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Seed Capital: Planting Oil and Reaping Benefit

3/3/2008 --

Students use business plan competitions as “fuel” to grow venture.

ANN ARBOR, Mich.—What does it take to grow a globally sustainable, strategically viable biodiesel producer in sub-Saharan Africa?

A tiny little seed named jatropha.

Now, add the Ross School of Business, the School of Natural Resources and Environment, the Frederick A. and Barbara M. Erb Institute for Global Sustainable Enterprise, the Samuel Zell and Robert H. Lurie Institute for Entrepreneurial Studies, a string of victories in some national business plan competitions, and the support of the world’s largest mining company, BHP Billiton.

The result is nascent biodiesel firm Mozergy, which is slated for headquarters in Mozambique and helmed by dual-degree graduate students Tony Gross, Mike Hartley, Jeff LeBrun, and Ali Moazed. What began as a master’s project at the School of Natural Resources and Environment is now a robust, award-winning business plan ready to roll out of the Ross School.

 “We didn’t even know what jatropha was,” says LeBrun, referring to the hardy, drought-resistant plant whose seeds produce up to 40 percent oil. Adds Moazed: “It has kind of exploded in the past year, ever since we started looking at it.”

Cultivation

The Mozergy team discovered jatropha while evaluating renewable-energy technologies to serve BHP Billiton’s primary energy need – electricity – in the southeast African nation of Mozambique. (BHP Billiton has committed $300 million to reduce its global-emissions footprint.) Though the students determined that jatropha cultivation did not resolve the issue at hand, they did unearth an unexpected business opportunity: an agricultural/biodiesel enterprise in which local farmers could participate and generate income.

BHP Billiton did not want to launch into biodiesel production itself, but the students were encouraged to move toward a stand-alone business model that could help the company and the local community. The proposed venture dovetailed neatly with BHP Billiton’s charter to seek opportunities for economic development in the communities near its operations.

“The company saw biofuels as a way to provide local farmers with an additional cash crop, to help them modernize their agricultural practices, and to diversify their agricultural mix,” says Hartley. Jatropha grows in harsh conditions and marginal soil that doesn’t support food crops.

As the team set about developing an economic model to test the viability of jatropha biofuel production, LeBrun discovered a business-plan competition sponsored by private-equity firm Knox Lawrence International (KLI). The firm’s principals were seeking investment opportunities in Africa and had partnered with New York University’s Stern School of Business to host the KLI Africa Business Plan Competition. LeBrun convinced the team that the contest provided the perfect “gut check” to develop and test their pitch. Suddenly, the students’ master’s project with its long lead time was transformed into a high-stakes standoff with an imminent deadline.

“We had never considered Mozergy a stand-alone business until that point,” Gross says, not to mention a stand-alone business that could speak to global warming, energy security, high oil prices, and the need for economic development in Africa.

Planting

The team drew on its shared experience, gleaned from working on the Frankel Commercialization Fund and the Wolverine Venture Fund, to hone the plan. They also relied on Ross courses in international finance and new-venture creation. Plus, LeBrun already had written a business plan on biodiesel produced from algae.

Eventually, a realistic vision took root for Mozergy. (The name is a hybrid of Mozambique and energy.) Once land, equipment, and supplies could be purchased, Mozergy would implement a franchise-based model to produce raw feedstock with its own core farm at the hub. Local farmers would be employed by the company and trained to grow jatropha on a commercial scale. Mozergy would extract the raw oil, and sell the “crude” to regional and global refineries.

Farmers who successfully completed a Mozergy-endorsed agricultural-extension program could then pursue microfinance loans to purchase equipment and plant their own jatropha. Mozergy would supply the initial saplings and agree to buy the farmers’ output.

“The training and purchase agreements demonstrate to microfinance institutions that these farmers are a lower-risk investment than people who don’t have a guaranteed customer and price for their product,” Moazed says. “Therefore, the people coming from our program would be more likely to get credit.”

Mozergy would reap benefits too. “The demand (for biodiesel) is high both regionally and globally,” Gross says. “This takes the burden off Mozergy to produce everything on commercial-scale farms. It enables the business to grow more rapidly while allowing farmers to do what they do best. And instead of having to manage 20,000 people, the company can have 20,000 people supplying it while ensuring suppliers are obtaining the best plant varieties and cultivation techniques.”

Pruning

With the concept taking shape, the greatest challenge Mozergy faced was winnowing down a complex business plan into a concise presentation for KLI. “We had the capacity to convey our deep knowledge about the the issue, Mozambique, and the plan itself,” Gross says. “But we had assembled about 50 slides and two days’ worth of information in no logical order.”

The team looked to the Erb Institute’s Drew Horning and the Zell Lurie Institute’s Paul Kirsch to review the presentation. “Paul struck this great balance of telling us how far we were, but also how much potential we had,” Gross says. “He really inspired us to believe we could win, which motivated us to work incredibly hard.”

The few remaining days before the KLI event were marked by sleepless nights, a blur of finals, and a host of scheduling conflicts. LeBrun actually walked out of a final group presentation at Ross after giving the introduction, so he could catch a waiting cab, hop a plane to New York City, and arrive at NYU just moments before Mozergy took the stage. The Ross students won the $10,000 first prize, beating teams from Columbia University and the University of California-Berkeley’s Haas School of Business.

Reaping

LeBrun is now nurturing contacts with potential customers and agricultural experts in Africa and the United States. He says a U.S.-based biodiesel refinery has verbally committed to purchasing whatever crude Mozergy can produce, and may participate in the developing project. That’s good news for the team, as they raise seed capital and plan a return trip to Mozambique this summer.

“When you’re pitching to a venture capitalist, you can talk about the market all you want, but, until you can prove you have a customer, there’s a lot more risk associated with the idea,” Gross says.

The team also has applied to BHP Billiton, KLI, the Erb Institute, the Zell Lurie Institute, and the William Davidson Institute for additional funding. Meanwhile, since the KLI win, Mozergy has won a $10,000 “Dare to Dream” grant award from the Zell Lurie Institute and a $20,000 award from the Better Living Business Plan Challenge, sponsored by Wal-Mart Stores Inc. The team also represented Ross at two national business-plan competitions: the Rice University Business Plan Competition and the Global Social Venture Competition.

“We all joined the Erb dual-degree program because we had a passion for business and for making a positive impact on the world from an environmental perspective,” Gross says. Adds LeBrun: “We knew there were amazing projects and opportunities both at Ross and the School of Natural Resources and Environment. But as far as this specific project goes, I think we had no clue what we were in for.”

Written by Deborah Holdship



For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847
E-mail: bernied@umich.edu