In 2004 and 2005, VCs were largely planting small seed investments in synthetic biology and genetic modification companies. All of these deals were less than $10 million in size. But VCs quickly realized that successful exits depended on scaling production of bio-based fuels. Combined with mandates for increased ethanol production set in the Energy Policy act of 2005, this motivated VCs to change course and begin making gargantuan investments in large-scale plants for corn or cane fermentation. Over the course of 2006 and 2007, VCs put $859.2 million in first-generation ethanol alone.
Even before the financial crisis of 2008, however, investing in large-scale plants was yielding VCs poor returns. By the end of that year, VCs had changed tack again, shifting focus from end product to other start-up features, such as flexible process technologies, capital light business models, and new geographies. They also made smaller investments in a range of other technologies, including cellulosic fermentation (Qteros’s $3.5 million Series A round in 2007), algae photobioreactors (Sapphire Energy’s $50 million Series A in 2008), and other chemical processes (Segetis’s $17.2 million Series B in late 2009).
Overall, in 2009, VCs invested $877 million across 51 deals for bio-based fuel and materials production, signifying a 26% drop from 2008.
Source: Lux Research report Navigating Through Scale to Successful Exits: A Compass for Biofuel and Biomaterial Investors.
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