BIOMASS ENERGY TECHNOLOGY SCREENING CRITERIA

FOR ENTREPRENEURS AND INVESTORS

BY RICHARD A. SUN, CFA

August 16, 2010

These screening criteria grew out of my work helping cleantech entrepreneurs develop new bio-
mass energy technologies and build companies with them. The criteria indentify the characteris-
tics of potentially successful ventures and technologies. Satisfying these criteria should raise the
probability of success, but will not guarantee it. Promising technologies do not automatically
lead to successful companies without excellent execution and that requires superior management,
marketing, and money.
Biomass will likely become a major energy source. Absent unanticipated major technological
breakthroughs in solar, geothermal or wind, biomass has far greater long-term potential. After
all, fossil fuel is biomass with an inefficient several hundred million year production cycle,
clearly leaving room for efficiency improvement.
Currently, the sector is rife with muddled and emotional thinking, wasted effort and, as in many
popular new endeavors, outright fraud. While only a tiny fraction of biomass ventures (perhaps
several of a hundred) will succeed, some of those successes will be spectacular—providing enor-
mous benefits to humankind and extraordinary financial returns.
The winning technologies have not emerged; at the moment all suffer from one or more technical
or economic flaws. The joy and profit is in the quest for those winners.
I wrote these criteria for angel investors and serial entrepreneurs. Since corporations and venture
funds have greater financial resources, management and infrastructure in place, and different in-
centives, they can take on more challenging projects. Ultimately, even their resources are limited,
so similar principles apply.
Don’t Burn Food
Never use a food crop as feedstock—do not even think about it. Doing so does not get you a No-
bel Prize. How can you reach meaningful scale if you are quite literally taking food out of peo-
ple’s mouths? Until we end hunger worldwide, diverting food or cropland to a higher value use
will be unpopular, if not immoral. Even if it does not raise food prices, too many people will
think it does.
Using Cropland to Grow Fuel Is Burning Food Indirectly; Don’t
Do not grow feedstock on land that should be used for food crops. This is equivalent to burning
food. As you scale, folks will notice. The adverse publicity and criticism will cause even your
mother to wonder about you. Without scale, you have a laboratory curiosity, not a viable energy
source.
Do Not Deplete Your Land—If It Is Not Sustainable, How Can It Be Cleantech?
Do not consume anything that should go back in the soil to maintain its fertility. If your technol-
ogy depletes the soil, how can it be sustainable? Doing so compromises your cleantech credibil-
ity.
Nitrogen: Necessary and Nasty
Nitrogen (along with many other nutrients) is necessary for plant growth, but our method of de-
livering it by chemical synthetic fertilizers has several adverse consequences. They include (i)
runoffs causing algae blooms which deplete oxygen and cause dead zones--20,000 square kilome-
BIOMASS ENERGY TECHNOLOGY SCREENING CRITERIA
FOR ENTREPRENEURS AND INVESTORS
BY RICHARD A. SUN, CFA
Page 2

ters recently in the Gulf of Mexico, (ii) the algae blooms can be toxic, (iii) destruction of mi-
crobes necessary for soil health, (iv) energy intense manufacturing process, and (v) use of natural
gas, a fossil fuel, as a feedstock. Excessive use of chemical nitrogen has been justifiably de-
scribed as “mankind’s most successful folly”. No energy crop dependent on traditional nitrogen
fertilizer is sustainable and cannot have a large-scale, long-term future. Corn has a particularly
high need for nitrogen. Determine whether your biomass source needs nitrogen, educate yourself
on the subject and assess the vulnerability of the crop.
Be Cheap, Be Better or Be Gone—Have a Compelling Price or Performance Advantage
The technology must be cost-competitive with traditional black (dirty) energy at consensus long-
term prices without tax credits or government incentives. For oil and liquid transportation fuels,
use the same forecast long-term planning price used by the major oil companies. They know this
business better than anyone does, and they are motivated to get it right. Unlike environmentalists,
politicians or bureaucrats, they pay a price for inaccurate forecasts. Using that benchmark price
moderates excess enthusiasm during price spikes and excess pessimism during gluts.
Do No Evil—Do Not Go Nuclear
Avoid any process or component that has even a remote possibility of creating or contributing to
a self-sustaining, biological chain reaction. If you think uncontrolled nuclear chain reactions
have unpleasant consequences (like mushroom clouds), remember biological ones can be far
worse over the long-term globally. Apply Murphy’s Law—assume anything that can go wrong,
will go wrong—and at the worst possible time in the worst possible way.
Reproduction was nature’s first and is still its most powerful chain reaction. Some view human-
kind’s exponential growth in population and resource consumption as the most damaging self-
sustaining (so far) biological chain reaction.
Avoid Government Handouts—Welfare Is For Wimps
You may take government handouts if you wish, but never, never rely on them, whatever their
form—tax credits, loans, mandates, etc. Force yourself to ride without trainer wheels—the win-
ners will.
Government support is frequently as deadly as addictive drugs and can be withdrawn with a
change of government or the popular mood. The public eventually figures out the true cost. If
you do not know why California’s 1980s vintage Standard Offer 4 contracts are relevant, find out
or find another endeavor.
Take whatever government largesse is given to you (you will be paying more in taxes to fund it
anyway), but do so intelligently. Impose the following self discipline on your venture: (i) con-
firm that it comes without restrictions that will unduly constrain your business, (ii) never base
your business planning on its continued availability, (iii) never change any material business
practice to take the benefit, (iv) do not allow your core management team to be distracted by the
government money, keep them focused on the real business, (v) since technical mistakes can es-
calate to felonies when government funds are involved, get the process and paper work right (and
verify, verify, verify), and (vi) hire inside-the-Beltway types to deal with the government—it is a
different world there.
Even with these constraints, there is a downside. Government incentives create bubbles by over
allocating economic resources to the favored sector. When those bubbles burst, as they all do
BIOMASS ENERGY TECHNOLOGY SCREENING CRITERIA
FOR ENTREPRENEURS AND INVESTORS
BY RICHARD A. SUN, CFA
Page 3

