How to Make and Lose (a Lot of) Money in Green Tech

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So far, Khosla Ventures investment in a next-generation biofuel company called KiOR has paid off. For an initial investment of $14 million, plus some millions more in subsequent rounds of funding, Khosla now holds something like $500 million of KiOR stock, which is publicly traded on NASDAQ. That's not such a bad return on investment.

But there's a hitch. KiOR hasn't made a dime. The company, literally, has no revenue. It's bled nine-digits worth of cash and it will need a lot more to complete building its crude-replacement creating plants. If they succeed in doing so, Khosla's fund could end up making billions from its small initial investment. If it fails, that $500 million will move rapidly towards $0. And, as KiOR has been a poster child of green tech success, any movement either way may be seen as a broader indicator of whether it really is possible to make money investing in early stage green tech companies.

So, what's going to happen? The backstory and a look at some prospective futures is ably researched and reported in a new story by GigaOm's Katie Fehrenbacher, "The perils of cleantech investing." At least some of it has to do with how patient Khosla and a few key other investors are willing to be. If they wait it out, the company could remain stable enough to secure the financing it needs for its plants. If they try to lock in their profits and bail on the stock, all bets are off.

Despite the recent dip in stock price, KiOR has actually maintained its stock fairly well over the last 6 months -- it's fared better than other pre-commercial, newly public, next-gen biofuel companies. A couple reasons for this seem to be because 1) the float was so small 2) the company's shares were owned by so few, and 3) hedge fund Artis Capital Management routinely bought up small amounts of shares on a daily and weekly basis in the three months post-IPO.

At the time of the IPO, Khosla Ventures controlled so much of KiOR that the company was considered a "controlled company" (by Nasdaq standards) and that's likely why bankers had Khosla Ventures agree not to sell a big portion of the shares for at least 360 days. If such a large amount of the shares were sold early on, the stock would likely crash.

There are a lot of reasons for floating only a small amount of shares in an IPO. The small float question has recently become a hot topic in the tech industry because Groupon only floated 4.7 percent of its stock, which Business Week called "the lowest Internet float in [a] decade." Many in Groupon's case think it helped prop up a higher valuation for the company.

It could have had the same effect for KiOR. And at the end of the day when the float is so small, it's hard to know the value of the company, and it's difficult to have a true market.
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Alexis C. Madrigal

Alexis Madrigal is the deputy editor of TheAtlantic.com. He's the author of Powering the Dream: The History and Promise of Green Technology. More

The New York Observer has called Madrigal "for all intents and purposes, the perfect modern reporter." He co-founded Longshot magazine, a high-speed media experiment that garnered attention from The New York Times, The Wall Street Journal, and the BBC. While at Wired.com, he built Wired Science into one of the most popular blogs in the world. The site was nominated for best magazine blog by the MPA and best science website in the 2009 Webby Awards. He also co-founded Haiti ReWired, a groundbreaking community dedicated to the discussion of technology, infrastructure, and the future of Haiti.

He's spoken at Stanford, CalTech, Berkeley, SXSW, E3, and the National Renewable Energy Laboratory, and his writing was anthologized in Best Technology Writing 2010 (Yale University Press).

Madrigal is a visiting scholar at the University of California at Berkeley's Office for the History of Science and Technology. Born in Mexico City, he grew up in the exurbs north of Portland, Oregon, and now lives in Oakland.

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