Venture capital is unlikely to venture into the bioproducts industry, says an expert in the field.
David Gauthier, a vice-president with Foragen Technologies Management Inc., said the bioproducts industry is a poor fit for that type of financing.
His company operates a $42 million venture capital fund focused on agriculture technology that seeks out investments with the ability to provide liquidity within five to seven years with a 50 percent return on investment.
“That might not be compatible with a lot of the bio-based opportunities out there,” Gauthier told about 150 delegates attending the bioproducts portion of Bio-Science Week 2004, a conference organized by Ag-West Bio Inc.
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Bioproducts are industrial products such as fuel, plastics and building materials that are derived from crops.
It’s an emerging industry with players ranging from Milligan Bio-Tech Inc. in Foam Lake, Sask., which makes diesel fuel conditioner out of canola, to Cargill’s large biorefinery in Nebraska that makes plastic out of corn byproducts.
While there is plenty of buzz surrounding the industry, Gauthier said venture capitalists will largely steer clear of it because they want to invest in low-volume, high-margin businesses. Companies that rely on commodity inputs are polar opposites.
Another strike against bioproduct projects is that they usually require large amounts of “real estate capital” to build processing plants. Venture capitalists prefer to invest in technology before the plant-building stage.
“We take a lot of technology right off the lab bench,” he said.
Companies such as Foragen are comfortable sticking with the tried and true approach of commercializing promising research ideas. To move out of the lab and into the field would require a fundamental shift in philosophy.
But that doesn’t mean the end of the bioproducts dream.
“There is a lot of companies out there that have not had a drop of venture capital money that are still very successful,” Gauthier said.
Randal Goodfellow, founding president of BioProducts Canada Inc., listened to Gauthier’s presentation and agreed venture capital is probably not the best source of funding for the budding industry.
“The objective here is to find other types of capital.”
But that has proven problematic.
He said the industry has to work on developing new business models that appeal to investors with a different set of expectations that go beyond generating profit and into the realm of rural development: “Considerations or motivations that are broader than a return that is just monetary,” he said.
Good candidates to provide this kind of funding include groups such as Western Economic Diversification and Sustainable Technology Canada, a government foundation set up to support the development of environmental technologies. Gauthier endorsed pursuing federal government funding. He said Ottawa is beginning to indicate it is willing to invest in the bioproducts industry.
“They’re starting to use all the right words.”
In its most recent throne speech, the federal government wrote: “The government will increase resources to support innovative environmental technologies and further encourage their commercialization.”
It backed up that promise in the 2004 budget by earmarking $250 million for the Business Development Bank of Canada and $20 million for Farm Credit Canada to spend on a variety of initiatives, including the bioproducts industry.
Yet the benefits for primary producers from the bioproducts industry remain in doubt, said Goodfellow.
He told Gauthier that producers don’t want the pat answer that there will be a trickle-down effect caused by an increase in economic activity in their area. There has to be a new business model that involves farmers in bioproducts projects without requiring huge amounts of investment.
“The answer isn’t there yet,” Goodfellow said.”That’s where I think some of the work needs to be done this year, getting that answered a bit more solidly.”
