Portfolio: LanzaTech and its VC network

After years spent in a laboratory, scientists Richard Forster and Sean Simpson achieved their goal of developing a disruptive technology that addresses air pollution issues. The nagging problem was monetization. How could they get their invention from the laboratory in New Zealand into markets where it could make a difference, particularly Asia?

Jennifer Holmgren was the first piece in the puzzle. In 2010, she joined as CEO of the company - known as LanzaTech - and the team started working on a strategy. They decided the best way to access local networks was through partnerships, stretching from VC firms to strategic players, across multiple Asian countries.

In 2007, LanzaTech received its first institutional funding when Silicon Valley-based Khosla Ventures led a $3.5 million round alongside New Zealand-based angel investor K1W1. Having identified China as its main objective, the company then raised an $18 million Series B round led by Qiming Venture Partners in 2010, which included a commitment from SoftBank China Venture Capital.

When developing a new technology, you can't catch everyone's attention. Only certain people are willing to be the first movers, with most wanting to go second - Jennifer Holmgren

Qiming, K1W1 and Khosla returned for the $55.8 million Series C round in 2012, although by this time LanzaTech was eyeing Southeast Asia. It also received backing from Malaysian Life Sciences and local oil and gas company Petronas. Last year saw the completion of a $60 million Series D round led by Japan's Mitsui & Co, with participation from China International Capital Corp. (CICC) and Siemens Venture Capital. Several existing backers also re-upped.

This expanding geographical imprint impressed investors back home and last December New Zealand Superannuation Fund (NZ Super) provided $60 million in growth capital. Nigel Gormly, NZ Super's head of international direct investment, notes that LanzaTech is based a couple of kilometres down the road from his office, so there was a general awareness of the company's early success.

Discussions continue as to how the sovereign fund can support continued expansion. "We aren't an industry expert like some of the venture capitalists," Gormly says. "Our role is really mid to late-stage and post-technology risk investment. We can help the business to scale up and accept that the journey may be a little bit bumpy. And by providing a large amount of capital, we can help companies optimize the timing of their IPOs, rather than being forced to go public at a time that is less than ideal."

Science in action

In essence, Forster and Simpson's technology enables carbon-rich waste gases from heavy industrial facilities to be converted into fuels and other valuable chemicals for use in plastics, nylon and rubber. It estimated that carbon emissions from the world's steel mills alone could generate 50 billion gallons of ethanol per year worth more than $50 billion.

Not only does the company address pollution problems directly and create renewable products that can be sold in the open market, it also does it efficiently, according to Andrew Chung, managing partner at Khosla Ventures, which is the largest shareholder in LanzaTech.

"The company has developed the technique that is very capital-efficient compared to a lot of other methods of addressing carbon," he explains. "You can build a billion-dollar pipeline and shift the gas to another place to use the carbon dioxide or carbon monoxide, or you could draw the ground and hope that geologically it works. With LanzaTech, for less than $15 million you can put a facility next to your steel mill or your factory than addresses your gases immediately."

Technology licensing agreements and upstream production joint ventures are a key element of the company's business model, while China is an obvious target market given that it produces half of the world's steel. Government support is also a factor. China has pledged to reduce its carbon intensity - or the carbon dioxide emissions per unit of GDP - by 60-65% on 2005 levels within 15 years. The country is expected to move faster than the US in terms of building and operating cleantech facilities.

LanzaTech's first move in 2010 was to engage the China Academy of Sciences (CAS). This was an important step because most domestic steelmakers did not understand how LanzaTech's technology works; validation by the CAS made marketing it easier. Through introductions made by Khosla, the CAS and the business community-backed New Zealand-China Trade Association, the company formed joint ventures with state-owned enterprise (SOE) Baosteel Group and independent player Beijing Shougang Steel.

At present, all joint ventures follow the same guidelines: LanzaTech commits intellectual property non-exclusively and the local partner is responsible for building the plants. Shougang is on the schedule to complete a full-scale commercial renewable energy plant this year, following the success of a smaller pilot facility.

Working with SOEs tends to be a lengthy process. First, most state-backed steelmakers want to see a technology implemented before scaling up. Second, getting approvals takes time. Baosteel was impressed by the technology demonstration plant in Shanghai but decided to build the full-scale facility in Guangdong province. Construction has been delayed by the local government dragging its feet.

