Market News

 October 14, 2014
Venture Capitalists Return to Backing Science Start-Ups

 Vestaron makes an eco-friendly pesticide derived from spider venom. Bagaveev uses 3-D printers to make rocket engines for nanosatellites. Transatomic Power is developing a next-generation reactor that runs on nuclear waste.

They all have one thing in common: money from Silicon Valley venture capitalists.

After years of shying away from science, engineering and clean-technology start-ups, investors are beginning to take an interest in them again, raising hopes among entrepreneurs in those areas that a long slump is finally over. But these start-ups face intense pressure to prove that their science can turn a profit more quickly than hot tech companies like Snapchat and Uber.

In August, the Founders Fund, which has backed social networks like Facebook and Yammer and the streaming-music service Spotify, announced a $2 million investment in Transatomic Power of Cambridge, Mass. Days earlier, Y Combinator, known for aiding web and mobile-app start-ups like the social news site Reddit and the game maker Omgpop, took part in a $1.5 million early investment in Helion Energy, which is developing an engine powered by nuclear fusion.

And last month, Google said it was buying Lift Labs, a San Francisco biotechnology start-up that makes a high-tech spoon for people with hand tremors.

"We're trying to revolutionize pesticides," said John Sorenson, a former genetics researcher and Vestaron's chief executive, who for years struggled to find investors as he watched other start-ups, like Snapchat and Square, raise many millions of dollars. Vestaron finally closed its third round of financing last month. "Thankfully, venture funders are starting to invest again in real, hard-core science and innovation," Mr. Sorenson said.

Over all, industrial and energy start-ups attracted $1.24 billion in venture capital financing in the first half of 2014, more than twice as much as in the period a year earlier, according to statistics from the National Venture Capital Association. Still, investment remains well below peaks reached in 2008, when industrial and energy start-ups attracted $4.64 billion.

Investment in biotechnology start-ups rose 26 percent in the first half of 2014, to $2.93 billion, from the period a year earlier and is on track to exceed the 2008 peak of $5.14 billion.

The investments are still dwarfed by the money pouring into other kinds of technology companies, especially those offering web and mobile services. Software start-ups attracted $11.2 billion in venture capital financing last year, 85 percent more than in 2008.

Investors partly feel betrayed by the billions of dollars they lost on the clean-tech boom and bust, when backers of solar panels, algae biofuels and futuristic batteries promised to change the world, but the companies mostly flopped. That experience has made investors wary of science-based start-ups with long development timelines in still nascent or heavily regulated markets.

But there is a growing feeling, investors say, that Silicon Valley has been avoiding the world's more difficult problems, a sentiment captured by a Founders Fund motto: "We wanted flying cars, instead we got 140 characters."

That unease is compounded by a sense that the field of consumer Internet companies has become impossibly crowded. To succeed, investors say, a company must break away from the pack.

"I'm just so interested in anything that gets me closer to an Iron Man suit," said Adam Draper, the chief executive and founder of Boost VC. One of the companies that Boost has mentored or coached is Bagaveev, a start-up using 3-D printers to make rocket engines that launch nanosatellites, a type of satellite that may weigh as little as a couple of pounds, into orbit. "Social media's already happened. V.C. funding is supposed to be about funding what comes next."

Transatomic Power, founded in 2011 by nuclear scientists at the Massachusetts Institute of Technology, is in the early stages of developing small-scale molten-salt reactors that could generate reliable, clean energy without creating nuclear waste. The technology is from the 1960s, but Transatomic Power is developing new designs, using its financing to run tests on materials and models. The start-up would need far more funding, or a partner, to start building the reactors.

"The world needs a source of stable, cheap electricity, and a new approach to nuclear power would seem like an obvious solution," said Leslie Dewan, a co-founder and the chief executive of Transatomic Power. "But it's tricky getting $300 million from investors," she said. "Maybe we need to build an iPhone app."

Vestaron, a pesticide company started in 2001, has similarly lofty goals in agriculture and food, a specialty basking in newfound attention from Silicon Valley. Vestaron says its spider-venom insecticide controls beetles, caterpillars and other pests without harming other animals. The insecticide, the company says, reduces agriculture's environmental footprint, makes work safer for agricultural laborers and overcomes the resistance pests have built up to other pesticides over the years.

This year, the Environmental Protection Agency approved the active ingredient Vestaron derives from the venom, giving the start-up the go-ahead to sell its pesticide commercially to vegetable and greenhouse farmers in 2015. Vestaron, which has a target of $1 million in sales in the first year, will use the latest round of financing to introduce its products to farmers, and eventually to home and garden uses, Mr. Sorenson, Vestaron's chief, said.

But even when science start-ups attract money, they are pressured from the beginning to think about profit.

For Xcor Aerospace in Mojave, Calif., that meant putting aside its long-term goals of building suborbital space planes and focusing instead on developing rocket-engine igniters to sell to NASA and aerospace companies. With a steady stream of income, Xcor was able to put the engine on the back of an experimental aircraft to test its space plane concept. After raising $14.2 million in May through the Space Angels Network, a group of angel investors in the aerospace field, Xcor is finally putting together its plane's fuselage.

"They knew that you couldn't come and ask for a billion dollars to build a space plane," said Chad Anderson, a managing director for the Space Angels Network. "So what they started with was the smallest component they could make that had commercial value."

Bagaveev can only dream of that kind of money. It raised just $535,000 in seed funding in April from a group of investors to develop reusable launchers that can send a satellite weighing up to 22 pounds into space --- a technology that Nadir Bagaveyev, the company's founder and chief executive, says will help open outer space to small companies that cannot afford multimillion-dollar satellites.

"We're like the UPS of space," Mr. Bagaveyev said. "You bring it to us, and we promise to bring it up within a week to a month."

Bagaveev will use the seed money, Mr. Bagaveyev said, to try to prove that his idea has potential. The start-up is planning its first test launch at the end of the year, and Mr. Bagaveyev hopes that will help the company attract more investment.

"We'll show what we're capable of, and then we'll be back for more investment," he said. "I think investors are bored with investing in another messaging app. And our idea is crazy enough that it might just work."