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When investors get excited about green technology, they generally mean wind farms, solar energy and biofuels. Weeds and dead bugs? Not so much.
But some venture capitalists think that's where the money is, and they're betting on a new wave of startups with (clean) killer instincts.
Companies such as AgraQuest and EcoSMART are getting attention from some of the biggest venture-capital firms, the same ones that were early investors in Seagate Technologies (STX, news, msgs) and Skype. One of the startups is Marrone Organic Innovations (MOI) of Davis, Calif., which makes herbicides out of citrus oil. MOI "is a Genentech in the making," says Sean Schickedanz, a general partner of Clean Pacific Ventures, referring to the long-term viability of the company. "This isn't a get-rich-quick thing we're building."
The growing popularity of biopesticides is a reaction to the millions of pounds of synthetic pesticides dumped on crops, golf courses and suburban lawns. Biopesticides are made of natural substances such as micro-organisms and plant oils, and can be used on crops that carry organic labels in grocery stores. Just take a look at the success of Whole Foods Market (WFMI, news, msgs) to get a sense of that market's growth prospects.
Acquisition targets?
Global sales of biopesticides are expected to hit $1 billion by 2010, growing 10% a year on average, according to BCC Research of Wellesley, Mass. Sales of synthetic pesticides, which dominate the $26 billion pesticide market, are expected to shrink by 1.5% a year over the same period. The result: Biopesticides will make up 4.25% of the global pesticide business in 2010, up from 2.5% in 2005."If we can deliver yields for farmers that are equivalent or better than agricultural chemicals, then we have a really big opportunity," says William E. McGlashan Jr. of private-equity firm TPG's affiliate TPG Ventures, which invested in the 12-year-old AgraQuest last June, accelerating the company's revenue growth. McGlashan sees the potential market for biopesticides as $3 billion to $5 billion a year.
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Big agricultural-chemical companies are keeping tabs on small biopesticide makers, experimenting with their own biopesticide products and, analysts say, eyeing potential acquisitions among the smaller players. DuPont Crop Protection agreed in June to provide startup MOI with "exclusive access to natural product discoveries" for use in biopesticide products.
"They are very eager to partner," says Schickedanz, of Clean Pacific. "Because they have bought, not built, in the past, they'll let the small guys take their lumps as they build out and discover and develop these strains."
That's the scenario that could benefit Pasteuria BioScience of Alachua, Fla., says Tim Cockshutt, the managing director of Advantage Capital, an investor. Pasteuria BioScience hopes to grow and distribute a roundworm-killing parasite, Pasteuria penetrans.
"If we can go out there and prove to everyone that we've done what we said we are going to do and we start commercializing it and get through the EPA, we think large companies will become very interested in the company and will buy it," Cockshutt says.
Faux bio?
The Environmental Protection Agency defines three main categories of biopesticides:- Microbial pesticides, which are based on micro-organisms such as a bacteria or fungi.
- Biochemical pesticides, which are naturally occurring substances that control pests by nontoxic methods, such as disrupting insect mating.
- Plant-incorporated protectants, or PIPs. These have been the focus of the big chemical makers.
PIPs are the most controversial of the three, as critics consider them more biotech than bio-friendly. An example of a PIP: Scientists can introduce the gene for a soil microbe into a plant's genes in such a way that the plant produces a substance that kills a pest.
The Biopesticide Industry Alliance, a trade group, doesn't consider PIPs biopesticides, and the U.S. Department of Agriculture says PIP crops can't be labeled organic.
Continued: Chemical pesticides still dominate
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