Whither goest thou, Zymergen?

Over the summer and fall, Zymergen’s Hyaline thin films project fell into crisis. There were reports of customer disappointment, expected revenues de-materialized, the stock price collapsed, two of the three co-founders left, and former Illumina CEO Jay Flatley stepped in as interim CEO. It was a year only Rough Riders could have enjoyed in Zymerland.

Flatley ordered a product review, and in November, news emerged that “several programs will be discontinued” and the cuts included:

• The electronics film programs, with the exception of ZYM0101, which is being developed in partnership with Sumitomo Chemical. Emerging data on the market segment being targeted with Hyaline and other electronics films indicates a smaller near-term opportunity than previously expected.
• The consumer care programs, including insect repellent, ZYM0201. Based on the portfolio review, the costs of customer acquisition with a direct-to-consumer model were prohibitive and, in the case of ZYM0201, it could not be produced and distributed at a price point competitive with incumbent products.

More than 200 people were laid off, the company is renegotiating its space lease arrangements, and restructuring some $100 million in debt. Overall, Flatley’s goal has been to extend the cash burn runway until further into 2023 and get some products moving commercially, fast. As a company with $99 million in quarterly expenses and $4M in quarterly revenue, ahem, ought to be doing, now that the hoped for zillions from Hyaline will not arrive soon, if ever.

The company is accelerating now three different programs, commenting:

“Two programs in the healthcare market have been promoted: one for development of key enzymes used in vaccine production, and a second in drug discovery, both of which build on previously existing programs and leverage core company capabilities. The Company has also continued to see success with its work in agriculture, particularly with a flagship program on nitrogen fixation where it is working with a partner.”

For now, the company is in what you might call a major retreat from the days when the buzz and promise of Zymergen revolved around of enhanced performance in materials. Now, the company is more squarely aimed in the short-term toward the insurance-protected world of pharma, and a slice of agriculture where a Zymergen product can compete on an avoided-cost and avoided-emission basis, such as nitrogen fixation.

It was not supposed to work out this way — Zymergen had lots of areas of promise and potential foci, but pharma is crowded and was not placed front-and-center when the company was young. Films, batteries, coatings, solvents, and building blocks for physical objects: that was ZY’s sector of the biotech zodiac.

Because the stock tumbled badly, key founders exited, products were shelved, there are bitter feelings, and it’s become conventional in some circles to run the company down. It is the hour of the naysayers.

It’s easy to look at the present and predict that new technologies will fail, 95% of them do, and lots of naysayers make good money out of being right 95% of the time, by running down everything. Harder is to look ahead and see where the value might be found. So, let’s take the question of the future. What now?

Short-term

There will be pressure to stay in pharma, and ag cost-avoidance for some time. There are sky-high prices in that sector, courtesy of health insurance mandates. A friend writes:

“I recall something from their investor materials last year, a chart re their plans to increase title, productivity, etc. Even their best targets headed to something like 50g/L, 0.5 g/L/hr and 92% DSP – yielding a cost of $82/kg (and they were nowhere close to that). At best, that’s for pharma ingredients.”

The agriculture business? Cost-avoidance for existing lines of business is a relatively easy sell in agriculture, In the end, the sizing of the company dictates the nature of the challenge. Companies with $400 million in expenses better find $500 million in revenue, and if there’s only 18 months or so, it better be a crushing need or a huge existing market where a product has immediate appeal, hence vaccines and nitrogen-fixing microbes.

Longer-term

We like plastics and fibers for Zymergen. Why? The world is crying out for better functionality — more barrier protection, less weight; less micro-plastics caused by seawater eroding nylon, polyester or acrylic over time. Also, the world needs ABS performance with a simpler molecule — better Legos, if you will. Also, better coatings for paper cups to make your Starbucks one-and-done compostable. Better K-Cups. 

Plastic prices are good, performance premiums are available, the handling issues are less risky than, say, circuitry. The volumes are large. The scale-up time is less than for fuels, margins not so tight. There’s $500 million in plastics for novel performers, for sure. There’s roughly $300 million in Legos, for starters, as Lego searches for sustainable, durable plastics.

