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What Ben Horowitz Would Say About the Solazyme Delays

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I recently cut the cord — stopped paying for cable TV, kept internet services, and turned to streaming digital content from Netflix, Amazon, and the like — after my cable provider hiked the my monthly bill yet again for no discernible reason. The decision has allowed me to do three things: (1) save money, (2) begin watching Breaking Bad (what was I missing?!?), and (3) read a heck of a lot more. My first choice to begin hacking away at my swelling reading list was The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers by legendary tech entrepreneur turned venture capitalist Ben Horowitz.

Horowitz begins by retelling his entrepreneurial story, which is essentially the behind-the-scenes to his blog, before yielding his experience in everything from hiring and firing executives to acting as a peacetime or wartime CEO. I’d definitely recommend it as mandatory reading for synthetic biology startups.

One quote early in the book got me thinking about delays at Solazyme and an important lesson for individuals at the helm of synthetic biology startups. For those of you out of the loop, the string of delays centers on a 100,000 metric ton per year renewable oils facility in Moema, Brazil that was constructed with Solazyme’s partner and feedstock supplier Bunge. The delays essentially come down to management originally calling for start-up (the beginning of production of commercial quantities of products and the beginning of ramp-up to the facility’s rated capacity) in the fourth quarter of 2013, then delaying that into the first quarter of 2014, then raising over $200 million in an offering of debt notes and common stock, and then delaying start-up once again into the second quarter.

In other words, the evidence may point to bigger problems at the facility than an “intermittent supply of steam and power” that was cited in early May as the culprit, which is my impression after visiting HQ the day after the news broke. Assuming larger problems are the case (further explanation below), management’s unwillingness to disclose such information would be understandable, especially considering the severe consequences the market imposed on Amyris for delays and the failure to meet production milestones encountered in 2012. Once you set a bar as a company, it’s mighty difficult to explain to customers, partners, or investors why the bar clotheslined you rather than you jumping over the bar.

Again, assuming larger problems are to blame, Solazyme’s plan to push through those problems behind closed doors could work. Saying “nothing to see here!” while simultaneously working around the clock to fix the problems and produce results on a new timeline as if nothing had happened could pay off. Unfortunately, claiming confidentiality to delay the disclosure of delays only buys you so much time. More worrisome for executives, the consequences are far worse in the end if you don’t deliver, and I think we’re beginning to see that take place with Solazyme. That brings us to the quote in Horowitz’s book that got me thinking about this in the first place:

“If you’re going to eat sh*t, don’t nibble.”

That epic and humbling piece of advice came from Dave Conte, the controller at Horowitz’s cloud-based startup Loudcloud, during a pivotal moment in the company’s history. The stock market was still reeling from the Dot-Com Crash — the NASDAQ went from 5,048 in March 2000 to just 2,052 one year later — and the funding environment for tech companies had vaporized. Ironically, going public was the only option for Loudcloud to raise the cash it needed, although Horowitz would call it “perhaps the least celebratory IPO in history”.

Post-IPO the tech company was losing customers left and right to bankruptcy, and Horowitz knew Loudcloud couldn’t reach its first year annual guidance of $75 million. It was the first quarter of Loudcloud’s existence as a public company. When coupled with a crashing stock market, things sure didn’t look good. Horowitz and the rest of the board wrestled with the idea of resetting annual guidance to just $65 million — even if $55 million was more realistic — to soften the blow and minimize the initial damage, then simply missing its new guidance at the end of the year (hopefully when the market was on the upswing). That’s when Dave Conte uttered: “If you’re going to eat sh*t, don’t nibble.”

Loudcloud reset annual guidance from $75 million to $55 million and took the full brunt of investors’ anger: the company’s share price fell from $6 to $2. However, the company ended up with $57 million in revenue for 2001 — a year that saw few companies meet their guidance — and shares recovered to $4 apiece. Horowitz demonstrated credibility and kept the trust of investors (those that stuck around, anyway) by being honest.

