Report projects reduced VC funding for cellulosic ethanol

A report recently competed by Lux Research concluded that venture capitalists’ (VCs) interest in funding cellulosic ethanol has passed its peak. The report, titled “Funding Exits for Biofuels and Biomaterials Investors,” found that venture funding for agricultural and industrial biotechnology gained considerable momentum during the last decade, soaring from $47 million in 1998 to $1.2 billion last year. However, only nine of the 170 CV backed companies researched in the study have seen successful exits to date. According to Samhitha Udupa, the report’s lead author, a successful exit occurs when a VC-backed company is acquired or completes an initial public offering (IPO).

To complete the report, Samhitha said her team built a database of institutional VC funding rounds in start-ups that dated from 1998 through 2008. The team identified 286 transactions spanning 170 companies across 27 countries. “We gleaned publically announced VC transactions from the PriceWaterhouseCoopers / Thomson Venture Economics / National Venture Capital Association MoneyTree survey, Capital IQ, trade publications, press releases, and other secondary sources,” Udupa said. “We completed the resulting data set with unannounced transactions sourced from our network. In addition, we drew on 49 primary interviews with developers and investors in the space. We believe that the database represents 90 percent to 95 percent of all VC investments in the space.”

The report is designed to dig below the surface of agriculture and industrial biotechnology to reveal more nuanced patterns of VC investment in genetically modified food and energy, pest resistance, biomaterials, chemicals, industrial enzymes, and first- and next-generation bio-energy. “VC investments in non-medical biotech have been driven almost entirely by biofuels,” said Udupa. “But VCs have been too distracted by high oil prices, had too few real guideposts, and been too smitten by the enthusiasm of politicians and a few lead investors to make a sober diagnosis in the field – new thinking is needed.”

According to Udupa, 20 of the 170 companies studied were first generation ethanol companies, including both corn-based and sugarcane-based ethanol producers. Among the ethanol companies, Udupa said there were two successful exits; VeraSun Energy Corp., which completed an IPO, and Celunol Corp., which merged with Diversa Corp.

The report makes several predictions regarding future investment in biofuels. According to Udupa, the research predicts that VC investments in corn ethanol are essentially over. “Interest in cellulosic ethanol has passed its peak as well,” she said. However, she also noted that some investment in cellulosic ethanol will continue due to renewable fuels mandates that have been established by the government. She also predicts that investments in biodiesel technologies are on the rise. “There has also been a noticeable shift in attention to biofuel companies that can produce more than just one product using the same overall process,” Udupa continued. “These companies can hedge against the volatility of oil prices – which ultimately determine the true competitiveness of their bio-based fuels again their petroleum-driven counterparts.”

The full report is available for purchase from Lux Research. It is approximately 30 pages long and includes historical industry trends, as well as projections for future investment. According to Udupa, the report also includes predictions on which market and technology-based factors will catalyze future shifts in VC investment strategies.

source: ethanolproducer