Daniel Englander

A New Valley of Death Found in Expansion Funding? June 5, 2008 at 8:03 AM

Innovation Fuels, a New York-based biodiesel company, has completed financing on a $15.5 million B round. The company raised $10.5 million in equity and $5 million in debt from Credit Suisse, RNK Capital, and Lyrical Partners. This is on top of the $15.5 million A round the company raised in 2007 to help finance its first biodiesel plant in New Jersey. What’s interesting here is the $160 million in credit Innovation Fuels picked up from Citizens Financial Bank to finance their upstream and downstream market consolidation. This brings up two interesting questions. First, why would a company raise a credit line ten times greater than a concurrent venture round? Second, why wouldn’t the investors foot the bill for this kind of capital?

President and CEO John Fox said the company will use the credit “primarily for procurement of our feedstock and to ship our product internationally.” Innovation Fuels is also opening a new European office. The upstream activities involve securing the acquisition of non-food feedstocks like jatropha, while downstream moves include buying up the holdings of North American Biodiesel, a Wisconsin producer. Expansion moves like these are outside of the traditional VC arena - early research, prototyping and technology piloting, new processes. But Innovation Fuels is still, roughly speaking, an early stage company. In other words, its likely the risk involved in scaling out is too high for more conservative project financing capital, but the moves are too staid for traditional VC. Though, its not like Innovation counts General Catalyst or VantagePoint amount its investors.

I think Innovation Fuels has found itself in a spot that’s becoming increasingly common among expanding greentech companies. While it’s a relatively new company, its expansion moves are outside of the realm of traditional VC. But its relative newness means it doesn’t have the capital base necessary to attract project finance. So, with a mix of credit and VC, Innovation will begin a slow scale out from 140,000 barrels per year in 2008 to over 1 million barrels in 2010. Okay, so not so slow. The point here is that a lot of greentech companies are facing a similar growth quandary - how do you expand into commercial production when you have a small capacity and capital base? Solar companies with 25 MW pilot plants and no revenues may find it hard to attract expansion capital in an increasingly crowded field of similar technologies.

The rise of late stage funds, such as RockPort’s new $450 million fund, may alleviate this. Though, most of those will be targeted to a small number of firms requiring large amounts to break into commercial production. Attracting the attention of those funds will be an increasingly competitive proposition, especially as VCs gain more experience in this market and become more choosy over which technologies they sink their money into. Which ones are those? The ones that have exit potential. Until then, we’ll see a few more of these credit/VC combinations, though hopefully it won’t become a trend.

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