Are There Lessons for Biofuels from the Rise & Fall of the Dot-Com Bubble?

Interestingly enough, many of the same characteristics of the difficult dot-com rise and fall are present in the current biofuels boom being experienced around the world.

The dot-com bubble was marked by unrealistic speculation involving faulty business models. The resulting business plans overestimated projections, included wild claims about market share, often did not consider factors such as logistics, and were backed by an impressive list of bios for personnel who passionately believed in the potential for the new companies but many times lacked legitimate experience.

In hindsight it has been apparent that basic business development questions should have been asked such as, "How long has the management team worked together?" Unfortunately these and other crucial questions were often ignored in the wave of excitement. Sound familiar to what is going on now?

Yet another component to the popping of the bubble was the fact that the dot-com's were fueled by venture capitalists and an investment climate fed by low interest rates and a strong economy. Many of the more conservative investors continued to scratch their heads, but ended up coming along for the ride based on the frenzy and novelty that was perpetuated by well-meaning entrepreneurs. People were led to believe that they had to be on the "in" although they did not necessarily understand the new business paradigm.

A similar trend has manifested with the biofuels boom as investors are attracted to the originality and the cause behind the business concepts. In fact, with issues such as global climate change, rising energy costs, and the Iraq war, there is a strong and altruistic demand for answers that are pulling along the entrepreneurs and investors.

One of the mainstays of the dot-com bubble business model was the use of investor money to fuel a net loss with the goal being the acquisition of market share. This strategy reminds me of many models I have seen in the biofuels industry that make the assumption that bigger is definitely better. However, this may not be the case in emerging technologies such as cellulosic ethanol in which I believe the winners will be the companies that are going from lab to pilot scale before ever pushing a scaled-up model. Investment in research and development may be a better bet than infrastructure at this point in the game.

The aforementioned is a much more diligent approach considering the variety of high-value products and corresponding markets whose ramifications on the industry are not fully understood, leading to many assumptions that may be flawed. I continue to believe that those projects that have access and logistic capabilities to involve multiple feedstocks while having the flexibility to add value as technology and markets develop will be the ones that will ultimately succeed.

So even though the parallels and perils of the "Dot-com Mentality" to the current biofuels industry should be obvious, does this make the inevitable consolidation and failures on the horizon bad news? Not necessarily. In fact, we should begin preparing now in the media, through open discussions and politics, to tell the story of the companies that emerged from the "Dot-com Bubble Burst" such as Google, Amazon, and Yahoo, and the fact that similarly strong players will emerge from the biofuels boom/bust.

There will be some exciting companies that materialize from the coming shakeout as true powerhouses in genetics, biotechnology, enabling technology, logistics, processing and and downstream value-added products.

Please feel free to contact Pete Nelson of BioDimensions at pnelson@biobased.org to discuss this article. This article is republished and used with permission of BioDimensions.