Khosla Ventures: Investing in Ethanol September 19, 2007 Chris Abad Mikhail Khleblaov Shadi Sedghi An-Chi Tsou http://www.hybridfuels.ca/

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.

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: www.koshlaventures.com 3

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

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 http://www.indycar.com/tech/images/ethanol.jpg

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

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

Where should Khosla invest? Getting Raw Materials Switch Grass No fertilization; 12 feet tall Bransby - 100 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

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

What ventures should Khosla avoid? Distribution and transportation American politics Tarrifs: $0.54/gallon till 2009 http://www.renewableenergyaccess.com/rea/news/story?id=46863 Protected American ethanol production Opponents Lower dependence on gas Ethanol production in Brazil

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. http://www.greentechnolog.com/ethanole85/

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 http://www.usfarmsinc.com/images/us_ethanol_prod06_zoom.GIF

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. http://www.greentechnolog.com/2006/04/ switchgrass_biofuel_green_ener.html

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: www.koshlaventures.com 14

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 http://blog.wired.com/cars/images/ 2007/06/20/ethanol_fuel_pump.jpg

Thank you! Any questions?