Study nature, love nature, stay close to nature. It will never fail you.
– Frank Lloyd Wright
Biology can take energy from the sun and carbon dioxide from the air to create an incredible diversity of molecules that store energy, cause interesting reactions, and form complex structures. Humans have been using and shaping biology for our purposes since we first domesticated wild animals over 15,000 years ago.
Synthetic biology, a field focused on the design and construction of novel biological systems using genetic modification, harnesses the power of nature and directs it to solving some of humanity’s biggest problems across medicine, industry, and agriculture. The power of synthetic biology can be used to grow healthy organs to replace failing ones, produce chemicals cleanly and efficiently, and make crops resistant to drought, pests, and disease. This is the next step after the domestication of nature, where instead of slowly shaping these organisms over generations of selective breeding we are building organisms tailor-made for our purposes from the ground up.
The market for products produced by genetic engineering in the US is currently quite large. The last estimate available, in 2012, pegged the market at over $300 billion and growing at over 10% a year. Though this shows a large demand for synthetic biology products, they comprise only about 10% of the markets they are looking to disrupt, showing the how much potential growth exists for the field. These are markets that can be massively transformed through the introduction of synthetic biology, and all incumbents need to be considering strategies that include synthetic biology. In fact, many incumbents are interested in developing synthetic biology products, if the number of partnerships between established companies and synthetic biology startups is any indication.
This investment thesis showcases the reasons that synthetic biology has now become a good investment and how to successfully invest in synthetic biology startups
It is focused on investing in agricultural and industrial applications of synthetic biology. Through there are many promising applications of synthetic biology in the medical space, agricultural and industrial applications offer a lower regulatory burden, a lower cost of commercialization, and a quicker path to market. Companies in these areas are focused on solving the massive problems that are caused by an exponentially growing world population.
Seasoned investors may be getting nervous at this point, recalling the biofuels companies of around 2010. These companies promised to use microbes to synthesize fuels at a cost and scale that could compete with traditionally-derived fuels. Through a combination of falling oil prices and disappointing product yields, many of these companies took sustained losses. Today’s synthetic biology companies do not have these same issues. Thanks to identification of correct markets and rapidly improving enabling technology, today’s synthetic biology startups can quickly achieve profitability.
Synthetic biology companies can compete in high-value materials markets
Synthetic biology can compete with traditional manufacturing methods as long as the products are high-value. High-value chemicals are often more complex than the simple hydrocarbons that are produced by traditional oil-based industries. This is where biological-based manufacturing beats traditional manufacturing: at efficiently producing cool, complex molecules with interesting properties worth lots of money. Synthetic biology provides a production platform with considerable cost advantages when applied to the right products. TerraVia’s technology couldn’t hit biofuels price targets, but was able to achieve over 60% gross margins in beauty products. Established companies have begun transitioning to these high value products, and new startups should be targeting these high-value small-market products first, like fragrances, enzymes, and even novel organisms. They can then use these products to fund further work commercializing lower-value larger-market products following the Tesla business model.
Enabling technology is rapidly advancing, dramatically decreasing the time and cost to get products to market
Through a combination of computation and automation, every phase of the design-build-test cycle has accelerated. An exponential decrease in the cost of sequencing means has resulted in an exponential increase in sequenced organisms from six thousand in 2010 to over one hundred thousand today, providing an expanded genetic toolbox for researchers to work with. Computational tools have been developed that can assemble the genes discovered in these organisms into metabolic networks for the production of novel molecules. High-throughput techniques can build and test millions of designs in one experiment and machine learning methods can use the data to inform the next round of design. All together, these technologies have reduced the time it takes to get a synthetic biology product to market from 10 years to 2 or 3 years and the cost from $100 million to $10 million, meaning that early capital can create much more value than during the first wave of synthetic biology companies. Now, companies can begin finding early customers and strategic partners off of series A funding and not series C or D as in the past. This provides early revenue and validation of a company’s technology and target market for early investors and significantly derisks the company for later-stage investors.
Though synthetic biology companies are a much better investment now than in the past, there are still risks inherent to the field. Biology remains difficult to reliably engineer, which is why high-throughput techniques are needed to evaluate many designs. The cost of DNA synthesis has not fallen at the same rate of DNA sequencing. Many customers do not trust products that come from genetically modified organisms, especially when it comes to food products. Most importantly, many synthetic biology companies are often based around a platform technology, not a specific market, and potential acquirers may only value the company for the portion that is applicable to their market of interest.
In conclusion, synthetic biology is enabling a massive shift in the economy towards using biology as a tool that offers decreased cost and increased efficiency of production. Drastic improvements in the technologies that enable synthetic biology are dramatically driving down the cost of commercialization. More and more investors are pouring into synthetic biology, and we will likely see our first unicorn of the field soon. The best investments will take advantage of advances in computation and automation that complements their proprietary science to manufacture high-value products. Investors need to start paying attention to this field or they will be left out in a world that is increasingly moving towards synthetic biology-based solutions for many industries.0