VentureBeat

Well-known but still young biofuel company Sapphire Energy has more than doubled its funding to more than $100 million for its “green crude,” a fuel it says will mimic the best characteristics of the oil we drill for today.

Sapphire’s plan, which I covered in depth back in May, is to grow tailored strains of algae on waste water. Algae is criticized because it often uses open pools of water, which evaporate quickly in hot climes, wasting a precious resource. So Sapphire will genetically modify algae to subsist on water that is useless to humans.

But few new details have come out since Sapphire emerged in May. Developing a process like Sapphire’s takes a long time, and the company estimates that it will need three to five years to reach 10,000 barrels a day of production — a nice revenue line for a startup, but a relatively tiny amount of fuel. And problems with the algae can occur at any point in that time window, delaying or halting progress.

If Sapphire is successful, it make a substance it calls “green crude,” which can be run through existing oil refineries to produce gasoline, jet fuel and other petroleum derivatives. Most algal biofuel startups, like Greenfuel and SequesCO, plan to make biodiesel, which is roughly the same as today’s diesel fuel.

One confusing point about Sapphire’s growing funding is that the company is unwilling to break down the numbers. It says it has raised “substantially more than” $100 million, and in May said it had taken $50 million. So its funding has at least doubled since then. However, reports that it has taken a $50 million second round may be inaccurate.

The new investor in this round, officially the second, is Cascade Investment, which is owned by Bill Gates. The other investors are ARCH Venture Partners, Wellcome Trust and Venrock. Sapphire is based in San Diego, Calif.

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

Another algal biofuel company has emerged from stealth mode, and this one has the biggest story yet, at least according to the estimation of its investors.

Only a year old, Sapphire Energy is a San Diego startup that has lab-developed an algae that it says can create a substance akin to crude oil that can be processed by existing refineries, transported through existing infrastructure and burned without difficulty by today’s vehicles.

Sapphire has raised over $50 million from three investors, including Arch Venture Partners, whose Kristina Burow helped co-found the company. Burow told me in an interview yesterday that Arch, along with Venrock and UK-based medical research charity The Wellcome Trust, has given Sapphire an “open checkbook” not based on the usual venture model of set rounds and valuations, from which the company can draw as much capital as necessary to commercialize the technology as rapidly as possible.

The excitement of Sapphire’s investors and founders over its technology stems in part from the size of its plans. CEO Jason Pyle says that where other biofuels can only promise to replace a small fraction of the oil use in the United States, the algae that Sapphire is working on could replace all of it.

How is that possible? Well, where fuels like ethanol and biodiesel rely on grown feedstocks — corn, sugar, switchgrass, trees — Sapphire’s algae requires no feedstock at all, just water and sunlight. Pyle claims that the requirement to grow without relying on a food crop was one of the company’s founding principles.

The two other requirements, that the algae cultivation not take useful land or use fresh, potable water, should quell many environmental concerns. Instead, Sapphire plans to use non-potable water like agricultural runoff and salt water.

One of the distinguishing factors of algae startups is that they tend to dream, and talk, rather large, and Sapphire is no exception. Like other companies, its algae has yet to be proven at commercial scales — a step that has foiled initial attempts by other companies, most famously Greenfuel Technologies, whose first large algae project grew so rapidly it choked itself out. But when I pointed that out to Pyle, both he and the two VCs I spoke to on a conference call (the other being Arch co-founder Robert Nelson) shrugged off the objection.

“The ability to produce this organism and use it is well understood at scale … the attempts of biofuel companies do not represent the best attempts at scaling these systems,” Pyle said. And although Sapphire won’t reveal where or how it intends to initially cultivate its algae, Pyle says it is specially developed to fit a particular niche in the ecosystem, which will both keep it from escaping into the wild, and keep wild algae from invading and damaging production, a significant problem for many algae startups.

However, despite the implicit criticism Sapphire has for its competitors, Pyle believes that there will be many winners in the algal biofuel space. “In a trillion dollar market, it’s hard to believe in a winner take all strategy,” he said.

While algae currently accounts for an almost negligible amount of the fuel market, in any country, it may take less time to commercialize than other technologies. Sapphire plans to move forward next with pilot testing, going from production of 100 barrels of “green crude” per day, to 1,000, all the way up to 10,000 per day.

If that model turns out to be the right one, the future of the biofuel industry looks fairly straightforward. Cultivation ponds drawing water from farms, waste-streams, tainted reservoirs, the ocean and other sources would be dotted thickly throughout the southern half of the United States, each producing three to four million gallons per year. To replace the entire crude oil usage of the country, it would take between two and three thousand of these ponds, according to my back-of-the-envelope calculations.

That scenario is a long way off, though: Sapphire plans to have its first commercial production plant in about three years, after which it would require billions of dollars in project financing to build up production. And how quickly that project financing comes through will depend almost entirely on the price of the finished product versus the crude oil prices at the time.