KEY POINTS:
It's hard to believe, Sean Simpson chuckles, that just three years ago people thought he was odd for taking an interest in ethanol.
"They wanted to know why it was we were making fuel, and what it was."
Thanks largely to the volatile price of oil, Simpson doesn't have to do much explaining these days. "It has really, really shifted in a short space of time," he told those gathered in Auckland for a conference on renewable energy last month.
The title of the conference, "Clean Billions", sums up the attitude among investors these days towards anyone with a clever idea for renewable energy, or "cleantech" as it is now known. Estimates vary wildly on how much is being poured into the sector from venture capitalists and private equity firms, but everyone agrees it's in the tens of billions.
In fact it has become so hot that the inevitable questions are starting to be asked about whether a bubble might be developing, as it did in the dotcom years.
But despite his long experience in bio-products development, and his work as head of the biofuels initiative at AgriGenesis BioSciences, it wasn't quite that easy when Simpson first went looking for money for LanzaTech, a company that wants to produce ethanol from waste gas.
"Our first investors were two guys in Auckland who had a company called Biodiscovery. They were scientists who had been working for about 15 years and they understood what we were trying to do and they gave us $100,000 to start off with."
Warehouse founder Stephen Tindall and the late Ross Clark also agreed that Simpson and his business partner might be on to something. "These guys moved us up a level, and allowed us to get in contact with people that we weren't able to contact before."
Clark, an eminent scientist probably best known for helping to develop a drug for the treatment of short-stature children, had good contacts in the Bay Area of San Francisco and it wasn't long before Simpson was pitching his plan to Vinod Khosla, one the best-known venture capitalists in the world.
The co-founder of Sun Microsystems and a partner in Kleiner Perkins (and now his own firm, Khosla Ventures), Khosla was an early convert to the idea that ethanol might be the fuel of the future.
"This guy invested large sums of money in technologies that were only valid in a very changed world. And hey presto, that world came to be," notes Simpson. "He invested in the future; he became very, very rich from doing that, and now he's putting his money into cleantech."
Khosla sent some of the best scientists in the world to New Zealand to check out Simpson's methods, which use a biological fermentation process. The genius of the idea was that the original feedstock - unlike corn and other feedstocks popular at the time - costs virtually nothing and was readily available.
"It was terrifying for a long time, and they asked us all sorts of very hard questions about how plausible it was to make fuel out of steel mill gas," recalls Simpson. "But we had some answers, and they agreed with [them], so they decided to put money in."
Khosla told the International Herald Tribune he had agreed to give LanzaTech US$3.5 million ($5.3 million) because it stood out from the scores of proposals he saw each day due to its ability to scale up to industrial proportions, and the credibility of its founding scientists.
"When I passed it on to my partners for due diligence, the technology stood up to every test, and the intellectual property protection was awesome," he was reported as saying. He also commented that "the performance of the bugs was frankly mind-boggling to me - not something I would have expected from a tiny research effort in New Zealand."
Simpson had hoped Khosla's cash would keep his firm going for three years. As it happened, it lasted just 10 months.
Fortunately, yet more cash has been forthcoming. In July, LanzaTech received $12 million in Government funding through the Foundation for Research, Science and Technology's Low Carbon Energy Technologies fund. It's a whopping amount for a Government grant - possibly the biggest ever for a start-up company.
"This is one of the most exciting projects of its kind we have invested in, with great potential to reduce our carbon emissions," said foundation chief executive Murray Bain at the time.
Local private equity firm Cranleigh, which is looking to spend up to $200 million helping businesses throughout Australasia expand, has also taken a stake in the company. However, LanzaTech is going to require plenty more cash yet, as ethanol production plants don't come cheap.
Tindall's investment manager, Brian Mayo-Smith, says he won't be surprised if LanzaTech is eventually forced to move overseas.
"We know that their total capital requirement is way beyond anything we're able to advocate ... LanzaTech is still doing its development here, but at some stage it may have to look at the fact that its market is not in New Zealand."
