Report: venture capitalists not interested in ethanol

By Erin Voegele | November 11, 2009
According to a report recently completed by Lux Research, venture capitalists' (VCs) interest in funding cellulosic ethanol projects has already passed its peak. Furthermore, the results of the report, titled "Funding Exits for Biofuels and Biomaterials Investors," show that VC investment in corn ethanol is essentially over.

To complete the research, Samhitha Udupa, the report's lead author, said her team built a database of institutional VC funding rounds in non-medical biotech startups from 1998 through 2008. The team identified 286 transactions conducted by 170 companies in 27 countries. In addition, Udupa said the team gleaned information from publically announced VC transactions from the PricewaterhouseCoopers MoneyTree survey, Capital IQ, various trade publications, press releases and other secondary sources. "We completed the resulting data set with unannounced transactions sourced from our network," she continued. "In addition, we drew on 49 primary interviews with developers and investors in the space." Udupa said her team believes the resulting database represents between 90 percent and 95 percent of the VC investments in the non-medical biotech space during the period evaluated.

The study demonstrates that venture funding for agricultural and industrial biotechnology gained considerable momentum over the past 10 years, increasing from approximately $47 million in 1998 to $1.2 billion last year. However, while investment soared during this time, only nine of the 170 VC-backed companies identified by the team have seen successful exits to date. A successful exit occurs when a VC-backed company is acquired by another entity or completes an initial public offering.

According to Udupa, 20 of the 170 companies studied by her team were first-generation ethanol companies. The team did not break these down further into corn-based and sugarcane-based ethanol producers. Among these 20 companies, Udupa said only two have seen successful exits; VeraSun Energy Corp., which completed an IPO, and Celunol Corp., which merged with Diversa Corp.

Several predictions are made in the report regarding future investment in biofuels. This includes findings that investments in corn ethanol projects are essentially over. "Interest in cellulosic ethanol has passed its peak as well," Udupa said. This prediction seems to be demonstrated by current quarterly data included in PricewaterhouseCoopers MoneyTree report. The report showed that only one cellulosic ethanol company, Cello Energy, had received VC funding during the second quarter of 2009.

However, Udupa also noted that some investment in cellulosic ethanol will continue, largely due to the renewable fuel mandates that were established by the Energy Independence and Security Act of 2007. Although VC interest in cellulosic ethanol is expected to decrease, Udupa said the report 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," she said, offering examples that include Amyris Biotechnologies and Solazyme Inc. "Such companies can hedge against the volatility of oil prices, which ultimately determine the true competitiveness of their biobased fuels against their petroleum-derived counterparts."

Udupa said that overall, the report is designed to dig below the surface of agricultural and industrial biotechnology in order 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 bioenergy. "VC investments in non-medical biotech have been driven almost entirely by biofuels," she said. "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 fieldnew thinking is needed."