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So You Wanna Get Into "DeepTech"
Some things to think about before you jump in
Over the last few years, I’ve been seeing more people in general wanting to get into what is being referred to as “deep tech,” specifically with an aim of helping to combat global climate change. I think if we want to really tackle this challenge it comes back to redesigning much of our economy and we can think of “deep tech” as being fundamental to this shift.
This category might mean innovations in building vehicles that transport people (e.g., Tesla and SpaceX) or it might mean the intersection of biology, chemistry, and software (e.g., Zymergen, Ginkgo, oh wait that’s the same company now). To the people believing that “biomaterials” or “carbon negative chemicals” is the future I think this is right, but if you jump into this part of the pool the things that made you successful in prior experiences might not hold true here. Here’s a list of things to consider in no particular order.
Pivots = Admission of Defeat
If you aren’t 100% of sure of a start-ups path in the beginning and you try to pivot in later stages of your company then you are already on the path towards defeat. I’m not saying it’s impossible, Amyris did it (still not sure they will survive), but every pivot I’ve seen has resulted in bankruptcy. Metabolix went bankrupt trying to commercialize their PHA technology, pivoted to Yield10 which seems to be struggling and ironically appears to be going after biofuels. Solazyme tried to commercialize algal biofuels, did a late-stage pivot towards oils for food consumption and then their pivot TerraVia went bankrupt. I won’t keep hammering on this, but if you get 5-10 years into building a company that uses some new deep tech such as CRISPR to edit the genome of a microbe to make some high value chemical and then figure out at year 10 that your business is not viable you fucked up years ago.
It takes years to go down a specific area of technology in this space and pivoting means you are likely throwing part of that work to the side (not all), but this sets you up for another lengthy path to profitability.
These are the mistakes or areas of concern I have for most companies looking to use new technologies to produce chemical products either through synthetic biology, enzymatic catalysis, or some version of AI/ML supported research.
Make no mistake, if you are using a technology to make chemicals and you want to go compete in the chemical industry your competition is lean (like an MMA fighter who has cut weight and just stayed there for 50 years), experienced, and doesn’t mind selling product cost for a few years and losing money to maintain their customer base.
Innovation in any of these areas is also likely worth investment I think because they are problems that I don’t think have been solved—yet.
Sugars and lipids are expensive for making anything other than high value specialty chemicals or fine chemicals. If you need sugar to make your stuff then you need to figure out a reasonable selling price for your product, your raw material costs, and then how much profit your investors expect you to make for them. Anything left over is what you have for SG&A, manufacturing, and R&D.
Carbon dioxide is difficult to purify from the rest of the air even though you might be paid to collect it from a producer. Last I read you could expect 15-20% of the gas coming out of a cement plant tower to contain carbon dioxide. You still need to isolate that carbon dioxide (likely some sort of amine based scrubber) and then get it in high enough purity to utilize in your microbe or chemical process.
Also, don’t forget you are gonna have to pay for shipping on top of any price quoted to you by a supplier.
Downstream processing or DSP is really difficult and expensive. Cytiva, formerly GE Healthcare, essentially exists to help biotech companies with downstream processing and isolate very specific therapeutics. Danaher bought them for some crazy EBITDA multiple. If you have titers in the microgram or single gram per liter range and you are not producing something that could cure cancer or make people immune to some sort of rare/deadly virus or something of equivalent value, then you need to re-evaluate your platform and your market. Can you handle these costs?
If you are trying to remove water from your product, it’s an expensive process. If you want to do an ion exchange the equipment and processing required to do it exist, but do not underestimate the costs or think, “someone will innovate here and bring the costs down.”
The only company I’ve seen involved with really big innovation in the downstream processing side is Bioextrax and I wrote about them here. Innovation in the “picks and shovels” could be just as big or bigger.
Difficulties of Substitution
If you have the next Nylon or Polyethylene sitting in your lab and its cheaper or more environmentally friendly than the stuff you are trying to replace. If you think about Porter’s Five Forces the last one is substitution and with any customer electing to substitute a current supplier or process for something new, that is not a drop-in, there is often an enormous switching cost.
Switching software from MS Word/Office to Google Workplace or GSuite (whatever it’s called) is pretty easy. Email, word processing, and spreadsheets are mostly the same. Salesforce to Hubspot or vice versa. Employees might complain about this new software for a little bit, but over time they will figure it out.
If you are a company that has invested $10 million dollars in a manufacturing line and start-up company comes to you with a technology that might make it obsolete and save you a lot of money, there is going to be some hesitation on going down this path. You may even want to investigate, patent, and then try and keep that technology from coming out to your competitors and keep depreciating your new/current assets.
Further, a customer may not take you seriously as a supplier unless you are ready to supply them commercially with an order. This might mean going from 1-2 kg samples of material to 25 kg samples to 5 metric tons over the course of 2-3 years. If you cannot produce at the scale needed, you will have a problem.
Building Commercial Capacity Before Cashflow
Building commercial capacity without cashflow is a leap of faith in your technology. You may have de-risked it as much as possible such as all indications are positive for scale-up, that you can manage your processes, and that your future customers will buy your stuff through letters of intent. It’s still a risk that would probably give me an ulcer.
If you don’t have the capital to do this then I think contract manufacturing, also referred to as toll manufacturing, is a great way to go in the interim. If your process and what types of controls you need then there is likely a company out there willing to allow you to use their reactors, fermenters, or purification equipment for a price. Sometimes, in order to win your business, they might even offer to do a few runs for free with the idea that you will pick them for the long term and use their capacity as your own.
Contract manufacturing is wonderful in a lot of ways. The manufacturer usually owns all of the risk and has to produce stuff to your specifications. The manufacturer will also take a 50% gross margin (or higher) to accept those risks and thus this means your sale price will be even higher to your customers. Maybe you can work on low margins while you prove out your technology and raise funds for building your own plant.
It’s tough out there and a lot of companies have failed. The sooner you reconcile any of the challenges above the greater your chance of survival.