ABS: Hard times may be good for algae

By Jerry W. Kram | October 14, 2008
Web exclusive posted Oct. 24, 2008 at 2:38 p.m. CST

The subprime credit crisis may be causing havoc on Wall Street, but algae producers should still be able to find funding from eager investors, according to a panel of experts who discussed venture capital and equity financing at the Algae Biomass Summit in Seattle in late October.

"The crisis will have an impact on investment, but the impact will be less on cleantech (clean technology)" said Robert Nelsen, cofounder of ARCH Venture Partners. "There will still be people with a lot of money to invest. Some of the company valuations will come down, and that will drive the casual investors out. But the professional venture capitalists will still put money in."

People with the cash to invest aren't going to let that money sit under their mattresses, said Jim Long, a partner with Gabriel Ventures. The investment situation for algae is actually better than it was a year ago, he added. The financial crisis will force investors to look for higher quality deals and companies should have to expect more scrutiny and due diligence before completing a deal.

The panelists agreed that this was a good time for companies to continue their research and development efforts. Those companies that are ready to move towards pilot and demonstration projects in the next two years will be well positioned to attract investment, said Josh Green, a partner with Mohr Davidow Ventures. "What you can create in the next two years will be the difference between the winners and losers," Green said.

Algae companies will not be served well by thinking small, Nelsen said. Given the size of the transportation fuel and other markets that could be served by algae, most venture capitalists won't be interested in projects that don't have the potential for creating at least a billion dollars of value. Long concurred, but added that another key area for investors will be the industries that will support the algae industry, comparing it to the California gold rush of the 1840s. "I am interested in the companies that sell the picks, shovels and Levis," he said. "They made as much or more money as the miners."

In order to attract private industry funding, algae producers will have to show potential investors how they are creating value in their companies and decreasing risks, Long said. Producers will have to figure out how much investment will be needed to take their companies to next level.

Companies need to decide how much equity funding they will take as opposed to debt funding, Nelson added. "A lot depends on how independent you want to be," he said. "Many companies will decide to partner with large companies earlier because they will need billions of dollars to reach the ultimate scale."

There are many kinds of equity funding, Green noted. While venture funding and other kinds of early funding are vital to getting an industry off the ground, debt funding will likely be needed to take the final step to become a major industry. However, there is a danger when obtaining debt if a growing company stumbles and fails to keep adding value, it can easily wind up being owned by its creditors, he added.
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