eventually, investors lose substantial sums. Bubbles start from good ideas that are carried to an
excess. The politicians and press conveniently forget any role government had in the bubble’s
creation and focus on the inevitable excesses of the private sector, using them to place blame ex-
clusively on business. Since business is a convenient and popular scapegoat, the politicians can
avoid their just share of the blame.
Consider the recent real estate and mortgage finance bubble. The politicians passed laws requir-
ing banks to make loans to low income would be homeowners. They created entire institutions to
refinance those loans, and then passed additional laws to make it easier to make those loans and
encouraged banks to do so. The loose loan practices then extended to all income and home price
levels. The politicians rejected the criticisms of the excesses and were in denial on the embedded
risks until after the bubble collapsed. Many bankers engaged in abusive and fraudulent lending
practices, but even those who were honest lost money and were condemned with the real miscre-
ants. What makes you think the energy boom-to-bust cycle will not develop along a similar
course?
Wait Until It Works—Avoid Unproven Technology
Avoid technologies that are commercially unproven or where significant technology issues re-
main. Research is not a business; it is science and engineering. You cannot predict the R&D
process—not yours, not your competitors. There is more fantasy in cleantech than in Disney-
world; more self-delusion than on internet dating sites and more unjustified hope than at casino
gaming tables.
Minimal Capital Requirements
Avoid anything that will require large capital investment to become cash positive. Leave those
capital-hungry technologies to the heavy wallets—the oil majors and venture capitalists; they
have the funds, the friends in Washington and the ability to crush you. They also have the staying
power to wait for the slow adopting utilities to accept the technology, whatever the delay. Even
Kleiner Perkins and Google are challenged by the time and money required to scale up energy
technology.
Dig In Fast, Dig Deep—Build a Sustainable Competitive Advantage Quickly
Avoid situations where you cannot build and maintain a superior competitive advantage quickly,
before you attract the attention of the large players who specialize in spotting and crushing the
early movers. First mover advantage is overrated; just ask anyone who was in the first wave of
an amphibious landing or had the point on a combat patrol.
You will need more than a strong patent wall, unless you plan to spend more money on lawyers
than the rest of your business. One entrepreneur knew he was in trouble when the other side
showed up with more lawyers than he had employees.
Avoid Overly Popular Technologies
Any obviously promising green technology gets lots of publicity and attracts hordes of well-
funded, high quality teams. What is your competitive advantage against that? If the technology
has been featured in The New York Times, look elsewhere (unless they panned it, then take a sec-
ond look). Angels must find the overlooked gems.
There are at least 30 visible serious players researching oil from algae, and no one knows how
many more geniuses in garages. Worse, you will be competing with some powerful alliances;
BIOMASS ENERGY TECHNOLOGY SCREENING CRITERIA
FOR ENTREPRENEURS AND INVESTORS
BY RICHARD A. SUN, CFA
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Craig Venter (who beat the government at sequencing the human genome) and Exxon are part-
ners. Are you smarter than Craig and better funded than Exxon? As Dirty Harry asked: “Are
you feeling lucky?”
Transportation Costs
Whenever possible use your feedstock where it is created and, unless the output has an unusually
high value-to-weight ratio, find a local use for it, if not on site. Transportation and handling costs
erode economics and energy efficiency. Gold is shipped around the world; concrete is used lo-
cally.
Think Small, Think Local—Avoid the Edifice Complex
Large utility-scale plants are difficult for entrepreneurs to finance. Look for technologies that
enable small plants with local consumption and distributed power generation. Doing so diversi-
fies risk, making financing far easier. You can grow just fast as with many small plants as with a
few large ones.
Success Creates Its Own Problems—Scale Can Destroy Your Economics
Think hard about how large-scale deployment of the technology will affect the supply/demand
relationship of feedstock and outputs. Realistically estimate the likely feedstock cost increases
and output price decreases that will result from large-scale deployment.
The financial forecasts for the first municipal recycling programs were spectacularly wrong be-
cause they assumed the prices of recycled product would remain stable despite the enormous in-
crease in supply. Taxpayers made up the shortfall.
Field of Dreams—Avoid Any Technology Requiring New Infrastructure
If you build it, they may not be able to come—for lack of infrastructure. Existing energy sources
benefit from trillions of dollars of infrastructure built over decades. Unless a new energy source
integrates neatly into the existing infrastructure, full deployment can take 30 to 50 years. While
hydrogen has many advantages as a fuel, the lack of infrastructure is prohibitive.
You Eat the Steak, Not the Sizzle—Don’t Count on Carbon Credits
Treat carbon credits as potential upside only. They may have some value eventually, but techno-
logical innovation and politics will probably make the credits less valuable than expected.
It is extraordinarily difficult to credibly or confidently value carbon credits. First, their monetary
value is set and manipulated directly by bureaucratic fiat and indirectly (i) by politicians, who are
under the influence of campaign contributors and (ii) by voters who the politicians follow (as they
claim to lead). Voters, in particular, are a fickle and changeable lot and are wont to turn vindic-
tive when they realize they are paying more green cash for green energy.
Second, the values of the credits are too easily reduced by improving technology and radical in-
novation--both of which are damnably difficult to predict. Technology innovators are smart, mo-
tivated, ingenious and often defiantly successful. Even worse, from an investor’s perspective, the
field has attracted too many of them.
Verify, Verify, Verity, Then Maybe Trust—Do Your Basic Due Diligence
Verify, then verify again by independent means. Trust at your peril. When there is a bubble
mentality, the fraudsters find ready prey. Even otherwise savvy institutional investors (purport-
edly the “smart money”) unconsciously relax their due diligence standards. There already have
BIOMASS ENERGY TECHNOLOGY SCREENING CRITERIA
FOR ENTREPRENEURS AND INVESTORS
BY RICHARD A. SUN, CFA
Page 5

