Investing in biofuel companies that produce oil-alternatives fell 5.4 percent to $930 million in 2010, down from $980 invested in alternative fuel companies in 2009, according to a report from cleantech analysis firm Lux Research.
While investing in alternative fuels across the board fell, investments in biofuel companies that can produce a diverse number of products from typical feed stock rose to an all-time high of $698 million in 2010. That's because the investment community is shifting from strict fuels companies to companies making both fuels and chemicals, Lux Research analyst Andrew Soare told VentureBeat.
"Investors were originally lured to alternative fuel companies because of government mandates and huge market sizes, but the cost targets of commodity fuels are often too low for new technologies to compete with, so they turn to higher margin chemical markets," Soare said. "Investors are favoring this shift, as 2010 investment in companies making both fuels and chemicals was at an all-time high, while investment in strict fuels producers reached a four-year low."
Solazyme makes an oil produced from algae that can replace petroleum made from typical crude oil. It works in just about everything, including jet engines. But some of the most lucrative prospects for biofuel companies like Solazyme aren’t in the fuel business at all -- they’re in producing chemicals for other purposes. That includes creating a line of anti-aging beauty products and food additives. Dow Chemical, for example, uses a product produced by Solazyme to replace a petroleum-based oil that insulates electric transformers from heat and discharging electricity.
"The whole idea about flexibility is that investors don’t want to be handcuffed to commodity price fluctuations," Soare said. "If the price of one feedstock becomes too high, a flexible technology can switch over to another feedstock, if the price of one product is too low, the flexible company can make something else."
Investors made fewer investments in the biofuels sector as a whole, and invested a larger amount of money in a smaller set of companies, according to the report. That's because most biofuel companies have started to mature, and with fewer new biofuel companies emerging in the past year, they are either in a position to raise their third and fourth rounds of funding or to go public.
While IPOs from biofuel companies like Solazyme and Amyris were successful, investors were less keen on biofuel provider KiOR's IPO because the company's process for creating petroleum is very capital-intensive when compared to other biofuel manufacturers like Solazyme and Amyris, Soare said. But the company still has a diverse portfolio of petroleum products, which has kept it sturdy amid the downturn in biofuel investing.
"Though KiOR raised the second largest amount of the five IPOs we discussed, it was seen as a disappointment by many, as the company priced below its target," Soare said. "While the company does have flexibility by using wood waste and is making an inherently flexible product in crude oil, the pyrolysis technology is very capital intensive, unlike other recent IPOs which rely on capital-light retrofit approaches."