Alternative Fuels Redux - Contemplating a Comeback

Two and half years ago when I initiated this journal the universe of alternative fuels was an expanding universe. Perhaps it was not expanding at quite the speed of light but surely at some considerable fraction thereof. Startups numbered in the hundreds, perhaps the thousands, and investors' dollars were pouring in. And as gasoline prices rose from three dollars to four dollars a gallon and then close to five, a sense of inevitability gripped what was in truth a rather disorganized industry, or, perhaps more correctly, a congery of little industries more or less related to one another. It was going to happen, it had to happen. Conventional petroleum producers would soon be in retreat, their places taken by all manner of innovators with all manner of new products—butanol, "green gasoline", pyrolysis oil, methyl furans, methane hydrates—the list was endless, and that, as it turned out, was a large part of the problem.

Without a clear successor fuel in the offing, auto manufacturers were simply going to stay the course, which they have. This meant that only those alternative fuels that were functionally identical to gasoline and diesel and jet fuel really had a chance. Hydrogen, favored by many, clearly wasn't an option. Nor was di-methyl ether, a clean burning, non-toxic, low carbon emissions fuel that arguably has the best economics of any of the alternatives.

And, quite apart from the fatal lack of market consensus regarding any of the alternatives, the startups themselves were passive in the extreme and did almost nothing to develop initial niche markets. Most expected that the existing production and distribution networks for petroleum would accommodate them. To a very limited extent, this happened. Some companies within the petroleum industry acquired rights to intellectual property pertaining to alternative fuel production or developed it themselves, and some even set up pilot programs or limited commercial production. But the volume of fuel produced was utterly insignificant in market terms.

Even more critical from my perspective was the lack of buy-in on the part of the support sectors of the existing energy industry. Manufacturers of plant production equipment evinced very little interest in the alternatives with the singular exception of tar sand. That meant that as a publisher I was doomed. I couldn't sell ad space to infrastructure manufacturers because they had already determined that there were no sales of any consequence to be had among the startups, even lavishly endowed startups with hundreds of millions of dollars of capitalization.

Unfortunately, there were plenty of perverse incentives in place that virtually ensured that almost all of the startups would follow paths that would doom the industry as a whole.

As was the case in the telecom boom, in which I was both an observer and a victim, most of the money behind the alternative fuels bubble came from venture capitalists, and so, not surprisingly, both debacles played out in much same way. In telecom the manufacturers of next generation network equipment made a pile of stuff that nobody wanted and sold very little. Most of the companies lasted around three years or so and then collapsed after burning through tens of millions of dollars apiece. The same has been true to date for the alt fuels contingent. They brewed up a lot of liquids that never ended up in fuel tanks, and now a lot of them are collapsing as investment dries up although the real crash is still ahead.

Still the telecom bubble is instructive and is broadly indicative of what lies in the future for alternative fuels.

Let me begin by saying that I knew many of the founders of telecom startups and the great majority of them were entirely sincere. They honestly believed that their individual innovations were going to alter the universe. They continued to believe that even after their marketing departments came back with the discouraging news that the AT&Ts and Verizons of the world didn't want to buy their equipment.

Such setbacks were ominous but everyone was having so much fun that almost everybody chose to ignore them. Most of the entrepreneurs genuinely enjoyed the wild rides they took a decade ago. Many had been low level executives with traditional hardware manufacturers before the boom and they saw their compensation packages double when they signed on to the new companies. Most had been persons of no consequence hitherto. Now they were being interviewed by the trend setting journals of the day like "Wired", "Red Herring", and "Upside", and they were suddenly celebrities in their own right. And then there was the constant adrenaline rush—the big deals and the big payoffs.

Guys who'd been hopeless nerds in engineering school and in their early professional lives became hot. These same guys lost weight, started working out, bought fast cars and motorcycles, cheated on their wives, and felt their egos inflating like a blowfish. And there were women who did the same, though not as many.

It never got quite like that in the alternative fuels business. Chemists are even bigger nerds than electronic engineers, and there are no equivalents of "Upside" in our business to pump their egos. And far fewer people got the big funding rounds. But some did and followed the same course as their predecessors in telecom and other areas of high tech. They savored the high salaries and they dreamt of exit strategies that would leave them with net worths of hundreds of millions.

The difference is that it hasn't happened to any significant extent in alt fuels. There have only been a few IPOs and none has been successful. And there have been very few successful sales to large incumbents. The wild ride has been shorter and few have walked away richer from it.

So what of the future? Alternative fuels will gain another hearing as petroleum prices ascend again. Alt fuels will get its second act. But it will be a lot harder this time just as Web 2.0 was a harder for the entrepreneurs than the first Internet boom. This next time around you might actually have to come up with a real marketing plan to get a meeting with the money guys.