Cranleigh's David Clarke agrees: "Without a doubt, a large majority investment from a US fund will mean the potential that a large part of that technology will leave the country. I've seen it happen many times ... If a clean energy company like LanzaTech goes to Denver, it gets accelerated depreciation, sales and state tax holidays, and state grants. They fall over backwards, and it makes it very attractive to look at that."
Of course, the whole point of venture capital is to fatten up companies for sale: that's how investors recoup their investments. It's one of the reasons VCs are known in some circles as "vulture capitalists", but you won't hear Simpson using that term.
"It's very, very exciting to meet guys [like Khosla]," he says. "How do you get to meet them? The first way you meet them is to always have great investors. LanzaTech has always been very fortunate in always having great investors."
In terms of cleantech, New Zealand is perfect for development, he notes. "We've got everything here: wind, waves, solar, geothermal, tides, biomass, agriculture, the lot. There's almost not a resource that we don't have. We've got the ideas - people are always banging on about No 8 wire and so on. What we don't have are people who, beyond an angel investment stage, are prepared to take risks with millions of dollars, and that's what we need."
Stuart McKenzie, from local venture capital firm Endeavour Capital, would probably beg to differ.
McKenzie left a 10-year career in engineering and project management to pursue his goal of establishing a New Zealand-based high-growth company. He took an unexpected opportunity to become an investor in early-stage businesses in 2001 and since then has been both investing and helping a variety of start-up companies.
However, he admitted to the Clean Billions conference that it wasn't always easy to find businesses that were likely to grow 10 times in just five years - the goal of many VCs.
"If we put $5 million in someone's business and we own one third of that business, say, we will want that to be $50 million in five years. For that to be $50 million, that means the business will have to have a $150 million valuation."
While Endeavour had several investments in the cleantech sector, it was only too aware "through bitter experience" how much money some of them could chew through - especially if a pilot plant might be needed, said McKenzie.
Endeavour's portfolio includes Derceto, a subsidiary of Beca, which has developed energy-efficiency software for large water distribution companies; Anzode, a spin-off from Canterbury University which has developed a battery-like device that can recharge very cheaply in just seconds; and Veritide, which also comes from Canterbury University and has developed two detectors: one for anthrax and one for diabetic screening.
Veritide, notes McKenzie, has two main competitors, one of which has received US$27 million in funding to date, and one which has received just under US$50 million.
"We've put $2 million funding into Veritide, and that's just the reality of funding in New Zealand."
Former lawyer Nick Gerritsen couldn't agree more. Over the past five years, Gerritsen has helped several innovative start-ups to develop their businesses, including Syft Technologies, Nano Cluster Devices and Vortex Technologies.
He has spent so much time in the Bay Area "drinking a lot of very terrible American coffee" that he now acts as a conduit for others looking for money. His current portfolio includes climate change website Celsias.com, individualised computer-based manufacturer Ponoko, charcoal maker Carbonscape, biofuel maker Aquaflow, "and a few others in the pipeline I can't talk about."
He is determined to see Aquaflow become the first company in the world to produce economically sustainable biofuel from wild algae, and notes it has already commissioned a proprietary biorefinery.
"The reason I've basically committed myself to working in the cleantech space is because this is one of - if not the - greatest opportunities New Zealand has to develop technology that can be applied to both the domestic market and globally," he told the audience at Clean Billions. "It's a massive mainstream opportunity. It's a way of delivering up foreign direct investment; it's a way of achieving higher-paid jobs; and a way of addressing New Zealand's lagging performance in the OECD."
Kleiner Perkins, he notes, has put 10 times the amount of capital into cleantech than it ever did with dotcoms.
"The reality is New Zealand has been way, way too slow. Cleantech is already three or four years ago. We made a decision three years ago after we came back from our first meeting with Kleiner Perkins ... there was basically bugger-all happening, so we figured we'd start to take those steps ourselves."
Gerritsen believes our capital markets have failed miserably to grasp the opportunities available.
"If you look at Windflow, out of Christchurch, Geoff Henderson deserves a gold medal for having to go to a public market largely to raise general capital for his wind turbine, which I can tell you is actually amongst the best in the world for high-speed wind sites, despite what the New Zealand market might think."
Gerritsen credits pal Murray Jago for being the first to recognise the potential of companies such as Aquaflow.
