The Bell Tolls for KiOR
A Lesson Learned
If there’s one thing billionaire venture capitalist Vinod Khosla has learned over the past decade, it’s that the oil companies aren’t as stupid as he thought. In 2004, Khosla was telling anyone who would listen to him that the only things standing in the way of running the entire country on biofuels were the oil companies, and a lack of funding. He set out to change both of those things, vilifying the oil industry at every turn, and convincing Congress to shell out tax dollars so he could show the dinosaurs in the oil industry how Silicon Valley rolls.
The result has been a debacle, with billions of investor dollars and tax dollars flushed down the toilet. What Khosla didn’t appreciate is that he isn’t smarter than the people in the oil industry. It’s just that the computing and information technology industries were still relatively new, and a great deal of innovation was still taking place in a young field with lots of room for innovation. The oil industry is 150 years old, and while the fracking boom shows that innovation still takes place in the oil industry, it is a very mature industry. Thus change tends to be incremental, not exponential. Almost everything that appears novel to an outsider like Khosla has almost certainly been investigated by multiple companies.
But Khosla convinced a lot of influential people that the energy industry just needed a visionary like himself to shake things up. He gave lots of talks and testified before Congress. He created ludicrous projections for how quickly cellulosic ethanol could scale up. (See my article “Vinod Khosla Debunked.”) Investors (including taxpayers via Congress) couldn’t give him money fast enough, and he proceeded to blow through it as he learned some hard lessons in the energy business, sometimes “inventing” things that had been around for a long time.
Traversing the Learning Curve
His first hugely-hyped company was Range Fuels. They were also prone to making overhyped claims, and in 2010 I was the first person to detail all of their broken promises and wasted taxed dollars in Broken Promises from Range Fuels. Their CEO took some shots at me and said I was clearly misleading and inaccurate – yet a year later they were bankrupt.
Khosa also funded a company called Calera, that he said would be worth more than GE’s power business. Those claims now look silly after Calera’s chemistry claims came under scrutiny. Ken Caldeira, a climate scientist at Stanford University, called Calera’s claims “the chemical equivalent of a perpetual motion machine.” See Examining Calera Corporation’s Claims.
Then Khosla took three advanced biofuel companies public in 2011: KiOR (Nasdaq: KIOR), Amyris (Nasdaq: AMRS), and Gevo (Nasdaq: GEVO). I have written several articles arguing that KiOR was overvalued – even as Wall Street analysts had it rated as a “Strong Buy” – and then this year in January I predicted bankruptcy in 2014. Also in January, I appeared on 60 Minutes with Khosla. He was hyping his “no downside” technology in KiOR, and I was countering with “He is out of his area of competency. He is in over his head.”
Even though I predicted the company would go bankrupt this year, I also said that Khosla would likely give them money to keep them afloat for a while. When KiOR announced in March that they would be out of money by April 1st, I told a reporter that it was still too early for a funeral:
At least one industry expert believes Khosla will release the money to KiOR in time for it to meet its financial obligations in the short term.
“I think…Khosla is going to give them enough money to limp along for a few more months in the hopes that he can convince a much bigger investor to come onboard,” Robert Rapier, a chemical engineer with two decades worth of engineering experience in the energy business, told The Dispatch on Friday.
Rapier expects Khosla to give the company enough money to keep its doors open but not enough to get the plant up and running.
“I don’t think Khosla is going to let them go under just yet,” he said.
He did extend that lifeline of $5 million a month for 5 months as I expected, but as I said it wasn’t enough to restart the plant. That lifeline ran through August. In June the company could not make a $1.87 million payment on a $75 million no-interest loan from the state of Mississippi, and they negotiated a 120-day reprieve (which ends October 31st).
In July KiOR announced that they had hired investment bank Guggenheim Partners to try to sell or restructure the company by October 31st. In September they were delisted from the Nasdaq, chalking up a loss of over 99% from the IPO. The company’s IPO price was $15, and today the shares closed at 9 cents on the pink sheets. Khosla’s two other 2011 IPOs – Gevo and Amyris – are down respectively 98.4% and 80.3% since their IPOs.
An Amateur Learns a Lesson as Taxpayer Expense
What went wrong? It’s not that they had a bad idea, or a technically impossible idea. It’s that they underestimated the economic challenges of doing what they were attempting. (One ex-director has come out now and said he warned the company about problems, but was ignored). Others have attempted similar routes to fuels, but there are numerous challenges in economically converting wood chips into gasoline.
Khosla glossed over the problems and made it sound easy as pie. He is accustomed to seeing technical challenges solved in Silicon Valley. Again, that’s primarily because these challenges are often relatively new. They are not like some of the challenges in the energy business, which have seen decades of work and billions of dollars spent on some of these approaches. The easy challenges were all solved long ago.
So here KiOR is at the end of the line. October 31st looms. Whether they officially declare bankruptcy in the coming month, they are done. There may be some attempt at face-saving by trying to fold the company up into another company, or by taking it private. But the plant hasn’t run all year. Maybe Khosla finally appreciates that the reason ExxonMobil doesn’t make biofuels isn’t because they don’t know how, or because they just love oil. It’s that they have found the economics lacking, and continued to do what worked for them. (As a former ConocoPhillips employee, I can assure that oil companies conduct R&D on every manner of biofuel).
Khosla is fond of saying that he knows he will strike out a lot, but he expects to hit a few home runs. At this point, he would probably be happy to get on base at all. Despite all the money that he has invested in the energy sector, I am unaware of a single success he has had. I know he hasn’t had any in the advanced biofuels arena. (I define success the way Khosla once defined it for me: economically producing biofuels at scale).
But this isn’t surprising. He was not an energy expert. I would have never entrusted him with dollars to invest in a field in which he was an amateur. The thing is, the energy business is much more capital intensive than the businesses he is used to dealing with in Silicon Valley. These “strike outs” can cost hundreds of millions or billions of dollars. You don’t get to strike out too many times before you run out of other people’s money to spend. Now Khosla, still searching for that elusive home run, is going to have an increasingly difficult time getting people to entrust him with their money.
Link to Original Article: The Bell Tolls for KiOR