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Monsanto Provides Substantial Boost For Local Startup

SAPPHIRE ENERGY INC.

CEO: Jason Pyle.

Financial information: Would not disclose.

No. of local employees: 100.

Investors: Monsanto, Arch Venture Partners, Wellcome Trust, Cascade Investment, and Venrock.

Headquarters: Torrey Pines area of San Diego.

Year founded: 2007.

Company description: The privately held company focuses on what it calls ‘green crude’ production — using synthetic biology to transform algae into gasoline, diesel and jet fuel.

What does Monsanto Co., the St. Louis-based behemoth of agriculture and biotechnology, have in common with San Diego’s green-fuel startup Sapphire Energy Inc.?

At the surface, the two companies seem to have quite different business operations. One is the world’s largest producer of genetically engineered seeds for farmers. The other is seeking to commercialize renewable, algae-based crude oil that can be used for gasoline, diesel and jet fuel.

But when you take a closer look, you see that their interests are more closely aligned. For both companies, it comes down to creating an abundant crop — and doing so with the help of synthetic biology. For Monsanto, those crops include soy beans, corn and cotton. For Sapphire Energy, the single focus is algae.

That’s why Monsanto and Sapphire Energy joined in a multiyear research and development effort to discover genes that could be applied to agriculture. In conjunction with this R&D collaboration, Monsanto made a “substantive minority” investment in Sapphire, said Jason Pyle, Sapphire Energy’s chief executive officer and co-founder.

Promising Partnership

Pyle declined to disclose the amount of money invested, but said that the research portion of the deal will focus on screening for promising traits in algae that Monsanto can apply toward traditional agriculture, particularly to increase crop yield and performance under stressful conditions.

“There’s no question that we have a very strong alignment of interests and that we’ll benefit greatly from this partnership,” Pyle said of the agreement announced March 8. “We have to be able to grow algae in a very large agricultural format. We share the exact same view of scale and cost.”

Sapphire Energy must produce such a mass quantity of algae to support its aggressive goal: to produce 100 million gallons of algae-based fuel per year by 2018, and 1 billion gallons per year by 2025, Pyle said. The company’s target customers include the U.S. military and commercial airlines.

The company already has attracted the attention of other high-profile investors who are confident in its prospects for becoming a major producer of renewable fuel. In 2008, Sapphire raised more than $100 million from investors that included Arch Venture Partners, Wellcome Trust, Cascade Investment LLC (owned by Bill Gates), and Venrock, the venture capital arm of the Rockefeller family.

More recently, the company was awarded $104.5 million in federal grant funds in conjunction with its planned construction of an algal bio-refinery in southern New Mexico.

Why Monsanto Cares About Algae

For Monsanto, this marks the first time it will be using algae as a platform to screen and identify promising genes, said company spokeswoman Sara Miller. What makes algae so appealing?

Laurence Alexander, an analyst with Jefferies & Co. Inc. in New York who covers Monsanto, said Monsanto’s partnership with Sapphire Energy gives the company a unique place in the energy industry.

“I think there’s a broader theme here,” Alexander said. “It’s the intersection of agricultural, industrial, and fuel value chains. Monsanto is sitting right in the center of this. If you look at anything that’s going to be a mass-row crop, whether it’s sugar cane or wheat or algae, you’ll probably see them becoming involved.”

Still Focusing on Fuels

But for Sapphire Energy, the greatest benefit of Monsanto’s investment and collaboration is the freedom to continue staying laser-focused on its mission: to produce crude oil, said Evan Smith, co-founder of Verno Systems Inc., a Seattle-based company that provides advisory and management services to players in the biofuel industry.

Other algae-producing companies that may have wanted to create biofuels have had to switch their focus to the nutraceutical or aqua farming industries in order to support their costs, Smith said. But Sapphire “has been able to find investors willing to write very large checks and wait for this business to scale.”

Pyle said there is no question that Sapphire Energy will stay committed to its goal. “We consider ourselves to be in the crude oil business, not the product business,” he said.

Yet, that kind of focus does come with risks, Smith noted.

“As Sapphire forgoes the opportunity to produce any high-value nonfuel products, they are making one gigantic bet on fuel,” Smith said. “It’s an incredibly capital intensive pathway to commercialization, and given that there are no byproducts they can fall back on, it’s all or nothing for them.”

Kelly Quigley is a freelance writer for the San Diego Business Journal.

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