"Many SOEs are interested in our technology, because the Chinese government is talking about pollution control. For some big steel mills, given the current political situation, I think they're just waiting for something to happen, such as the introduction of clearer policies," says Ken Lai, who was hired as LanzaTech's Asia vice president two years ago.

Qiming and CICC are both using their networks of government officials and contacts within the steel industry itself to provide support. CICC has also arranged several meetings between LanzaTech and the National Development and Reform Commission (NDRC), which is responsible for formulating the country's energy and industrial policy.

For its part, Qiming is willing to be patient. The VC firm went in envisaging a 10-year holding period - which means it is only halfway through - with commercialization gaining momentum after 6-7 years. LanzaTech is currently in negotiations with 60 Chinese steel companies.

"We took a long-term view of what would need to happen for this technology to enter the marketplace, and it has turned out about right," says Gary Rieschel, co-founder of Qiming. "Dealing with the SOEs has become more complicated in China compared to four or five years ago. It is more difficult for them to allocate capital. However, I think Baosteel is suspending commercial projects rather than cancelling them. They is still a strong interests in seeing what happen with the new technology."

While progress in China might be challenging, LanzaTech has been busy making inroads into other markets. Two months ago, it announced a partnership with ArcelorMittal, one of the world's largest integrated steel and mining companies, Primetals Technologies to build a commercial-scale production facility in Europe. ArcelorMittal and Primetals will cover the EUR87 million ($97 million) in estimated construction costs.

This came shortly after commercial ethanol facility was approved by China Steel Corporation (CSC), Taiwan's largest integrated steelmaker. A carbon recycling platform was built in Kaohsiung in 2010 that has an annual production capacity of 100,000 gallons of ethanol. Now CSC has committed to spend $46 million on a facility that can generate 30 million gallons a year.

"It is very hard to commercialize a new technology and that's why it takes a lot of touch points. There are many people helping us. We need the technical guys and chairmen in the target companies to get excited," says Holmgren, LanzaTech's CEO. "We need engagement at all levels, because it's very easy to say ‘no' to something new."

The partnership with Mitsui & Co. is central to the company's plans to push into Japan where steel mills and coal-fired power plants can make use of the technology. In other parts of Asia, such as Indonesia and Malaysia, the focus is more on solid waste than industrial waste gases, with a range of renewable products made from non-food feedstock.

Dealing with local governments in Southeast Asia can be problematic and time-consuming, but LanzaTech expects to have more commercial-scale units up and running across the region in 2016.

"When developing a new technology, you can't catch everyone's attention. Only certain people are willing to be the first movers, with most wanting to go second. We talk to a lot of people and companies, but then focus on those that are most positive or are industry champions," Holmgren adds. "When we get the first commercial unit running and can show our technology works, we will get the followers."

Achieving scale

With commercialization still at an early stage, LanzaTech doesn't want to rush into an IPO. This is one of the functions of NZ Super's capital, providing a bridge between the private and public markets.

"VC firms are good at developing business ideas and getting companies off the ground, but they are not particularly suited to the more capital intensive and longer investment horizon opportunities," says NZ Super's Gormly. "We can support the business as it focuses on maximising long-term value without being constrained by artificial deadlines or constraints around fund life cycles and limited pools of capital."

NZ Super has already earmarked $50 million for a follow-on investment in LanzaTech. It reflects the sovereign fund's broader policy of diversifying into alternative and non-conventional energy, alongside traditional energy investments.

"Having Mitsui and NZ Super come in, really took the company to the next level and now we are scaling up," Holmgren adds. "It's a different level of discipline compared to the earlier rounds and the demonstration process. When these funds were doing due diligence, they asked questions in a way that made us reflect on our past. I don't think you would be successful without that kind of reflection."

LanzaTech moved its headquarters to the US and now has its own facility in Chicago that will serve as a base for further research and development. The company want to work on its genetically modified organism (GMO) portfolio - creating microbes that eat waste gases and produce biofuels, for example - and US regulations in this area are less limiting than in New Zealand.

Beyond that, LanzaTech will continue to leverage its venture capital investors to commercialize these new products. "You can choose to not give up part of the company and be on your own and do things slowly, or you can choose to share the company and get on with business," Holmgren says. "We chose to share part of the company. To me, there is no other way to move forward."

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• Topics
• Venture
• Expansion
• Cleantech
• Australasia
• Greater China
• New Zealand Superannuation Fund
• New Zealand
• Cleantech
• Venture
• Growth capital
• Khosla Ventures
• Qiming Venture Partners
• China