been and will be more mini-Madoffs in biomass. Do a search for “Cello Energy” and read how
an Alabama boy took two of the biggest, “smartest” Silicon Valley venture capitalists. Learn
from their loss.
Beware the Software Millionaires—Expertise Does Not Always Transfer
Many self-designated cleantech entrepreneurs and investors have not yet earned the designation.
They have been very successful in ICT startups; they know how to manipulate data and electrons.
Google deploys new technology in seconds with the push a button; they may or may not know
how to manage metal and fire. They have not yet proved they know how to move and manipulate
tons of metal while, quite literally, playing with fire. Black energy specialists know how to do
this.
If the ICT crowd is involved, look for situations where either they made the transition early and
have had some successes (like Vinod Khosla) or where they have brought in black energy pros as
equal partners. Otherwise, expect what the heavy metal crowd calls “energetic disassembly.”
Applying the Criteria: Rules versus Guidelines
Males of a certain age remember Bill Murray, playing opposite Sigourney Weaver in the movie
Ghostbusters, saying he had a rule against sleeping with demons. When she put her hand on his
inner thigh, he continued: “Well, it’s more of a guideline.” Consider these criteria as either rules
or guidelines as circumstances or your basic instincts suggest.
A Final Word
As Franklin Roosevelt said:
“Happiness is not the mere possession of money; it lies in the joy of achievement, in the
thrill of creative effort.”
If we succeed in building a new energy economy through entrepreneurial creativity and achieve-
ment, then we are truly engaged in such a thrilling and joyful activity.

__________________________________
Richard A. Sun, CFA is the founder and owner of Sun & Co. and has been involved, often in a key
role, with 25 startups and early stage companies as an advisor, investor, executive, founder or
member of the Boards of Directors. He was a banker for 22 years with Bankers Trust Company
(now Deutsche Bank), Goldman Sachs, First Boston (now CreditSuisse) and UBS. From 1994 to
2001, he was a private equity investor with Emerging Markets Partnership, a $6 billion firm
backed by AIG and the Government of Singapore. He has arranged, advised on or made over
$11 billion of private debt and equity investments. He received a BA from Princeton University
and an MBA from New York University.