While heeding that advice proved to be the right move for Horowitz and Loudcloud in that instance, honesty should always be the decision of company leaders. Sure, you could try to sweep things under the rug and let customers, partners, and investors down softly, but doing so takes on added risks. Horowitz and Loudcloud would have risked their credibility and the trust of investors at a time (the Dot-Com Crash) when both were valuable intangibles. Investors with a short-term mindset may have lost trust the day the company reset its annual guidance, but by being honest, even though it meant making investors uncomfortable, Horowitz built long-term credibility.

That brings us back to Solazyme

I’m actually quite supportive of CEO Jonathan Wolfson. He’s built an incredible team, an incredible platform, and has an incredible vision. There’s an enormous need to find a more sustainable supply of oils — and Solazyme appears to offer a pretty darn good solution. I would actually rank Solazyme’s management team near the top of the list of all public companies I cover or follow. That doesn’t mean Wolfson and management don’t make mistakes. All CEOs, even the best-of-the-best, make mistakes. Unfortunately, deciding to nibble may be beginning to cost Wolfson and management the trust of investors.

The first delay of Moema was announced in November 2013 and chalked up to adding more robust quality control equipment for switching between industrial, food, and fuel products. It seemed reasonable at the time, and Wolfson stated that Solazyme was hoping for start-up to occur in the fourth quarter as scheduled until a last minute decision:

Up until a few days ago we expected to stay on our previously committed production timeline as well. But with the added project scope we’re pushing production of the first commercial oils back into the first quarter.

Not such a big deal; production was pushed into the first quarter of 2014 and Solazyme provided a rational explanation. On the next conference call on February 26th, Wolfson stated:

…As I have explained previously, we are carefully staging production ramp-up with a planned 12 to 18 month timeline to reach nameplate capacity, at both Clinton and Moema. That clock has started at Clinton with our successful initial commercial production of multiple distinct oils. The clock will start soon at Moema, with initial fermentation operations just getting underway.

Awesome. It seemed as though Solazyme was still on pace to flip the switch at Moema in the first quarter of 2014. The company took advantage of favorable market conditions to raise $202.8 million through an offering of debt notes and common stock at the end of March, but the silence on Moema wasn’t broken until the next conference call on May 5th. Wolfson again spoke about the nearing start-up of Moema, stating:

Our facility has been experiencing intermittent power and steam availability resulting from the start-up of a new co-gen facility at the adjoining Moema sugar mill…It’s a big disappointment, not to be able to report from our first commercial product for Moema today. We were really hoping to do that right up to the wire.

If you follow the company as close as I do, then it’s easy to see why people are beginning to question the honesty and credibility of management. Wolfson told investors that production was expected in the fourth quarter until days before the November call, then told investors at the end of February that the clock would start soon, then raised a boatload of cash, then told investors that production was expected to occur before the call three weeks ago. Note that, without continuing delays, you wouldn’t have to question if the original delay announced in November was actually due to equipment additions, or if the financing deal at the end of March was actually as innocent as attaining funding for capital expenditures and product expansion. Could management be telling the truth? Absolutely, but you could make a good argument that a bad case of nibbling is going on, too.

Of course, regardless of outcome, it’s possible that few investors remember this sequence of events five years from now if Solazyme is successful. Heck, the company could announce start-up at Moema today and many would forgive management. However, if things don’t work out quite so well, how severely will management’s credibility suffer? It’s something all entrepreneurs should consider asking themselves if they were facing the same situation.

The lesson for startups

Both examples, Loudcloud and (potentially) Solazyme, involve decisions made by public companies, but there are parallels to be made to startup life. However, it’s important to note that not every problem your startup encounters can or should be defined as, well, a plate of you-know-what. Some obstacles faced internally — a shaky product development project, a fading partnership, learning that your product sucks — really can be solved behind closed doors by rallying your team to find a solution by a deadline or reminding customers and partners of the value you create. But if you know there’s no way to deliver, then honesty really is the best solution. After all, your credibility, trust, and name are all on the line. Could you survive without them?

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Maxx Chatsko

Maxx Chatsko

I help the world invest better by breaking down complex companies and technology platforms into language anyone can understand.

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