Petro Parity: Biofuels or Biofools

Our latest premium Forbes report was just released to subscribers. Some choice quotes from Robert Tjian, founder of Tularik:

The best scientists I know share one common denominator: a willingness to take risks.

And from Nobel laureate Bob Grubbs, a pioneer in catalysts:

It's really easy to start a company, but it's harder than hell to get any money out of it.

Meanwhile, I’ve long lamented biofuel ventures, dubbing them “biofools”.

Well, the expert analysts at Lux Research have an open webinar on the issue LIVE on Feb 10th at 11:00am EDT. It’s called, “Biofuels' and Biomaterials' Path to Petroleum Parity”

You can register here

Environmental and economic problems posed by petroleum are spurring the search for renewable, bio-based alternatives. To date, most biofuels and biomaterials developers have focused on lab- and demonstration-scale studies to improve performance and reduce cost so they can compete with petroleum products, and those goals are coming within sight. The hurdle on the horizon, however, is scale: Today’s biotechnologies would need an area the size of Russia to replace the 30 billion barrels of oil consumed annually. Complementing or replacing oil will require integrated, dual-use facilities in the biofuels value chain, and bio-based carbon capture to move from the realm of science fiction into science.

Join them to hear Lux Research’s first-of-its-kind analysis of how bio-based materials will compete with oil, and when and how they’ll reach the elusive goal of “petroleum parity.” Learn:

• How biofuels and biomaterials costs stack up against petroleum-based products

• What performance metrics biofuels and biomaterial stack up on – and where they fall short

• Whether biofuels and biomaterials technologies have the potential to scale up to match petroleum’s output

• Which biofuel and biomaterial technologies look most promising in the areas of cultivation, processing, and production

• How to follow the path toward petroleum parity and where the opportunities to profit will arise

Like Water for VC

Here are two great insights on VC generally and Water specifically.

First from Lux Research’s Heather Landis from their Lux Populi blog:

“Fifteen years ago, if you asked Asit Biswas if he believed there was a global water crisis, he would have answered “Yes.” Now, however, the Stockholm Prize winning water researcher says he believes the water crisis is indeed a myth. Biswas made his statement in a lecture at the 2009 Nobel Conference held at Gustavus Adolphus College last October.

While there are notable books on the subject of global water scarcity, including those authored by fellow speaker Peter Gleick, Asit pointed out that he doesn’t see a world water crisis caused by physical water scarcity, but by water management – or rather, a lack of water management.

Asit believes that there is indeed enough water to go around as long as people manage their water better. In his talk he highlighted the fact that 70% of the world’s water is used for agriculture - therefore, inefficiencies in the food chain are also a major drain on water resources. According to Asit, food waste is extremely high, with the USDA reporting that 27% of food in the U.S. goes to waste, while in India 50% of fruits and vegetables and 33% of all cereal grains never make it to the consumer. Asit noted getting food to the people and minimizing waste is one way to increase food availability without the need for additional water. His idea extends to the domestic side as well, where water leaking from distribution pipes is commonplace around the world.

Water efficiency and management is a cornerstone to many of Lux Research’s water reports, most notably the recent reports published on agriculture and water IT. In the Lux Research report entitled “Malthus Returns: Solving the Unsustainable Agricultural Water Demand Conundrum” (client registration required), we highlight the fact that it’s impossible to recapture an appreciable amount of water evaporating from agricultural regions. The only option left to agriculture is to increase water efficiency through technologies such as drip irrigation provided by Netafim and John Deere Irrigation; smart irrigation systems provided by Hydropoint and PureSense; and practices such as increasing crop yields and reducing the volume of water needed.

Improving water efficiency on the domestic side is addressed in the Lux Research report “Ranking Water Information Technologies on the Lux Innovation Grid” (client registration required). In the report, we highlight the fact that utilities, industries, consumers, and governments need to manage water more efficiently, and a basic solution to the water management problem is obtaining better information about water usage through information technologies provided by companies such as Derceto and Itron to minimize unaccounted-for water, reduce water consumption, minimize water pollution, and reduce energy consumption.

There are no fundamental issues that contribute solely to the water crisis. Water is indeed scarce in certain areas of the world where the population density is high, and it’s true that water efficiency and management are in dire need of improvement, as is the aging infrastructure. Improving water efficiency is an integral component to solving the water crisis, but there is also a need for increased funding of public water supplies as well as more investments in the hydrocosm to continue development of innovative water and energy-efficient treatment technologies. Finally, there’s a need for change in the mindset of how water is used and consumed. Not until all of these criteria are met will we truly see an end to the water crisis.

