For Solazyme, a Side Trip on the Way to Clean Fuel

They graduated, and the backpacking trips grew shorter and further between. Mr. Dillon went on to earn a Ph.D. in genetics and a law degree, and ended up working as a biotech patent lawyer in Silicon Valley. Mr. Wolfson received law and business degrees from New York University and eventually started a software business. But the two still got together every year. And they kept talking about the company that, they imagined as time went on, would use biotechnology to create renewable energy.

“These were delusional rantings of kids,” said Mr. Wolfson, who, like Mr. Dillon, is now 42.

Then Mr. Dillon found microalgae, and delusional became real. Microalgae, a large and diverse group of single-celled plants, produce a variety of substances, including oils, and are thought to be responsible for most of the fossilized oil deposits in the earth. These, it seemed, were micro-organisms with potential. With prodding, they could be re-engineered to make fuel.

So in 2003, Mr. Wolfson packed up and moved from New York to Palo Alto, Calif., where Mr. Dillon lived. They started a company called Solazyme. In mythical Valley tradition, they worked in Mr. Dillon’s garage, growing algae in test tubes. And they found a small knot of investors attracted by the prospect of compressing a multimillion-year process into a matter of days.

Now, a decade later, they have released into the marketplace their very first algae-derived oil produced at a commercial scale. Yet the destination for this oil — pale, odorless and dispensed from a small matte-gold bottle with an eyedropper — is not gas tanks, but the faces of women worried about their aging skin.

Sold under the brand name Algenist, the product, costing $79 for a one-ounce bottle, would seem to have nothing in common with oil refineries and transportation fuel. But along with other niche products that the company can sell at a premium, it may be just the thing that lets Solazyme coast past the point where so many other clean-tech companies have run out of gas: the so-called Valley of Death, where young businesses stall trying to shift to commercial-scale production.

For years, policy makers, environmentalists and entrepreneurs have trumpeted the promise of harnessing the power of the sun, wind, waves, municipal solid waste or, now, algae. There has been some success. Since 2007, United States energy consumption from renewable sources has grown nearly 35 percent, and now accounts for about 9 percent of the total, according to the Energy Information Administration.

But the gains have been punctuated with prominent failures. Once-promising clean-tech ventures that attracted hundreds of millions in federal support — like the solar panel maker Solyndra, the cellulosic ethanol maker Range Fuels and the battery supplier A123 Systems — have failed. While ethanol, derived from crops like corn and sugar cane, has become a multibillion-dollar industry, it threatens to drive up the price of those plants for food and cannot yet replace conventional fuel. The next generation of biofuels, based on nonfood plants, is still struggling to take off.

Venture capital, which once gushed to renewable-energy start-ups like crude from an oil well, has slowed. In contrast to software-based companies like Instagram or Facebook, these new energy businesses burn through staggering amounts of capital over many years for research and early-stage equipment before even demonstrating their promise, much less turning a profit. Worldwide in 2012, venture capital investing in clean technologies fell by almost one-fourth, to $7.4 billion, from $9.61 billion in 2011, according to the Cleantech Group’s i3 Platform, a proprietary database.

“These are very high-innovation, capital-intensive, long-term businesses, and new-energy technology is a very new field,” said David Danielson, a former venture capitalist who is assistant secretary for energy efficiency and renewable energy at the Energy Department. “We need a new model for how these projects are going to get financed and commercialized.”

In other words, clean-energy companies can’t rely only on the classic venture-capital approach in which investors demand a fat, fast return. Mr. Danielson said that to succeed, companies need a combination of government research-and-development grants, industrial partnerships and a willingness to pursue higher-value product lines en route to entering larger, but lower-margin markets.

“The problem with a lot of clean-tech deals is that they have been about the way you make things in high volume or in production, which means you can’t prove out the ideas unless you build factories and actually make things in volume,” said Andrew S. Rappaport, a venture capitalist who is a board member of Alta Devices, a solar film start-up.

That company is one of a handful that, like Solazyme, is pursuing niche markets for its core product, in its instance developing fast-charging cases for smartphones and tablets, until it can produce low-cost, commercial quantities of solar materials for homes and businesses. A Bay Area start-up called Amyris, meanwhile, has shifted its genetically engineered yeast toward chemicals and cosmetic ingredients as it tries to build a biofuel business.