Martin Tobias and his new business partner, John Plaza, were driving around downtown Seattle last week when a bus went by, blasting exhaust...

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Martin Tobias and his new business partner, John Plaza, were driving around downtown Seattle last week when a bus went by, blasting exhaust fumes into the air.

“Smell that?” Tobias said. “That’s diesel.”

A few minutes later, Plaza parked his Chevy pickup at a curb in Pioneer Square to demonstrate what a vehicle fueled by biodiesel smells like. Rising from the exhaust pipe was an aroma similar to popcorn.

It’s also the smell of a new career for Tobias, who in May became chief executive of Seattle Biodiesel, a small company in South Seattle that sells an alternative fuel for diesel engines.

Up to now, Tobias, 41, has made a name for himself in software, having worked at Microsoft in the 1990s and starting the Loudeye digital-music company in 1997.

He became a venture capitalist at Ignition Partners after leaving Loudeye in 2001, entering a position that perfectly suited his attraction to startups and knowledge about software. In his quest to find new industries that Ignition could invest in, Tobias began looking in 2003 at the alternative-energy sector.

It was an area ripe for investment, but so low-tech when it came to software that it didn’t fit with Ignition. Still, Tobias continued exploring the industry on his own, and the search for an Ignition investment became the search for a personal venture.

“I got more and more excited about alternative energy,” he said. “Frankly, there are too many venture capitalists looking for that next Microsoft and not enough looking for solving problems in alternative energy.”

By last year, Tobias had sold his Porsche Cayenne SUV — a big move for the self-described “speed freak” who owns five motorcycles — and he bought a Volkswagen Touareg with a diesel engine. He used up the half-tank of diesel gas in the car, and has filled it with biodiesel ever since. He later bought a diesel-powered Volkswagen Beetle.

Renewable resources

Biodiesel is made from oils or fats that are put through a chemical reaction. Most newer diesel cars can run on straight biodiesel, but often biodiesel is blended with less-expensive petroleum to bring down the cost. Some biodiesel fueling stations, such as Dr. Dan’s Alternative Fuel Werks in Ballard, sell nearly 100 percent biodiesel, which produce less harmful emissions than conventional fuel.

A gallon of the fuel was selling for $3.10 at Dr. Dan’s recently. Other gas stations were selling a gallon of regular diesel for $2.59. Dan Freeman, the owner of Dr. Dan’s, said he generally sells about 20,000 gallons of biodiesel a month.

Customers find it very “self-empowering” to reduce the impact on global warming and that “they don’t have to support foreign oil,” Freeman said. He claimed Seattle has more biodiesel customers per capita than any other city in the United States.

Tobias said he was becoming increasingly convinced that biodiesel was a great opportunity that needed to be acted on fast. He met Plaza last fall through a mutual friend and by the winter had invested $250,000 in Plaza’s new company, Seattle Biodiesel.

Tobias said he and Plaza were alarmed by the United States’ reliance on other countries for fuel.

“We have to deal with corrupt and horrible countries because of this heroin dependency on fuel that we have,” he said. “Here we are a drug addict.”

Running the company

He became more involved at Seattle Biodiesel, and by May he wanted to run the company — an idea that thrilled Plaza, a retired commercial-airline pilot. Tobias wanted to raise money, hire more people and expand quickly, and Plaza wanted a big-picture role with less focus on day-to-day operations. Tobias has since raised $2 million from private investors.

Tobias said he could have continued at Ignition and helped yet another Internet-focused startup, but he preferred to learn something he didn’t know much about. He admits he’s no biodiesel expert but said he is bringing to an old-fashioned industry the lessons he’s learned in the software world.

“One of the things that this industry needs is a professional management approach,” he said. “A risk-taking, aggressive, very entrepreneurial approach which is very prevalent in the software business.”

He will still do some work for Ignition, but most of his time will be spent at Seattle Biodiesel’s plant in South Seattle.

There, the company imports 25,000 gallons of virgin soybean oil at a time from the Midwest in railroad cars. The plant processes the oil and makes about 4,000 gallons of biodiesel a day, which it sells to distributors in the Northwest who then take it to Dr. Dan’s and other retailers.

High demand

Seattle Biodiesel, which opened about two months ago, sells out of its supply every day, Plaza said. It has 30,000 gallons of storage capacity, but the tanks are empty. The company has nine employees, enough only to process fuel about 18 hours a day for five days a week.

It’s not profitable, but Tobias estimates it will make money by the end of the year.

The ultimate goal: To make a gallon of biodiesel for less than it costs to make a gallon of petroleum diesel. And not have to depend on the federal subsidies currently in place to get there. Tobias wouldn’t mind, though, if the government removed the steep state and federal taxes that saddle biodiesel and other fuels.

It isn’t possible to drop the cost that much without subsidies, say some.

“You can’t do it on an economic basis without a government subsidy,” said Bruce Finlayson, a chemical-engineering professor at the University of Washington. “That needs to be there if we’re going to have biodiesel.”

But Plaza and Tobias have a detailed plan. They want to hire more people and run the plant 24 hours, bumping up production and sales. They want to extract oil from local crops instead of hauling soybeans in from the Midwest.

They are also exploring ways that crops can be engineered to produce more oil. Right now, soybeans are only about 14 percent oil and 86 percent protein meal, they said.

If Seattle Biodiesel can do those things, Tobias said, the company can change the economics of making a gallon of biodiesel. Considering that the U.S. diesel market is $160 billion a year, he said, Seattle Biodiesel could be bigger than Microsoft or Boeing.

“This is not a $10 million or $15 million Seattle company,” he said. “All of a sudden, this is an Exxon-sized company.”

Kim Peterson: 206-464-2360 or