Now on VC:

The heyday for nanotech venture capital (VC) likely saw its peak in 2008, when overall investment reached $1.4 billion. Last year, the sector raised only $792 million, signifying a 42% decline from 2008. But while overall nano VC backing is down, it's not out, according to a new report from Lux Research. Investment in nano-driven healthcare and life sciences increased last year at the same rate that overall nanotech VC dropped -- 42%. These two segments attracted $404 million last year, and are likely to lead VC investments in nano for the near future.

Titled "2009 Nanotech Venture Capital: Healthcare and Life Sciences Provide Life Support," the report will help VCs, large corporations and start-ups understand what developments will drive VC investments in nanotech over the next few years, and where future funding will likely turn.

"Life sciences had been a big sector for nanotech VC early on, but energy and environmental deals grabbed the lead during the past several years," said Jurron Bradley, a senior analyst at Lux Research, and the report's lead author. "As deals in energy and environment dropped 69% last year, the life sciences and healthcare segments are back on top."

Drawing on its proprietary database comprising primary interviews with 1,000 start-ups and corporate players, Lux Research also spoke to 15 of the top VC firms that have invested in nanotech. The firm asked VCs whether funding would go up or down, and where the most activity would be. Among its key observations:

-- Reflecting global VC trends, nanotech funding fell 42% to $792 million in 2009. Despite the drop in overall value, the number of deals in 2009 actually increased slightly to 92, as VCs distributed the wealth more broadly. Specifically, they bid farewell to mega deals, slicing average deal size by 41% to $8.6 million.

-- Series D or later investments plunged 73% to $235 million. After a year of triple-digit investments in single companies, the Series D party ended in 2009. In contrast, Series B rounds surged 49% to $339 million and almost reached parity with Series C and later rounds, which collected $376 million. As in 2008, Series A walked away with the smallest portion at 7% or $56 million.

-- Most VCs expect near term funding to decrease or remain flat. Some 53% of VCs interviewed said they expected their peers would likely maintain existing portfolios rather than pursue new deals. Less than half of those interviewed predicted their investments would increase over the next two to three years.
Despite the gloomy outlook, nanotech will survive. While VCs play a crucial role in providing investments for early-stage companies and guiding them to exits, VC backing is only a small piece of the funding puzzle.

"Unlike corporate or government investors, VCs tend to accept more risk and fund early stage companies," said Bradley. "That helps explain their increased interest in nano-enabled healthcare. Although the long cycles imposed by clinical trials increase the risk of funding these start-ups, healthcare is a premium-based sector where margins are high."

"2009 Nanotech Venture Capital: Healthcare and Life Sciences Provide Life Support" is part of the Lux Nanomaterials 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 Nanomaterials Journal, and on-demand inquiry with Lux Research analysts.

Ten VC Predictions for 2010

Here's my Lux Capital partner Peter Hébert with a much-buzzed about

"Ten VC Predictions for 2010: Outrunning The Bear"

He who loses less, wins? Venture capital in the 2000s was much akin to the joke about the two campers who cross paths with a bear. As the angry bear begins charging out of the woods towards the campers, the first camper starts putting his sneakers on. The other camper screams, “It’s no use, we’ll never be able to outrun the bear!” And the first camper yells back, “I don’t need to outrun the bear, I just need to outrun you!”

Over the past decade, venture capitalists could claim top-quartile performance just by showing smaller losses than the rest of the pack.
The start of 2010 provides a clean slate—that is, after we break out the scorecard and grade last year’s predictions.

Last January, I envisioned a 2009 cleantech price correction, which pretty much hit the mark. While media gushed over the billions investors poured into cleantech during 2009,

Several VC-backed companies with valuations deep into the 9-digits opted for the M&A escape hatch (SunEdison, Optisolar), taking haircuts in the process. Other high-profile pioneers like GreenFuel closed up shop and called it a day. Even cleantech’s most promising ventures were unable to avoid the reset. Case in point: Solyndra, which just last month filed for its long-awaited IPO. The company’s valuation was recalibrated during its $286M Series F financing, priced at less than $4 per share, compared to a prior Series D-3 offering at $23 per share.

