1. Khosla Ventures: Investing in Ethanol
September 19, 2007
Chris Abad Mikhail Khleblaov
Shadi Sedghi An-Chi Tsou

2. Khosla Ventures Background
Company Focus
Significant/innovative technologies
Seed to late-stage investments
Breaking up monopolies- large markets
Investment of general partners’ capital
Interest in Ethanol
2006 production facilities: $1.50-2/gal to $10/gal
Social interest
- Created in mid-2000s after working in Sun microsystems, experience in Kierestu-style investments, which promotes strategic opportunities and insight to field for portfolio companies
-Company focus on innovative technologies: Mobile, alternative energy, bio refineries, sometimes new markets
-Interest in ethanol also because the field was dominated by oligopoly of fully integrated petroleum companies.
Socially, more focus on energy independence, alternative fuels, etc.

3. Comparative Risks of Fuel Technologies
they’ve done background research before- look at the risks, like any good investment company should.
- they rate the different costs, risks and scale them to compare
Source: 3

4. CO2 Emissions from Alternative Fuels
On an environmental safety level, it is also much more efficient to invest in ethanol
Fig: Carbon Emissions per mile driven of various fuels (Source: NRDC) 4

5. Ethanol Commonly produced by fermentation, through yeast
Yield  sugar extraction
Advantages over gasoline
Alleviates shortages
More cost effective
Environment-friendly
-Also known as grain alcohol or ethyl alcohol
-Been used as a motor fuel- even by Henry Ford. But then gas was cheaper and easier to produce.
-In 2004, over 34 billion gallons of ethanol-blended fuel used in U.S. alone

6. Value Chain of Ethanol Production
Retail
Raw Material
Production
Ethanol
Manufacturing
Marketing,
Sales &
Distribution
Corn
Corn-milling
Transportation
Auto
Manufacturers
Fermentation
Sugar
Storage
Political Ties
E-85 ethanol and other reformulated gasolines + ethanol byproducts, some of which can be fed to cattle.
Cellulose
Breakdown
Plant Cells
Non-market
Environment
Ethanol
Byproducts

7. Where should Khosla invest?
Creation of Ethanol
High source of significant technology
Corn fractionation
Enzyme-based process
Cellulose and Hydrolysis
Large Market Opportunity
Gasoline prices increase
Demand for gas is steady

8. Where should Khosla invest?
Getting Raw Materials
Switch Grass
No fertilization; 12 feet tall
Bransby gallons per ton
Skeptics – 96 gallons per ton
Potential for improving cellulose breakdown process
Corn
Abundant source in the US; 43% worldwide
Much research in the break down of Corn

9. Porter’s 5 Forces Buyer Power Barriers to Entry Threat of Substitutes
Demand for alt. energy
Vertical integration threat
High bargaining power
Barriers to Entry
Government tariffs
Need for large volumes
Large capital requirement
Threat of Substitutes
Products not in food chain
Cheaper options (ligno
cellulosic)
Rivalry
- Oil companies
Supplier Power
Raw material production
Food industry competition

10. What ventures should Khosla avoid?
Distribution and transportation
American politics
Tarrifs: $0.54/gallon till 2009
Protected American ethanol production
Opponents
Lower dependence on gas
Ethanol production in Brazil

11. How to Invest Kieretsu-style, parallel investments Competitive
Energy sources (yeast variants, enzymes)
Ethanol creation (corn milling, feedstocks, sugar, etc.)
Comparative
U.S. corn production
kieretsu-style definition: focus on specific technologies
Advantages are that you share insights and strategies, have more opportunities for business
Room for scientific breakthroughs to reduce high energy input
lignin (a subproduct of the breakdown of plant cells) can be burned and add energy to the ethanol production process and also the lignin combustion can be used to generate electricity
Celunol Corp had genetically engineered a bacterium to convert sugars to ethanol
Mascoma and new themophile microorganisms that improve energy efficiency in converting ethanol
yeast strains that could hydrolyze cellulose then ferment the resulting glucose.
Competitive: focus on newer, breakthrough technologies
Comparative: who can produce more corn, more efficiently. In US, we have high tariffs on incoming corn, sugar, etc. so this is a comparative advantage of us having the corn production capabilities.

12. Value-Chain Coordination
Clusters
Lower transportation costs
Improve communication
Form key alliances
Farmers
Auto manufacturers
- do clusters like they do in the semiconductor business to promote more people working together- different sectors working closely.
-auto companies and corn production facilities are all in the midwest- super convenient. ethanol production facilities are there too!
- this leads to forming key alliances

13. Innovation Ethanol Production Viability for investment Energy sources
Corn processing/milling techniques
Corn production
Cellulose production
Viability for investment
Energy sources- scientific breakthroughs, gov’t investment
-Corn milling/processing techniques- enzyme-based process rather than wet milling process.
-Improve efficiency of transportation, manufacturing equipment.
switchgrass_biofuel_green_ener.html

14. Future of Ethanol Technologies
-Obviously lots of good prospects in technology for ethanol- producing it is becoming more efficient and getting greater value for the same area. This is good!
-That means that will be able to produce more fuel with the same amount of acreage.
Source: 14

15. http://blog.wired.com/cars/images/ 2007/06/20/ethanol_fuel_pump.jpg
The Future of Ethanol
Potential as additive/alternative to gasoline
Flexible Fuel Vehicles
Highly complex political, economical concerns
Capital
Environmental
-Political concerns should help improve the efforts to make ethanol more mainstream- environmental concerns, competition with other countries, etc.
-Main concerns are with the huge initial capital investment and concerns with the environment- what will happen with the crops and cattle with all the corn being grown only for fuel purposes?
-But with better technology in the future, this shouldn’t be as big of a problem. Huge potential for investment- a lot of scientific research in many fields within the ethanol production part of the value chain. Lots of profitable opportunities
2007/06/20/ethanol_fuel_pump.jpg

16. Thank you!
Any questions?