What can the biofuels industry learn from TMO’s insolvency?

Why do some biofuels microorganisms fall by the way side?

In the case of TMO Renewables, says Hamrick Engineering chief Ed Hamrick, it is not about running out of money. It’s about running out of reasons to be.

Last week we reported that, despite a number of high-profile joint ventures and licensing deals, TMO Renewables was forced into receivership. And in the case of TMO, we pointed out the challenges of a being a development stage company with a licensing model when the customer base consists of development stage companies that may experience significant development challenges and delays all their own.

But Ed Hamrick of Hamrick Engineering, who took a more in-depth look at TMO. offers a different thesis. He thinks that the microbe simply became out-competed by new micro-organisms and cellulosic strategies coming on to the market that offered many of the same benefits with fewer processing challenges and costs.

He writes:

Pets.com and TMO Renewables (dot-com and biofuels epic fails)

“One of the biggest failures of the dot-com bubble was pets.com – a company that sold pet supplies online with delivery by companies like UPS. It’s useful to examine why the recent failure of TMO Renewables was as inevitable as the failure of pets.com, for many of the same reasons.

“Pets.com lost $300M of investment capital, while TMO Renewables only lost $75M of investment capital (46M pounds). Neither company lost any money from government loans or loan guarantees – but they both had unsophisticated investors who didn’t understand the fundamentals of the business. Pets.com went public quickly, without ever turning a profit, and their investors were people caught up the dot-com craze who didn’t understand the futility of selling pet food on the internet. TMO’s investors were largely non-technical British investors and pension funds caught up in the ‘green energy’ craze who had little understanding of the technical and business problems faced by TMO.

“Pets.com sold pet supplies and accessories – competing with companies that sold identical products in every grocery store in America. They acquired customers by selling their products at an average of 27% less than their cost so they could be less expensive than buying pet food at a grocery store. The bulk density of pet food is low, especially compared to the cost, so shipping costs further ate into their profit margins.

The business model

“In hindsight it was a foolish business model, since the companies they were competing with had profit margins of 3 percent so pets.com couldn’t become profitable by simply getting to a large scale (like amazon.com eventually did). The shipping costs of pet food were never going to go down enough, and amazon.com could more efficiently sell pet toys and accessories that had higher profit margins.

“TMO also had a competitor – plain, ordinary yeast that could be bought for the price of pet food in 22 lb (10 kg) sacks using 2000 year old technology for making ethanol. Yeast is essentially free, and TMO failed because they weren’t able to compete with free.

The Fiberight deal in retrospective

“One of the notable licensors of TMO’s TM242 organism was Fiberight (fiberight.com). In 2010, Fiberight and TMO announced a 20 year, $500M deal to build 15 commercial-scale cellulosic ethanol production facilities in the US within 5 years. It’s been 4 years now, and if you search the Fiberight web site today, there’s only one mention of TMO on a page from 2010. Why did TMO’s plans with Fiberight go nowhere? I’d suggest that it’s because yeast is a better solution than TM242 and that Fiberight has wisely chosen to use yeast with enzymatic hydrolysis.

“Why did TMO trumpet a 20 year, $500M deal in 2010? And why did Diverso, one of TMO’s largest investors, give interviews in 2011 that saying that TMO may seek a U.K. stock listing in 2011? And why did TMO announce a ‘binding MOU’ (oxymoron?) in April, 2013 that they were going to build, own and operate a 10 million litre ethanol plant in Brazil? Did any of these ‘announcements’ coincide with a desperate search for funding? (Naah – it couldn’t be that 🙂

The technology fail

“In hindsight, the failure of TMO was rooted in three technical issues, all of which were successfully hidden from TMO’s investors or simply were too technical for TMO’s investors to understand:

“1) The TM242 organism could only produce ethanol at 5% (w/w) concentration. Distillation costs go up exponentially with reduced ethanol concentration, so the distillation costs with TM242 were significantly higher than with yeast.

