Still room to cure addiction

“Lots of room for investors eager to cure oil addiction.” That headline appeared in the April 2006 issue of VCJ. I figured it would take at least a few years for VCs to jump into biofuel investments, but by the end of last year our headline appeared to be outdated.

As you’ll read in this month’s cover story, “Green Acres,” venture capitalists pumped more than $740 million into 27 biofuel companies last year. That’s a dramatic increase from the $110 million invested in 15 such companies in 2005.

VCs see an even bigger opportunity in biofuels than they do in solar (see our May cover story, “Solar Flare”).

Venture capitalists are aggressively pursuing the biofuel market in spite of a number of risk factors that one would think would give them pause, not the least of which is the market’s reliance on government subsidies.

Any time you see that much money flowing into a new space that quickly, you are bound to hear talk of a bubble. A recent clean technology report by Lux Research notes: “With 930 energy startups operating worldwide—198 of which are venture-funded—energy technology looks primed for a classic private equity boom and bust.”

I’m usually pretty skeptical about hot investment sectors, but I think the Lux folks are wrong on this one.

For countless reasons you’ve heard over and over again, the United States must move away from petroleum. The government has voiced its support of finding alternatives, and consumers have made it clear through their purchase of hybrid cars that they are eager to go green.

Our existing infrastructure can be used to deliver some biofuel (such as ethanol), and all of the agriculture and waste products needed to produce biofuel on a massive scale can be produced domestically.

Consider that Americans spent more than $230 billion on gasoline in 2004. Venture-backed biofuel companies would need to capture less than 1% of that annual spending to make their investors whole.

I can’t say exactly when it happened, but the petroleum problem has already hit its tipping point. And for that reason, there is still “lots of room for investors eager to cure oil addiction.” —Lawrence Aragon