Why a Government-Based Business Strategy is Tricky

Experts say it’s counterproductive, but biorefining firms continue on with government
| January 09, 2012

The government is a tricky organization to work with. At least that’s what Pamela Serino, director for the quality and technical support office at the Defense Logistics Agency (Energy) told a ballroom full of prospective advanced biofuel producers at a conference this fall. Serino was there to explain how her team at the DLA would go about awarding the advanced biofuel contracts created when the U.S. DOE, the USDA and the U.S. Navy announced they would award up to $510 million to a number of future biorefinieries that could supply biobased jet or marine fuel.

Serino makes it very clear that the process won’t be easy. The DLA acts as the main contractor for many government entities such as the U.S. Navy, and the selection process was “a little touchy” she says, because “if [advanced biofuel producers] can’t meet the contract requirements, it is going to come back to us and the customer won’t be happy.” With these newer fuels, she adds, “there are some that just don’t exist yet, so we are actually awarding contracts on a prayer kind of thing.”

Of course, Serino isn’t entirely correct—there are some fuel providers such as Solazyme or Dynamic Fuels that have already provided renewable jet fuel for use in several U.S. commercial flights. But her sentiments on government partnerships do highlight one of the most complex directions a nascent biorefining firm may take on its path to commercial development and prosperity. As Serino says, working with government is “tricky,” and without going too far into the current political atmosphere and economic climate this past year, expecting Congress to agree on any sort of legislation that would immediately bolster the advanced biofuels industry would be like expecting the major oil companies to voluntarily give up their tax subsidies. It could happen, but not likely. 

Company builders and government grant writing experts spoke with Biorefining Magazine and gave their take on when walking the government tight rope makes sense, and when it doesn’t.

Sam Nejame helps his clients enter and evaluate new markets or, in some cases, create them. He’s managed process design projects for Pfizer, GE and the Department of Defense, and today, he says, he helps companies apply for grants, loans and loan guarantees. A major part of Nejame’s job is working with people like Serino, but for him working with government isn’t always productive.

“Nondilutive capital can be alluring,” he says. “If you can get help building your demo plant or first commercial facility and it makes sense, sure, do it. But,” he adds, “even now government opportunities are just one source of funding. No company should base its business plan solely on winning government money.”

Russell Howard, CEO of Oakbio and one of the founding members of Codexis Inc. and, before that, several other companies, shares the same popular belief with Nejame. “It may be seductive to work on an exciting grant-funded project,” he says. “Grants provide nondilutive funds that may be used to build value in core technology, develop product concepts, or advance product development at scale.”

But working with, or through, a government-based organization or grant as a means to company growth can be counterproductive. “Executives need to understand it’s a time-consuming process and it distracts from running the business,” Nejame says, adding that some people see it as marketing. “If the grant is not core to their mission I tell them not to pursue it. It’s great when it works, but there’s no such thing as free money.”

Howard believes that a government-backed business strategy makes sense, but only for the right companies. Mature firms that can explore areas not in tune with their core values have the ability to invest time and research into a grant, but for a small company, this can be extremely tenuous. “The very low probability of funding,” Howard says, “coupled with the weeks of effort and opportunity cost involved in chasing funds that may not materialize, is a profound cost for small innovator companies.”

Nejame’s and Howard’s perspectives are fairly clear regarding what government support companies should or shouldn’t focus on. Large companies with the financial wherewithal to devote time and research into markets that might not be in line with the company vision could, and should, seek out the services of people like Serino. But for smaller companies, pursuing government assistance isn’t worth the chase.

Nejame’s advice for the smaller companies, or even those simply looking to find the funding to continue on the path to commercialization, starts with existing relationships. “Later-stage companies will need to look to their existing VCs. You’ve got to keep making milestones and giving the guys with the bucks reason to keep you alive,” Nejame says, adding, “Strategic money is smart money. Expect to see more acquisitions. And of course, the public markets will open again. Institutional investors will have a shot at these lottery tickets. Some companies will fail, but others are going to pay off at big multiples.”

Nejame’s sentiments of prosperity to come, one that isn’t directly linked to a government strategy, sounds appealing and is highlighted even more by Howard. “What the government may be able to promise one day may evaporate one election cycle or years later,” he says. So, as both seem to show, working with and focusing a business strategy based on government-anything seems detrimental to commercialization and financial stability. Or as Serino says, it seems “tricky.”

Even with very few companies that can actually supply the quality, high-volume quantities of renewable jet fuel to the U.S. Navy or the U.S. Air Force, included in Serino’s speech in that ballroom in October, she also noted that there were already roughly 100 applicants looking to win government contracts. So why would so many biorefining firms look to enter into such “tricky” ground? Nejame offers his perspective. “Well, the U.S. Air Force isn’t going to go Chapter 11 like we saw with American Airlines,” he says. “Obviously, the military has a need and a history of paying top dollar for new technologies.”

Author: Luke Geiver
Associate Editor, Biorefining Magazine
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