Venture capital funding reduced as industry matures

By Erin Voegele | October 24, 2011

A new analysis completed by Lux Research shows venture funding is slowing in the biochemical and biomaterials market. However, the reduced level of venture capital investments is not bad for the industry. Rather, it shows that the sector is maturing.

According to Lux, startups and investors need to retool their strategies to tap newer opportunities as multibillion-dollar acquisitions and a wave of IPOs indicate an impending end to a boom in the nascent biobased chemicals industry. The report, titled “Seeding Investments in the Next Crop of Bio-Based Materials and Chemicals,” states that the biochemical sector received $3.1 billion in venture funding over the past seven years.

To complete the research, Lux tracked 177 venture transactions worth $3.14 billion in 79 companies between January 2004 and September 2011. The organization also examined another 49 companies that found funding through nonventure sources.

Major findings of the analysis show that venture investments in green materials have recovered from the recession. In fact, they rose from $48.9 million in 2004 to a new peak of $806.3 million in 2010. Those investments are on pace to hold steady in 2011. In comparison, venture investments in alternative fuels have dropped 5 percent, while venture capital funding for smart grid, energy storage, and electric vehicles dropped 43 percent.

As the biomaterials and biochemical sectors continue to mature, Mark Bünger, a Lux Research Director and lead author of the report, said that companies are going to have to begin tying funding opportunities more closely to revenue, rather than tying those investments to interesting ideas or technologies. “This doesn’t mean there isn’t any more space for new technologies,” he said. However, he added the new technologies are more likely to represent incremental improvements rather than entirely new processes.

A group of technologies with a higher level of complexity, however, are now beginning to attract more venture capital. Lux’s research points out those newer opportunities lie in artificial photosynthesis, novel molecules, and biomimetic structural materials.

“The one point we really want to make sure to get across is that just because this space is maturing and venture capital will probably peak and start decline, that doesn’t [reflect poorly on the achievements of the industry],” Bünger  said. “That is just how venture capital works. This has been actually a very, very successful set of investments for venture capitalists when you look at the fact that so many companies have [successfully filed for] IPOs, and that there are a few more that either have the potential to go public or be acquired at good valuations.”