate that it must be cheap, fast and scalable enough to have attracted Khosla’s interest. For one thing, carbon monoxide is dirt cheap and readily available. The global steel industry alone emits half a ton of carbon monoxide per ton of steel produced.

Key to the firm’s success will be the performance of its bacteria, specifically their growth rates and conversion efficiency. It will be in good shape if it can keep the costs of its fermentation process down, particularly as it continues to modify its bacteria, and if its plants scale up well. Several better-capitalized companies, such as Amyris Biotechnologies and LS9, which are engineering microbes to make hydrocarbon-based fuels from plant sources, are already inking major deals and building pilot facilities.

Not to be outdone, LanzaTech has just raised another $9.3 million from New Zealand’s government funding agency, the Foundation for Research, Science and Technology (FRST), to be distributed over the next 5 years. It plans on using the grant to set up a pilot plant within the coming year; it hopes to have a scaled up demonstration facility ready by 2013. It will also use some of the proceeds to research alternatives to ethanol.

LanzaTech has also received the backing of The Warehouse, New Zealand’s largest department store retailer.

Sequesco joins a growing list of startups that are using synthetic biology to custom-produce advanced biofuels. But unlike competitors LS9 and Amyris, which are engineering microbes to make hydrocarbon-based fuels from various plant biomass sources, it uses waste carbon dioxide as its primary feedstock.

The idea is to pump CO2 from large emitters like coal plants or biorefineries into the firm’s bioreactors, in which large colonies of bacteria would use the greenhouse gas and a nutrient broth to produce ethanol, biodiesel and other valuable byproducts. The protein-rich byproduct could be sold as animal feed or fertilizer, while the lipid-rich byproduct could be converted into bioplastics.

This is similar to what GreenFuel Technologies, a Cambridge, Mass.-based algal biodiesel maker, has been doing. It pipes in CO2 from power plants or industrial processes through large ponds filled with algae to make them grow and then harvests them. Sequesco’s business model can best be described as a hybrid between what GreenFuel and Amyris are doing.

Sequesco’s bacteria grow 10 times faster than most algae raised for biodiesel, and because they are non-photosynthetic, they can be grown 24 hours a day, rain or shine. Area isn’t a constraint for the bugs (only volume is), so they can be cultured in conventional, low-cost bioreactors. Since space isn’t an issue, there’s great potential for scalability, and the bioreactors can be installed almost anywhere.

One of the technology’s main benefits, CEO Lisa Dyson tells me, is that it makes biofuel production a two-step process: CO2 to biomass and then to ethanol/biodiesel. This helps keep costs in check and dramatically speeds up the process — which will come in handy when the firm transitions into commercial-scale production.

Over time, the firm plans to further modify the microbes to coax them into producing more lipid- and carbohydrate-rich biomass — which, in turn, would mean more biodiesel and ethanol. Its long-term goal is to make it a one-step process: CO2 to biofuel.

Dyson thinks combining sequestration with biofuel production will also help give her firm an edge over rivals. Piping in waste CO2 from emitters lets the company reduce its carbon footprint and would, through a cap-and-trade system, allow it to earn revenue by selling carbon credits.

With the ethanol backlash still going strong — a leaked World Bank report recently concluded that biofuels have caused food prices to increase by 75 percent — money has been pouring into algal biodiesel and cellulosic ethanol. Sapphire Energy and Aurora Biofuels, both algal fuel producers, have raised major funding rounds — to the tune of $50 million and $20 million, respectively — over the past few months. EdeniQ, an Encino, Calif.-based cellulosic ethanol startup, raised $33 million in May and claims to be hard at work on bringing the cost below $1.50 a gallon in the near future.

While still a young firm — it was started this February — Sequesco has already set some ambitious targets. Dyson said it planned to have a demonstration facility up by the end of 2010, to be followed in short succession with small and large commercial-scale plants in subsequent fiscal years. It may appear later this year at CopenMind, a cleantech event which aims to help universities market their licensable technologies to VCs and other investors.

At this stage, the firm is looking for seed funding and has already talked to several private investors.

updated, with some corrections