How Investing in the Cow Shit Industry can Go Wrong (A Misadventure in Biogas)
Shit is a shitty investment. Who could have guessed?
From here the jokes are so obvious I won’t bother with them. It’s enough to say if this was fiction it would be a little too convenient, but as non-fiction I find it hilarious.
Here is a short interview with Joe Malcoun about his investment into a Biogas company (turning manure into energy to resell to a utility). I’ve always been fascinated with renewable energy, especially reusing waste material, so I particularly enjoyed this post.
Joe’s is an interesting story because of the depth of his expertise. Even knowing everything there was to know about the industry, the economics, and the mechanics of the company… the thesis crumbled because of one variable that wasn’t included in his investment process (and another input the was a red herring).
Here’s Joe:
Who are you, what is your story?
My name is Joe Malcoun and I’m a midwest born and raised, three-time Michigan alum with a very high appetite for risk. I invest in a lot of different things including startups, real estate, energy projects and progressive political activism. My “first career” was in sustainability and energy, and I’ve since become a tech entrepreneur. I’m the CEO of a software company called Nutshell. We provide elegantly designed and easy to use sales software for growing teams. I am also very actively involved in building out the Ann Arbor, MI startup scene. As co-founder of Cahoots — a nicely appointed and amenity-filled work and play space for entrepreneurs in downtown Ann Arbor — I’ve really put my money where my mouth is.
Where did you get the investment idea?
Before business school I worked for a corporate sustainability consulting firm called, GreenOrder. One of the Principals at the company was partnering with a fairly impressive group of accomplished businessmen to develop biogas energy projects on dairy farms near Bakersfield, CA. I was tasked with supporting his research for this opportunity. Fast forward…after business school I spent nearly four years as a on DTE Energy’s Strategy and M&A team and was about to embark on a new career as an independent investor. When I shared my status update with my contacts, I received a reply from the partner at GreenOrder asking me if I’d like to participate in a new capital raise for the biogas projects.
What was the idea?
The management team had partnered with the largest dairy operator in California to secure a substantial source of cowshit for their biogas operations. They also hired an engineering and operations team to build out biogas digesters and generator sets on two different locations. The electricity generated from these systems was contracted for PG&E to buy under a specific requirement the utility had to source a portion of their renewable energy from precisely these types of projects. Additionally, the federal government was providing significant tax credits that would help return the initial capital investment quickly.
What did you do to research, understand, de-risk, and diligence the plan?
I already knew a lot about this area. I was probably as much of an expert on the economics of renewable energy projects as one could be at this point in time. I spent a ton of time digging into the financial model and researching the state and federal policies that would impact the project. I even got in touch with contacts I had at PG&E to ensure the power purchase agreement assumptions were valid.
What did you think would happen?
I was really confident that this investment was going to be a nice source of cashflow. The model and economics seemed to make a lot of sense given all that we had assumed.
What happened?
The project has been a disaster. It has significantly underperformed in every way for the entirety of its existence. Mechanical failures. Digester efficiency problems. Cancellation of the federal tax credits. Absolutely shit communication from the management team. To date, I have only recovered a small portion of my capital.
Why did that happen?
I think the biggest failure here was a management team that, on paper seemed like rockstars, but in reality was simply inexperienced. They relied more on who they knew than what they knew and have not been very effective at quickly mitigating the downside. I had WAY too much confidence in them. This was the first of many failures that I describe as “never invest in something because you are impressed with the other investors”. This has always failed me, including an investment I made alongside big names like Sheryl Sandberg.
How did this all end?
It hasn’t. I can’t decide if that’s a good thing or a bad thing. I continue to harass them every few months for information and plans and continue to be wholly disappointed by what I get back.
What did you learn?
First, when someone tells you there is an absolute minimum investment, don’t ever believe them. One of the reasons I have been particularly upset by this deal is that I took them at their word that there was a minimum and then later found out that they allowed others in for much lower amounts. This was my FIRST big investment and it was substantial for me. I wish I hadn’t put so much at risk.
Second, don’t ever invest in something because you are impressed by the investor list. I definitely told myself “Oh wow, the former Secretary of Agriculture definitely knows what he’s doing.” and “Well, if my former boss is in this, it’s gotta be a good deal.” Total bullshit.
What should we learn from you?
Never invest in biogas deals. Never.
From this story, two things jumped out to me:
The main cause of failure (from Joe’s perspective), which was the inexperienced management team, wasn’t a part of the research process. We tend to focus on our areas of expertise. Joe knew well how to due-diligence the economics, so that was where he focused.
Another thing was that some additional confidence came from a data point barely correlated with the success of the project (other investors). It is hard to throw out evidence like this which is “comforting” but not necessarily supporting evidence of success.
The “meta” part of the analysis is very difficult to see — zooming out to a layer above each piece of evidence, and sorting out which variables should be counted, which should be ignored, and how to be sure you’re looking everywhere at all risk points possible.
If you have a story of losing money and getting your ass kicked — write it up and share it with us! I’ll publish stories of all kinds contributed from readers as posts (anonymously if you prefer).
You are welcome to write it yourself. If it’s easier for you, I’m happy to hear the story over the phone and turn it into a post for you.
Email me about your stories: Eric@iamaterribleinvestor.com
I look forward to learning with you.
If you liked this, read other posts on I Am A Terrible Investor:Intro to I Am A Terrible Investor
The Beginner Bravado Effect, and the "shit shit shit" implication
How Horsehead Holdings made me look like a Horse's Ass
How Pranav took a 50% loss after being up 5x on Ricoh IndiaI also write deep-dives into business topics with the help of an awesome community in Evergreen.Follow me on Twitter: @EricJorgensonAnd Please... Join I Am A Terrible Investor.
