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Search Funds: A New Model for Innovation in the Synthetic Biology Industry

To the scientists, researchers, founders and investors in the field, synthetic biology may excite because of its science-fiction quality technologies. It may excite because of its potential to solve some of the world’s most vexing issues from treating cancers, to sequestering carbon from the air, to producing food abundantly and cheaply. Or, it may excite because of its ability to democratize biology, empowering entrepreneurs to use biology to add value across many different industries. Still in its infancy, the synthetic biology industry has already taken on applications from consumer to healthcare, engineering microbes to produce next-generation films for our smartphone screens, bacteria acting as cancer treatments, and cells producing lab-grown meat.

The promising growth of new synbio technologies and business models have enabled both entrepreneurs and some in the Fortune 500 to leverage the tools of biology within almost any market. The synbio stack, a collection of equipment and biology-as-a-service platforms, is gradually eliminating the financial, time, and expertise barriers to creating synbio “apps”. 

With this quiver, the biggest question now facing synbio organizations is where to aim this biological toolset.

The search fund model

Each year on the campuses of top U.S. business schools, investors meet with would-be entrepreneurs looking to launch their own search fund, a relatively unknown investment vehicle with an impressive track record. 

Under the search fund model, an entrepreneur studies a specific market landscape looking for a promising existing business. When they find one, they pitch the opportunity to investors, acquire the business, and grow and expand it — providing the entrepreneur with a chance to break into a new market while minimizing much of the risk new ventures face early on identifying product-market fit.

The most famous example in search fund lore demonstrates the potential power of the model. In 1995, two entrepreneurs acquired a small Texas company offering roadside assistance insurance sold primarily through local wireless carriers. The two entrepreneurs built off this wireless carrier distribution network, and pivoted from offering roadside assistance to providing insurance for cell phones. Today, that company is a multi-billion dollar enterprise called Asurion.

The Asurion story is not an anomaly. Testifying to the promise for investors, a Stanford Graduate School of Business study found an average 33.7% annual return in search funds, with the average investor recouping seven times their investment. Investment risk is lower than with traditional entrepreneurship as well, with one in four search funds delivering an above-market return versus only one out of ten new ventures. For entrepreneurs, a search fund represents an opportunity to scout, identify, and eventually run a promising business — and to cash in on the value they create.

What would a synthetic biology search fund look like?

The magic in the search fund model exists in its ability to reduce the risk of traditional entrepreneurship, by building off the foundations of an existing business. For synthetic biology organizations with established platforms that minimize the scientific risk of new endeavors, a search fund model would enable these organizations to team up with industry veterans who are best equipped to tackle the market and execution risks prevalent in launching a new product or use case. Within synthetic biology, experts from across diverse industries—including food and agriculture, chemicals and fuels, and textiles and manufacturing—are needed to both identify valuable applications for synbio products and to bring those products to market upon development. Both use case identification and downstream product commercialization could be greatly strengthened by the presence of not just synbio aficionados, but also veterans from the targeted industries. 

Under an adapted search fund model, a synthetic biology organization would sponsor, with a salary or stipend, would-be entrepreneurs from markets that they are interested in entering to explore potential use cases in that area of expertise. That entrepreneur would then scour the field to pinpoint a desirable use case and pitch this use case to the sponsoring organization. If the sponsoring organization sees similar value, they can opt to invest in the form of capital, access to their discovery platform, or licensing of their technology. The entrepreneur will take ownership of this line of business and be responsible for commercializing the technology within that use case; in return, the entrepreneur receives a salary and a stake in the new enterprise, reflected in either equity or royalties on any sales.

Why does synthetic biology need dedicated search fund entrepreneurs?

When it comes to building products with biology, getting the science right is obviously a challenge. But so is identifying the right products to build in the first place. Whether discussing a platform company like Zymergen or a one-molecule shop like Kalion, the success of the business depends on first identifying a profitable application and then executing to market to sell that product.

Zymergen demonstrates the value of a strong application identification process for companies with versatile synbio platforms. One of the leaders of the industrial synbio space, Zymergen has built a machine-learning platform for creating microbes that churn out new, custom-designed molecules for a given task. Earlier this spring, the company announced their invention of a new biofilm, Hyaline. They identified a strong market need for thinner, more flexible electronic films, and leveraged their platform to meet that need. Hyaline represents a sizable opportunity as a truly unique product, and may soon end up inside smartphone screens, camera lenses, and circuit boards. In Hyaline, Zymergen may have a new “holy grail” material for the electronics industry — could employing a search fund model help them find holy grail products in agriculture or textiles or food science?

Even for companies with narrower platforms founded upon single molecules,  teasing out product-market fit is essential for earning profit. Kalion, a small biotech with a unique platform to manufacture high-purity glucaric acid, could pursue a range of diverse use cases for the chemical, from manufacturing Adderall to reinforcing construction materials. With this staggering array of potential markets to enter, synthetic biology companies could more rapidly spin-out successful business lines by embracing a search fund model.

To continue growing, young biotechs will need to continually identify additional valuable revenue streams. While Zymergen and Kalion have found strong early applications for their products, a search fund model provides organizations like these an opportunity to scale their pipelines of future products by bringing on incentivized individuals with specific domain expertise.

In October 2019, Ginkgo Bioworks announced the formation of Ferment Fund, a $350 million investment vehicle hoping to disrupt established markets with new synthetic biology companies. The Ferment Fund is not a search fund in the typical sense: its focus still lies in investing in external start-ups or Ginkgo-incubated businesses, rather than on sponsoring entrepreneurs ‘searching’ for the next synbio application. That said, companies backed by the fund—underwritten by Ginkgo’s existing investors such as Viking Global Investors, General Atlantic, and Cascade Investment—will have the advantage of launching with full access to Ginkgo’s platform for cell programming, bypassing the technical hurdles of founding a synbio company.

The Ferment Fund is not a search fund in the typical sense. Investors in a search fund may have little expertise in the field they are entering. In contrast, Ginkgo and its strategic partners have an intimate understanding of their industry and are focused on enabling spinout companies in mature industries where synthetic biology has been underutilized but can have a profound impact on a business and its larger ecosystem.

Synthetic biology search funds: Accelerating the bioeconomy

For synthetic biology to achieve its most far-out applications, the community will need to invite, welcome, and entice experts and entrepreneurs from the very same industries it is aiming to disrupt. 

For synthetic biology companies, the search fund model offers a relatively low-risk way to source profitable new markets, customers, and use cases. 

For the synthetic biology industry, the search fund model incentivizes experts from fields such as food and agriculture and electronics and fashion to enter the space, bringing new knowledge into the field. 

And for the world at large, search funds could be a powerful accelerant to bring the tools of synthetic biology to a wider audience, bringing about the promise of synbio to previously untouched fields.

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Matthew Kirshner

Matthew Kirshner

A long-time enthusiast of emerging biotech, Matthew Kirshner works in life sciences consulting at Putnam Associates, focused on bringing pharma and biotech products to market. When not at his day job, Matt writes about new applications for synbio tech, the evolving synbio landscape, and the business strategy behind the decisions of the leading synbio companies. He enjoys meeting and discussing with others in the synbio space, and can be reached at matthew.kirshner@gmail.com.

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