By Samhitha Udupa -- Venture funding for agricultural and industrial biotechnology gained considerable momentum over the past decade, soaring from $47 million in 1998 to $1.2 billion last year. Yet, of 170 companies backed during that period, only nine have seen successful exits to date. That’s left venture capitalists (VCs) with few clues to predict which sectors hold the most future promise, according to Lux Research’s latest report, titled “Finding Exits for Biofuels and Biomaterials Investors.”
The report digs below the surface of agricultural 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.
Venture capital firms fund the innovations that bring many industrial and agricultural biotechnologies from lab to marketplace. Conventionally, agricultural and industrial biotechnologies are categorized broadly as “green” or “white” technologies. However, for the purpose of their report, Lux Research categorized companies by their specific technologies and applications, as they believe that the VC investment patterns are much more nuanced. The applications comprise GM-food (genetically-modified-food), GM-energy (genetically-modified-energy), pest resistance, biomaterials, chemicals, industrial enzymes, first-generation bioenergy, and next-generation bioenergy.
Lux Research has built a comprehensive database of institutional venture capital funding rounds in agricultural and industrial biotech start-ups from 1998 through 2008. They found that $4.17 billion in venture capital has gone into 170 individual start-ups during this period over 286 investments across 27 countries. VC spending reached its nadir in 2007, after which the financial markets crashed and VCs tightened their grips on their proverbial purse strings. At the highest level, Lux found that:
VC investments in agricultural and industrial biotech are down in 2008.
Overall, venture capital investments in industrial and agricultural biotech increased (with fluctuations) from $47 million in 1998 to $1.41 billion in 2007. A notable turning point occurred in 2006, which marked a tenfold increase in value over 2005 (mostly due to bioenergy investments). However, with the changing economic tides of 2008, VC investments significantly decreased both in cumulative deal number and value, with only $1.18 billion raised over 62 deals – a 16% decrease in value from 2007.
Early-stage investments in bioenergy have dominated since 2004.
Unlike most technology-based venture investments, average first-round investments in bioenergy companies are very high, due to the high capital costs involved in achieving the scale required for a high-volume product like fuel. For this reason, even though most bioenergy companies have only completed Series A or B rounds of funding, these companies account for $3.5 billion, or 85% of total transaction value over the 10-year period. Traditionally, VC returns are analyzed by looking at exits via initial public offering (IPO) or acquisition. Additionally, these exits typically drive future VC investment trends in specific technology areas. However, a surprisingly low number of VC-backed firms have successfully exited since 1998, leading Lux Research to look to policy and “follow the leader” mentality as catalysts for VC behavior. Based on this assessment, Lux predicts that:
VC interest in first-generation fuel technologies will continue to wane.
The initial boom in corn ethanol investments occurred immediately following the signing of the Energy Policy Act of 2005, marked by large deals like Cilion’s $160 million Series B. However, when markets took a hit in 2008, the poor economics of corn ethanol became apparent, and now about 66% of corn ethanol plant capacity lies dormant in the U.S. alone. Even cane ethanol plants, which are economically viable in Brazil, will cease to see VC investments, as sugar refineries will turn to debt financing to fund their factories. However, given that ramping ethanol production (or any biofuel for that matter) is a capital-intensive process, Lux expects that development and scale-up will be stalled until the economy recovers.
GM-food technologies will become more attractive.
Four of the nine successful exits occurred in GM-food companies for a total value of approximately $160 million. Yet, VCs continue to focus their attention on bioenergy technologies, which are too immature to merit investment through exit performance. In coming years, water scarcity will become more of a concern than dwindling fossil fuel deposits, causing innovations in GM-food crops to occur outside agrichemical corporations to garner VC funding, and eventually exit via acquisition.
“Finding Exits for Biofuels and Biomaterials Investors” is part of the Lux Biofuels and Biomaterials Intelligence service. Clients subscribing to this service receive ongoing research on market and technology trends, continuous technology scouting reports and proprietary data points in the weekly Lux Research Bio Journal, and on-demand inquiry with Lux Research analysts.
About the Author
Samhitha Udupa is a Research Associate at Lux Research on the Biosciences Intelligence team. She has conducted extensive primary and secondary research in biofuels, biomaterials, targeted delivery, synthetic biology, and other areas of emerging biosciences. She is the lead author of the report titled “Finding Exits for Biofuels and Biomaterials Investors.” Samhitha holds a B.S. in Bioengineering from the University of Pennsylvania.
About Lux Research
Lux Research provides strategic advice and on-going intelligence for emerging technologies. Leaders in business, finance and government rely on Lux to help them make informed strategic decisions. Through their unique research approach focused on primary research and their extensive global network, Lux Research delivers insight, connections and competitive advantage to their clients. Visit www.luxresearchinc.com for more information.