"He sat down over a glass of beer and wrote out our first $10,000. That guy made the thing happen - much more than all the other VC guys we'd spoken to previously."
He is also grateful to an 87-year-old grandmother who gave him money, simply because she wanted to leave something for her grandchildren.
Like Gerritsen, Jim Watson doesn't mind admitting he is jumping on the cleantech bandwagon.
The veteran scientist started out as an immunologist for Syntex Corp, the US pharmaceutical company now owned by Roche, then went to the Salk Institute, which carried out the Human Genome Project.
In 1981 he returned to NZ to teach microbiology, and went on to establish New Zealand's first listed biotech company, Genesis Research and Development.
In 2004 Genesis suffered a high-profile and expensive failure with its childhood eczema drug, but Watson was not deterred and two years later formed BioJoule, a Genesis spin-off investigating the potential of hardwoods to provide alternatives to oil.
It was rather more successful - in October last year Hong Kong-based biofuel company Pure Power Global bought BioJoule for $6 million in cash and 1.2 million Pure Power shares.
Watson has stayed with BioJoule, which now provides R&D to the rest of the Pure Power group. Pure Power also owns a 19.9 per cent stake in Aquaflow.
While he is thoroughly enjoying his latest incarnation, Watson is grumpy about what he perceives to be an increasingly cloudy investment climate.
"My opinion is that the VC available for starting new companies is probably at an all-time low, and part of that is money but part of it is what I call attitude ... There was an element of risk that investors of funds used to accept, but the growth of the capital market in general has been fairly small and increasingly, I think, the VC market has become more risk-averse."
Watson, who is also president of the Royal Society, believes the Government's Venture Investment Fund should simply accept that it is going to strike both successes and failures. "Unless we do that I think we will simply strangle the development of new businesses."
At the same time, we're also too tough on our Crown Research Institutes, he believes.
"The Government expects that the research institutions should be able to take their ideas from lab to market, yet these organisations are notoriously bad at doing that. Their staff are simply not trained to do that.
"It's unfair to the CRIs and I think it's not a good use of money."
That said, he is also puzzled why the Government isn't making a much bigger deal of the role we could play in developing renewable energy.
"I can't understand for the life of me why the Government isn't making renewable energy or just energy security the number one priority.
"By doing that and putting money into it, I think you'd suddenly get a focus for activity. I think there are many scientists in CRIs and universities who would go into these areas and there would be a real stimulation to actually do things to provide more energy for the country, and that will have its effect in terms of spin-outs."
In actual fact, says Watson, New Zealand has been fairly successful at growing small high-tech companies. Some of the success stories so far include MAS Technology, Tait Electronics, Fisher & Paykel Healthcare, Datacom, Peace, Rakon, Global Information Systems, Binary Research, Trade Me, Seaworks, Orion Healthcare and Jade, just to name a few.
The problem is, so many get sold to overseas buyers. However, he's optimistic that will slowly change.
"I think there's a fabulous group of small companies that are going to do good things. I think in the climate change areas in agriculture, innovation will spawn around this."
Unlike the sceptics, Watson still holds out hope that we will eventually develop our Nokia.
"We have to think like that or we'll end up like the the Nauru Islands, and treat ourselves as a phosphate factory and we'll get mined out - only we'll lose all the people."
Gerritsen, too, believes that in the end it all comes down to daring to dream, and having the gumption to turn those dreams into reality.
The point was brought home to him in a poignant way in 2004 when he attended the unveiling of a memorial in Havelock, near where he lives in the Marlborough Sounds.
The memorial was for the late Sir William Pickering, the Kiwi who became one of the world's leading space scientists and who grew up in the area.
Pickering, who was then 93, attended the event and Gerritsen took the opportunity to ask him what had inspired him to reach for the stars. Pickering told him about a fishing expedition he had been on as a 12-year-old in the wetlands around Havelock. It was winter, and when he returned from the trip it was dark.
He looked up at the sky, gazed at the Milky Way - and suddenly wanted to be there.
"We have to get back to that, and believing in the big New Zealand idea," says Gerritsen. "We've got to cut the crap, and actually go out and do it."
