Algae-based biofuel companies have been raking in the venture capital this year, raising a record-breaking $179.5 million to date, according to numbers from the Cleantech Group.

That compares with what appears to be about $32 million raised last year, based on a Cleantech Group chart of quarterly totals that doesn't list the actual numbers.

"Algae has really exploded this year as an investment theme," Brian Fan, a senior director of research for the group, said at the Cleantech Forum earlier this week in Washington, D.C.

The latest round of financing arrived Wednesday, when Cascades Investments, an investment firm owned by Bill Gates, doled out $50 million to algal biofuel maker Sapphire Energy (see Bill Gates Digs Algal Oil).

The move comes on top of the $45.5 million the Cleantech Group had already tracked this quarter, bringing the total so far to $95.5 million – and the quarter isn't over yet.

That compares with less than $4 million raised in the third quarter of last year, and makes the third quarter the best ever for algae-based (or algal) biofuels.

Before this year, the first quarter of 2007 held the historical high for the most money raised in a single quarter with $15 million, Fan said.

But while VC investments in algal biofuels are up, they still only comprise a fraction of the total amount that biofuels companies have raised.

In the first two quarters of 2008 algae biofuels raised $84 million, with all of the investments in the second quarter, while the rest of the biofuel sector raised $406 million.

Although algae's oily properties help make the aquatic plants an alluring feedstock for biofuels, challenges, such as the difficulty of growing large quantities of algae at an affordable cost, have kept companies from commercializing the slime.

In the past, uncertainty has prevented investors from eagerly funding companies working in the space. But Bill Gates' financial backing of Sapphire Energy, via his investment firm, highlights a changing year for algal-biofuel companies.

Gates' financial injection is not the only one Sapphire Energy has received this year. In June, Greentech Media reported that the company raised about $50 million (see Funding Roundup: Solar, Biofuels Dominate Light Week). 

Another big algal-biofuel deal this year came from Solazyme. In August, PE Hub reported that the company had raised $45 million (see Green Light post and Funding Roundup: Mega Solar Deals, Algal Biofuels and Clean Water).

It is the large round sizes raised in the second and third quarter so far that has turned 2008 into a record-breaking year for algae-based biofuel, Fan said.

Up until 2008, Fan said he was seeing smaller rounds on the order of $5 million and $7 million.

So what's changed?

For one, the economics of first-generation biofuels like grain-based ethanol and soy-based biodiesel haven't proven favorable, Fan said.

The rising price of corn feedstock for making ethanol has put the squeeze on company margins, causing a number of plants to be delayed or cancelled in the last year (see Mascoma to Play Smaller Role in Pilot Project, Another Ethanol Plant Gets Cancelled, Poet Cancels Ethanol Plant, Ethanol Margins Suffer and Ethanol's Tough Times Continue).

As well, Fan said, first-generation biofuels have come up against increased scrutiny and have been blamed for competing with agricultural land, driving up food prices and damaging the environment.

During the last year, various studies examined the impact of biofuels on food and on the environment (see Lester Brown Talks Smack About Ethanol). Among the most damning were studies published in the Science journal, which concluded that biofuels may cause more greenhouse gas emissions than traditional fuels.

Cellulosic ethanol, which is still being developed for commercial scale, aims to be a solution.

Cellulosic ethanol doesn't directly tap potential food sources, but still faces issues that can impact food prices and the environment, Fan said. Crops grown for the biofuel, as well as those grown to make biodiesel, can compete with agriculture for fertilizer, water, farm equipment and labor, he added.

According to Fan, algae can avoid many of these issues because it doesn't take up large quantities of land or fresh water. Many algal-biofuel developers grow algae in ponds or enclosed containers.

The other driver of algae biofuel VC investments came from the first round of financing Sapphire Energy raised this year, Fan said. He believes the move instigated other algae companies and their investors to react to ensure they had the capital to keep pace with Sapphire.

Fan also believes that more funding is on its way for those looking to enter the subsector. "I think we are going to see a lot more seed round and first round investments in algae companies in the foreseeable future," he said.