Lux Research study addresses future of biorefining investments

By Erin Voegele | August 24, 2011

A new study by Lux Research Inc. has found that although investment in alternative fuels remained flat last year, funding for feedstock-agnostic and end-product flexible technologies was more common. According to Lux Research, in 2010 investors contributed $930 million to alternative fuel startup companies, which represented a four-year low. However, investment dramatically climbed to an all-time high of $698 million for companies that are flexible in terms of feedstock and end products. Lux Research notes that as this trend continues, startups with less flexible technologies will be forced out of the industry.

To complete the study, Lux Research compiled a comprehensive database of all the investments in the alternative fuels space since 2004, said Andrew Soare, an analyst with the organization. “The sort of investments we tracked were venture capital, private equity and corporate investment,” he said. However, government investments were not addressed. Data used to compile the database came from Lux Research’s intelligence service, as well as U.S. Security and Exchange Commission filings, press releases and other news reports.

The study also contracted and compared investments that have been made by corporate investors with those made by institutional investors, such as private equity firms and venture capitalists. According to Soare, 74 percent of total investment since 2004 came strictly from institutional investors. The remaining 26 percent came from corporate investors, or was split between the two categories. “While the investment in aggregates is down by venture capital firms and private equity, [which] decreased significantly since 2007, corporate investment has stayed relatively steady, which is interesting,” he said.

Furthermore, Soare noted that institutional investors have had a greater tendency to invest in companies with less flexible technologies that have lost money, while corporate investors have been more attracted to companies focused on synthetic biology and waste thermochemical conversions. “The majority of corporate investment was definitely focused very significantly on flexibility,” Soare said. “I think the corporate investors have a better understanding of how flexibility is key to commercialization.” In the long-term, he also states that trends point toward investment dollars shifting from biofuels to biochemicals.

Additional findings of the study include that while synthetic biology’s inherent flexibility is a wise investment, it’s not the only one. Catalytic approaches that can produce a wide range of fuels and biobased products are also attractive. In addition, technologies capable of using agricultural, solid or gaseous waste also represented strong investment opportunities.

According to the study, going forward investment will favor fewer companies in later-stage funding. Lux Research states that those closest to commercial-scale production will continue to raise large Series C and D founds of financing, while less advanced companies will struggle to land moderate earlier rounds. This is likely to result in more failed startups in the next few years.

Lux Research also anticipates that new corporate investors will enter the space in the near-term. Although energy and agricultural companies have dominated the corporate investor space to date, waste management, pulp and paper and food and beverage companies, as well as non-obvious downstream brand owners will enter the space. 

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