Plant eaters

Executives with Qteros inc., a startup named for a lowly, but powerful, microbe, believe they hold the key to solving a long-standing renewable energy problem: producing plant-based ethanol with a minimal carbon footprint.

Indeed, the Hadley, Mass., company, which was founded as Sun Ethanol in late 2006, recently changed its name to honor the so-called Q Microbe its technology is based on. The Q Microbe is a naturally occurring organism that a University of Massachusetts Amherst microbiology professor, Susan Leschine, discovered 10 years ago in the forest soil of western Massachusetts. Since then, she and a team of four others who jointly founded the company have been studying the way it works and trying to enhance its productivity. The company hopes to introduce its first commercial product by 2011.

"It basically consumes plant matter and spits out ethanol," says Jef Sharp, executive vice president and co-founder of Qteros. "We have so far scaled its productivity up 15-fold, and if we can scale that up another two-fold, there will be no question that it will be the most cost-effective solution for manufacturing ethanol."

Although ethanol is a clean-burning fuel, critics have long pointed out that producing it is energy-intensive. Using a natural organism like the Q Microbe to produce ethanol helps reduce the carbon-based byproducts of that process, which get trapped in the atmosphere and worsen global warming.

Venture, hedge fund and strategic investors are on board. Qteros in November raised $25 million in a Series B round of funding led by venture firm Venrock Associates of Palo Alto, Calif. The other participants in the round were Battery Ventures, BP plc, Camros Capital LLC, Long River Ventures and Soros Fund Management LLC.

Jason Matloff, a partner with Waltham, Mass.-based Battery who invested in both the latest round in Qteros and the startup's earlier Series A funding, says the Q Microbe is a potentially powerful source of cellulosic ethanol. It has a "very strong predisposition to metabolize cellulose that appears to be unmatched by many of the competing genetically modified organisms," he says. -- Andrea Orr

"Jonathan Schwartz and his team have demonstrated remarkable vision and strong discipline in executing its turnaround strategy. This leadership ... underscores the company's ability to sustain its recent momentum and the gains it has made in the marketplace."

-- George Roberts, co-founder of Kohlberg Kravis Roberts & Co., January 2007

Oops. Sun Microsystems Inc.'s market capitalization was $20 billion when New York private equity firm Kohlberg Kravis Roberts & Co. invested $700 million in the company nearly two years ago. A few months later, in May 2007, KKR co-founder Henry Kravis would characterize the period as "the golden era of private equity."

Today, Sun's market value is $2.2 billion. Sun CEO Jonathan Schwartz is axing jobs. The encomiums have stopped.

As was typical at the time, KKR levered up on its investment in Sun. The deal took the form of a private investment in a public entity, or PIPE, with the buyout firm providing equity for only half the funding and borrowing the balance. It looked like a modest deal. Such leverage was peanuts compared with the massive PE deals that punctuated those halcyon days, suggesting that KKR was willing to accept a smaller, but secure, return. Sun also had strong cash flow, smart leaders and stellar technology parked in lots of big financial institutions and corporations. Meanwhile, KKR was no newcomer to technology. In recent years the firm has dived deep into tech, buying companies such as chipmakers Avago Technologies Ltd. and NXP Semiconductors (which, like Sun, KKR has recently had to write down) and software and data storage provider SunGard Data Systems Inc.

KKR took the stake in Sun through its publicly listed (in Amsterdam) KKR Private Equity Investors LP fund. The idea was to warm Sun's stock in the glow of KKR's reputation for adding value to distressed, but undervalued, companies. Meanwhile, Sun got cash and access to an all-star team of turnaround pros.

It hasn't worked out. Sun increasingly looks like a tech industry footnote. Shares in KKR PEI have tumbled of late, after it reported steep third-quarter losses and said a planned merger with KKR would be delayed until 2009.

The private equity firm will survive, even as more of its portfolio companies fester and deleveraging shrivels its returns. Will Sun Microsystems? -- A.S.