According to a report just released by Boston-based Lux Research, in 2010, investors doled out $930 million in support of alternative fuel technologies, a 5.4 percent drop from the year prior. As the space matured and the recession lingered, financial backers favored firms on the brink of maturity that would use the extra funding to build scale, rather than taking a risk on industry startups.

Last year, investors also allocated larger sums to fewer companies – favoring flexible alternative fuel technologies and waste-to-fuel conversions, as well as companies making both fuels and chemicals.

Indeed, a production process that is “feedstock-agnostic” or can provide a range of end products is what biofuel investors wanted: It increases addressable market, provides secondary revenue streams, and unshackles technologies from price volatility.

The residual effects of all this cherry-picking may drive more startup companies over to chemicals or out of pocket entirely in the coming months.

“The recent successful IPOs of Amyris, Solazyme, and Gevo all reflect the larger industry trend of investing in more flexible end-product technologies,” said Andrew Soare, a Lux Research analyst and lead author of Hedging Bets with Flexibility in Alternative Fuels. “A handful of fuel-focused start-ups continue to draw investors, including waste-to-fuel companies Enerkem and LanzaTech, and cellulosic ethanol companies Qteros and Mascoma. But flexibility is part of their DNA as well, in that they derive fuels from multiple feed stocks.”

Among Lux Research’s key conclusions:

• Synthetic biology’s inherent flexibility is a wise investment, but not the only one. Synthetic biology has attracted the most funding since 2004: $1.84 billion or 28.4 percent of the total. But investors shouldn’t ignore other flexible technologies. The catalytic approaches from Virent and Elevance, for example, can produce a range of fuels, rubbers, oils, and plastics. Technologies capable of using agricultural, solid, or gaseous waste, such as LanzaTech, GlycosBio, and Ignite Energy present further opportunities.
• Investments will favor fewer companies in later stage funding. Most alternative fuel technologies today are past the point of initial seed funding, and are seeking capital to scale up manufacturing. Those closest to scale will continue to raise large Series C and Series D rounds, while less advanced companies will struggle to land moderate earlier rounds, resulting in more failed start-ups over the next few years.
• Expect new corporate investors to enter the space. While energy and agricultural companies have been the main corporate investors, waste management companies have recently joined them with investments in a half dozen waste-to-fuel technologies. Expect forward-looking corporations to bring additional industries into the fray, such as pulp and paper, food and beverage, and non-obvious downstream brand owners such as UPS.

However, with all of this said, there is a caveat: The report was issued on August 17, the day after President Obama delivered a game-changing speech – committing the U.S. Departments of Agriculture, Energy, and Navy to invest up to $510 million during the next three years, in partnership with the private sector, to produce advanced drop-in aviation and marine biofuels for military and commercial transportation.

Opening the White House Rural Economic Forum at Northeast Iowa Community College in Peosta as part of a three-day rural bus tour, the President said, “Biofuels are an important part of reducing America's dependence on foreign oil and creating jobs here at home. But supporting biofuels cannot be the role of government alone. That's why we're partnering with the private sector to speed development of next-generation biofuels that will help us continue to take steps toward energy.”

This public-private influx of funding will have a positive impact on the industry; whether it changes investment choices remains to be seen.

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