A cautionary tale: not everything green turns to gold
How Zymergen raised $800m and went public at a $4bn valuation…whilst generating no revenue. PLUS: 7 tips to avoid losing your money whilst investing in sustainable start-ups
Survival of the fittest
The natural world has long been the source of technological breakthroughs. From Velcro (burdock seeds) to prosthetics (elephant trunks) to surgical glue (slug slime), biomimicry has been an endless source of inspiration.
It should come as no surprise. With 3 billion years of evolution to draw upon, the animal and plant kingdoms are the ultimate R&D lab.
Now, confronted with a new challenge – plastics – biotech company Zymergen is turning to nature for inspiration. This time, however, rather than looking up and around, we’re bringing microscopes.
Microbes to the rescue?
Zymergen aims to replicate products like plastic films used in smart devices at 1/10th the cost of existing products using a process that they call ‘biofacturing’.
The principle is this: microbes consume a carbon source, glucose sugar or waste gas and convert it into chemicals for manufacturing. By replacing traditional, petroleum-based raw materials, the process is far greener.
In fact, Zymergen even go as far as to describe microbes as “the most perfect chemical lab in the world.”
VCs lapped it up, investing more than $800m before the company went public.
Sounds great, right?
…Right?
Wrong.
Whilst in theory everything seems swell, the coffers tell a different story.
After a successful IPO in April, earlier this month the company announced that it expects little to no revenue this year. Or next year. The CEO then left. Oh, and the stock promptly fell 76%. Yikes.
But what about all that money they raised? Surely that should see them through the storm?
Wrong again. The company is burning cash, accumulating eye-watering net losses of $858.3m to date.
All of this isn’t to say that Zymergen is dead and buried, however.
Whilst the outlook is gloomy for the near future, biofacturing could still turn out to be a breakthrough technology. But if you invested in the IPO, your brokerage account won’t make for pretty viewing.
And it certainly isn’t to say that you should avoid investing in eco-conscience companies. On the contrary, the space is ripe with opportunity. But before YOLOing your life savings into a random company because it has ‘Solar’ in its name, there are some precautions you should take:
How to avoid the pitfalls - 7 tips for investing in young, sustainable companies:
1) Know your circle of competence
In the late 90s, an animated Bill Gates introduced Warren Buffett to the revolutionary concept of the Internet. The Oracle of Omaha wasn’t interested, famously replying, “Will people still buy gum after this comes along?” He didn’t understand tech, so he wouldn’t go near tech stocks, regardless of the temptation. But he wanted to make sure his investment in Wrigley was safe. The lesson: be honest with yourself and stick to what you know.
Be especially wary of buzzwords.Take Zymergen, for example. They describe themselves as “bring[ing] together different technical disciplines; life science with electronics, biology with chemistry and material science.” Lots of jargon – and if it means anything to you, great – but for the plebs like myself, it should set off alarm bells. You’d be surprised at how many ‘proprietary ML algorithms’ are just Excel spreadsheets made by the summer intern…
2) Don’t take everything at face value
Zymergen boast of having sold more than $1bn worth of goods. But looking deeper, this is slightly misleading; the figure refers to the value of products sold with a Zymergen-manufactured component, which doesn’t translate to revenue for Zymergen. In fact, as mentioned earlier, the company expects little-to-no revenue over the next couple of years. Think critically. Scrutinise everything.
3) Look for track record
For less-established companies, you’re investing in the founder/CEO as much as the idea. This is especially true for private companies. Investing in someone with a previous win under their belt – even if only modest – increases the company’s chances of success.
4) Revenue is important
When it comes to demand, start-ups often talk about total addressable market size. Such calculations can be contentious and overly optimistic. It’s hard to dispute actual sales, however. So, look to revenue as an indicator of future demand. And it’s even better if the company is profitable.
5) Obvious prospects for physical growth in a business do not translate into obvious profits for investors
Investing on the basis that X industry is going to be massive 10 years from now is no guarantee of success. Even in a growing industry it’s hard to pick the winners.
For example, in the early 20th century, it was clear that air transportation was the future. Aviation stocks were all the rage, much like internet stocks in the late 90s. Yet, out of the hundreds of airlines that emerged, almost none made a profit. Most only survived a few years. In fact, to this day, the cumulative earnings of the aviation industry across its 100-year history have been negative.
6) IPO? More like IP-no
Most of the value in an IPO accrues to institutional investors who get in at the initial underwriting price. Retail investors tend to get a crummy deal, only being able to buy once shares have skyrocketed which is why Benjamin Graham – Warren Buffett’s mentor – strongly cautions against investing in IPOs. From 1980-2001, if you had bought each IPO at closing price on the first day of trading and held on, you would have underperformed the market by more than 23 percentage points annually. Sure, with some IPOs you might strike gold, but you’d be defying the odds.
7) Picking companies is hard -- don’t beat yourself up
It’s impossible to be right all the time; so many factors affect a company’s stock price. Not even the experts have dependable ways of selecting the most promising companies. A company may see its fortunes reversed through no fault of its own due to an external event. So, if you do lose money, don’t beat yourself up; remember it’s a long-term game.
Snippets:
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