“2) The TM242 organism needs a pH of about 7, while enzymes used in enzymatic hydrolysis need a pH of about 5. This means it wasn’t possible to do SSF (simulaneous saccarification and fermentation) with TM242. There are several other technical reasons SSF can’t be used, mainly that the high temperature of TM242 denatures cellulosic enzymes. SSF is needed to cost-effectively make ethanol from cellulosic feedstocks.

“3) The TM242 organism couldn’t be distributed to customers in 22 lb (10 kg) vacuum packed sacks like yeast can. This meant that customers needed an expensive on-site yeast propagation apparatus or needed to receive regular deliveries of TM242 from TMO.

The commercial fail

“There were also four significant business reasons for the failure of TMO:

1) The Process Demonstration Unit (PDU) built in 2008 was just too expensive and wasn’t scalable. It cost $13M to build, had 5 km of piping, a $250K pump that couldn’t handle abrasives in the biomass and didn’t do SSF. It was sized to process only 750 kg/hr at 50% dry solids, which works out to about 300,000 gallons of ethanol per year. This is a capital cost of $43 per gallon per year, compared with $7 per gallon per year for other large cellulosic ethanol products, and $1 per gallon per year for large corn ethanol plants. There was never any possibility of making the capital costs of a TMO solution competitive with corn ethanol plants.

2) The bulk density of biomass is quite low, and the cost per kg is also low (sometimes negative). The cost of transporting cellulosic biomass is the dominant cost, so solutions that can be cost-effectively located near the source of the biomass make more economic sense (i.e. Sweetwater Energy). TMO didn’t have a viable solution for distributed production of sugars from cellulosic biomass.

“3) The TM242 organism is a genetically modified organism. Getting approvals to use genetically modified organisms can be a long, tortuous (and possibly unsuccessful) process. It might take 2 or 3 years to get approvals from the Brazilian and Chinese governments to use this organism in these countries, and since TMO only gets revenue when their licensors produce ethanol, this adds uncertainty to the prospects of profitability and makes it harder to go public.

“4) Terranol produced a genetically modified organism (V-1) from standard S. cerevisiae yeast. It shares many of the advantages of unmodified S. cerevisiae yeast and also ferments C5 sugars. Most of the technical problems of TM242 are solved by the V-1 organism, and Novozymes is helping market the V-1, making the TM242 organism significantly less competitive.

“It makes more sense for a company to just use enzymatic hydrolysis with yeast, and to switch to unproven organisms like the V-1 or TM242 when they’re approved for use and better understood.

Fundamental issues and flawed business assumptions

“Companies ignore fundamental issues at their peril. Pets.com ignored that it’s cheaper to just buy pet food at the grocery store, and TMO ignored the fact that S. cerevisiae yeast works quite well. Neither company failed because they ‘ran out of money’ – they failed because of flawed business assumptions – and more money wouldn’t have solved the problems of either company.

“So how can we apply the lessons learned from the failure of TMO to other biofuels businesses today? I’d suggest that one characteristic of companies that are most likely to be successful is that they’re self-funded or have sophisticated investors.

“Beta Renewables gets its funding from a family-owned company with many years of experience making specialty chemicals. POET/DSM have many years of experience making ethanol and are self-funded. Dupont has been making chemicals for more than 100 years and is self-funded. Ineos Bio has been making large chemical plants for many years and is self-funded. All have varying prospects for success in the biofuels business.

“On the other hand, one characteristic of companies that are likely to fail are that they try to go public long before they have any revenue or focus on getting investments from non-technical investors such as pension funds or foreign investors.

“If you’re considering investing in a biofuels company, remember the lessons of the failure of pets.com (and TMO, and Range Fuels, …). In Silicon Valley, failed companies aren’t failures, they’re just valuable learning experiences, and there are a lot of useful lessons to be learned from the failures of biofuels companies like TMO.”

The Bottom Line

It takes just a handful of processing technologies to revolutionize an energy landscape. Which one, or ones, will succeed in the challenge of realizing a microbe’s promise, matching that to customer desire, design an affordable process, keep the financial fires well-stokes, clear the policy pathways, and attract the kind of world-class talent that can take the technology to scale and beyond?

The answers are not yet clear — but one thing that is: the music’s playing, there are fewer chairs than players, and the scramble for seats is well underway.