SOURCE: Lux Research

Lux Research

October 01, 2009 09:00 ET

Biofuels Pitfalls Confront VCs in Non-Medical Biotech

Despite $4.2 Billion Invested, Non-Medical Biotechnologies Like Biofuels Now Require New Tactics for VCs, Says Lux Research

BOSTON, MA--(Marketwire - October 1, 2009) - 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.

"VC investments in non-medical biotech have been driven almost entirely by biofuels," said Samhitha Udupa of Lux Research, the report's lead author. "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 of the field -- new thinking is needed."

The report is based on 49 primary interviews with VCs, corporate investors and start-ups, as well as a comprehensive database of 286 institutional venture funding rounds in 170 non-medical biotech start-ups from 1998 through 2008. Among its conclusions:

--  Initial public offerings (IPOs) will be on hold for the near future.
    IPOs are off the table given the harsh economic environment and the
    fluctuating stock market. However, well-funded corporate investors aiming
    to enter the biotech space stand to benefit from the market's dismal
    economic straits. Expect more biotech start-ups to successfully exit
    through mergers and acquisitions rather than IPOs for at least the next
    year.
    
--  Next-generation bio-energy will gain momentum as corn ethanol start-
    ups fold. Next-generation bio-energy firms will see significant investment
    in the coming three to five years. Many start-ups have only begun capital-
    intensive scale-up to demonstration or commercial levels. Meanwhile,
    investments will dry up in corn ethanol as more VCs realize that the
    market's viability is driven by corn and oil prices more than scale of
    production.
    
--  Genetically modified (GM) food technologies will attract more
    investment. Four of the past decade's nine successful exits occurred in GM-
    food companies, for a total value of approximately $160 million. That,
    combined with increasing concerns about water scarcity, will attract more
    VC funding for GM-food crop technology.
    

"Investors can use three strategies to find their way out of the woods," said Udupa. "They should apply concrete lessons from recent successes and failures, take a portfolio approach to feedstocks and products, and target newer opportunities in food, water, and carbon."

"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 Lux Research

Lux Research provides strategic advice and on-going intelligence for emerging technologies. Leaders in business, finance and government rely on us to help them make informed strategic decisions. Through our unique research approach focused on primary research and our extensive global network, we deliver insight, connections and competitive advantage to our clients. Visit www.luxresearchinc.com for more information.

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