Many biofuel companies are finding the best way to make money is to stay away from biofuels, at least for a while.

A number of biofuel companies are first focusing on industrial chemicals or food supplements as they seek a route to get out of the lab and into the market. Chemicals used in everyday products, such as rubber or plastics, are also made from oil as fuels are but they can command higher prices than gasoline and diesel.

Start-up Verdezyne today will announce that BP Alternative Energy Ventures and Dutch chemicals company DSM are investing in the Carlsbad, Calif.-based company. The money will allow Verdezyne to build a pilot plant to make adipic acid, which is used for fiber in carpets or as a precursor to plastics. The process, which uses genetically engineered yeasts, will be more environmentally benign and cheaper than oil, said Verdezyne CEO E. William Radany.

"You've got to generate the sort of margin that you would via petrochemical method. Otherwise, why is anyone going to commit the assets to build a plant," Radany said. "The cost of manufacturing the traditional way has gone up with the rising cost of petroleum and it's a very noxious process."

Chemicals get less attention than fuels but they represent a large potential market. Amyris, which recently signed a contract manufacturing deal to make chemicals and fuels from sugar cane in Brazil, estimates that the specialty chemicals market is about $400 billion annually compared to jet fuel which is over $1 trillion, according to Jeri Hilleman, the chief financial officer of Amyris. In its first large-scale plant in Brazil, it will make farnesene, a hydrocarbon which is used for cosmetic products and lubricants.

"We absolutely see ourselves as a biofuel company as well as a renewable chemical company. But we can produce chemicals with positive gross margins today whereas fuels will take a little more time to bring production costs down," said Hilleman. "We can sell chemicals more quickly and profitably than fuels."

Green chemistry Out of a given barrel of oil, a significant portion--on the order of 15 percent--goes to products other than diesel, gasoline, jet fuel, or heating oil, according to the Energy Information Administration. Many biofuel companies, such as Joule Unlimited and Kior, will first target the fuels market, but over the years a number of companies have sidestepped the challenges of supplying fuel by focusing on renewable chemicals or other products.

Aurora Algae, once called Aurora Biofuels, last year switched gears away from diesel replacement to food products, including animal protein, feed, and Omega 3 oils.

Solazyme, which grows algae in industrial fermenters, is spreading its bets across fuels, food oils, and skin care products. Codexis, which went public last year, has a diversified "green chemicals" strategy applying its specialty enzymes technology to make low-carbon biofuels, pharmaceuticals, and industrial chemicals.

A number of companies are making biofuels and renewable chemicals using industrial fermenters where genetically engineered microbes, such as bacteria, secrete the targeted chemical.

Biotech companies that use genetic engineering say they can modify their microorganisms to make different products. Synthetic biology company LS9, for example, has genetically modified bacteria to produce replacements for gasoline or diesel. Using the same fermentation process with different "designer microbes" yields chemicals for consumer goods products through a partnership with Procter and Gamble.

This sort of pattern will play out as renewable chemical companies seek a profitable niche as they eye the larger fuel market, say industry watchers. It's an approach that could help biofuels other than corn ethanol get a commercial foothold.

Certain molecules typically refined from oil serve as "building blocks" for other products, according to Gevo CEO Pat Gruber. Using sugar or cornstarch, the company's genetically engineered yeast makes isobutanol and similar chemicals used in making rubber, plastics, or kerosene.

To avoid the large upfront cost of building new biorefineries, Gevo's strategy is to retrofit corn ethanol plants with its equipment to make its chemicals. The chemicals themselves are identical to those made from oil, making them seem less risky to potential customers.

"We don't do anything new except that it's renewable, cheaper, and cleaner. And we expect the cost of oil will go up faster than our (carbohydrate) raw materials." said Gruber. "Making chemicals instead of fuels is just a pragmatic thing."

Verdezyne has parallel efforts to use its yeasts to improve the yield on ethanol production and to make adipic acid. It sees petroleum suppliers, or chemical companies which consume large amounts of oil, as potential customers mostly for economic reasons. "There's some market pull for being green but ultimately it comes down to price and performance," said Radany.