So what does 2010 hold in store for VC investors? I’m foolhardy enough to once again venture predictions. Behold the biggest stories in the coming year:

1) Venture-backed IPOs rebound smartly, with 50%+ first day price jumps on name brand offerings from Facebook, LinkedIn or Zynga. Among the S-1 clutter, another big beneficiary will be IPOs from smaller, little-known, and speculative-grade companies that also make it out. The visceral response to many IPO filings: Who?

2) At least one famed VC partnership fractures or sees an orderly wind-down, with insider gossip eventually leaking out. The changing of the venture guard moves full steam ahead, as weak fund performance from the lost decade finally forces LPs to question historic allocations to “franchise funds”.

3) A large, non-traditional investor enters the venture fray, boasting a very long fund duration (~20 years) vehicle focused on science and technology. Commence discussion on whether the traditional 10-year fund life makes structural sense for early-stage life sciences and energy investments.

4) Stealthy cleantech companies unveil. After years of intrigue and speculation, not to mention tens to several hundred million dollars invested, several energy technology companies finally lift the curtain and introduce themselves to the world. Will the emperor be wearing clothes?

5) Spike in biotech M&A. December 2009 served as an excellent indicator of what’s to come, with more than $1 billion returned to venture funds through the acquisitions of Acclarent, Calixa and Gloucester. Expect this month’s JP Morgan healthcare conference to play host to the industry’s ultimate speed dating session.

6) Semiconductors regain luster. After years spent languishing as pond scum in the VC pool, the public market chip rebound finally extends to its capital-starved, private brethren. Expect several IPOs and profitable M&A for some of the largest revenue generators.

7) Solar failures litter VC landscape. Schumpeter’s gale of creative destruction blows through the 250+ private solar companies. A handful of heavily-funded solar PV and CPV companies flame out, while sector leaders like First Solar consolidate their market position.

8) Energy investors swap wind and solar for abundant natural gas and carbon-free nuclear. Looking to replace a large swath of coal-fired power for base-load electricity generation? Natural gas and nuclear are not just attractive base-load alternatives—they are the only options.

9) Russian oligarchs and other foreign investors snap up late-stage U.S. tech. DST’s investments in Facebook and Zynga serve as a role model. Let’s hope they encounter more success than the sovereign funds that purchased big stakes in U.S. investment banks.

10) Return of the VC mystique. A counter-intuitive prediction, but one that reflects the above assumptions and data points. A select few IPO grand slams create massive returns and fanfare, sparking a resurgence of interest in the asset class. LPs actually begin to talk about new opportunities in venture capital!

My Take on 2010

Count me in the bullish category. In contrast to more cautious views in 2008, the venture marketplace has finally priced in reality. At Lux Capital, we’re finding far more value in venture investments today than throughout the 2000s. On a recent flight back from the West Coast, my seat-mate was a well-regarded LP, invested in many leading venture funds. He told me that he is “super bullish on VC”, more positive today on the asset class than at any time over the past 15 years.

Sure, there are structural challenges that serve as near- to intermediate-term headwinds. Outside of a few corner cases, public liquidity does not exist. Strategics are only now coming out of their shells to scavenge for M&A opportunities. Equity values have been crushed, wiping away years of incremental value creation. Investors today demand liquid assets that can be sold at a minute’s notice before the close of trading.

But historically, capital-scarce environments like today are exactly the times when fortunes can be minted. Genuine-article growth businesses are fetching valuations that bring later-stage share prices below seed rounds. New investors no longer require bubble markets to earn attractive risk-adjusted returns and gain some margin of safety. And don’t forget: in a slow-growth economy, venture capital is the only asset class that can create un-levered growth.

CES and Wireless TV Now

So, where’s the growth? If leading indicators are what you seek, go west, young man: to CES. Consider: every Board meeting I’ve participated in this week had at least one VC calling in from Las Vegas. What a difference a year makes. Compare the mood and sentiment at CES last year (subdued, uneventful, off-peak attendance) with this year’s overdrive, full-blast, media-frenzied, jam-packed event. Tech is not only thriving, it’s jumping off the operating table, bouncing off the walls and bursting through the hospital doors.

One hot ticket has been SiBEAM (full disclosure: my venture fund Lux Capital is an investor). If you hate wires like I do (or better yet, my wife does) you’ll love Wireless HD and a living room completely free of the messy morass of wires. Here’s my exclusive Forbes interview on the heels of CES with SiBEAM CEO John LeMonchek:

John LeMoncheck: Unwiring Home Entertainment