Case in point. In the past day, French President Emmanuel Macron and Eastman CEO Mark Costa announced Eastman’s plan to invest up to $1 billion in a material-to-material molecular recycling facility in France. This facility will recycle up to 160,000 tonnes/year of hard-to-recycle plastic waste. A year ago, Eastman announced a facility in Tennessee, more on that here. That’s recycling, not enhance performance, but it demonstrates a customer base deeply interested in transformation. Customers of the Eastman venture include LVMH Beauty, The Estée Lauder Companies, Clarins, Procter & Gamble, L’Oréal and Danone. Those are good customers to have.

A challenge? A need for speed

It probably strikes you as absurd that we feel a challenge for Zymergen, which is entirely based on speeding innovation through machine learning and artificial intelligence, is to move faster with its customers. It’s been I think 8 years now since I first sat down with co-founder and former CEO Josh Hoffman as he was raising a Series A. Eight years from nowhere to IPO is a birdie score, maybe an eagle. Eight years from zero commercial products to zero commercial products is, at best, a par score, maybe a bogey.

Why, given all the focus on speed. Speed to IPO, speed to raise cash, speed to build infrastructure, speed to lease space, speed in product discovery, why is the commercialization proceeding slowly? 

The corporate customer problem

It’s simplistic and wrong to say that Zymergen has had a “if you build it, they will come” attitude. Or a “fake it until you make it” culture. That’s too easy. There is something there, something special, perhaps transformative. Though it’s not fashionable now to mention it.

What goes wrong with these companies? Myself, it seemed to me as an observer at a distance that Zymergen and Solazyme shared a weakness – they underestimated the complexity and risk-adverseness of large customers who signal the intent to place big orders. There’s an awful lot of maybe disguised as yes, until it becomes maybe not. 

Why big companies struggle to be great clients

A great client relationship is one that, if it has to fail, does so cheaply and quickly. Why do partnerships between small-ish ventures and larger corporates have difficulty? Not all of them do.

Big companies are not simply peopled by unprincipled cowards who wave the white flag when trouble looms. Nor are they all ponderous dinosaurs, nor are all emerging ventures frisky and virtuous mammals. Success is culture, partnership success is partnership culture.  Transparency matters, ask your beloved.

The Blockbuster Problem

Many partnerships and especially the big partner within have what I would describe as the Blockbuster problem – the inability to see how their ability to operate will be impacted by the future of technology and prices.  Blockbuster couldn’t see in 2000 why Netflix was a good acquisition for $50 million. Blockbuster 2000 wasn’t Blockbuster 2012, and Netflix 2000 sure wasn’t Netflix 2012. Streaming and bandwidth pricing changed everything.

It’s not that people don’t see it coming. They didn’t see how one company, Blockbuster, would find it difficult to jettison its stores, or even to explain jettisoning its stores, to the shareholders they had at a time. Netflix found it easier to jettison its DVDs-by-mail business model. Sears, K-Mart, the printed book business, cable television, the list is long. Yet, Kodak didn’t crumble because it did not understand that digital was coming, it crumbled because it could not find a way to transition to a new way of thinking.

As industry legend Jeff Lievense remembers, “I was a young Kodak employee in the 1980s when they killed their digital imaging program. Still burned in my brain is the company’s rationale: “Digital image quality will never be as good as conventional.” Tough to cannibalize a business that you dominate. Back in those days, Kodak had a 75% global market share in photography. Fast forward to today, Kodak’s infant, insignificant bioproducts business (where I worked, became Genencor, now part of IFF) has a market value that far exceeds Kodak.”

Yes, that’s the digital revolution, this is the sustainable one. But there are lessons in here. One of the reasons why the advent of robotics did not seem to cause the end of any major consumer brands — big companies deployed them as cost-avoidance. Actual product performance innovation? That’s been another thing entirely. Ask General Motors ‘what happened to the EV-1?’ Indeed, ask what happened to EVs in general during the decade before Tesla and Fisker.

Getting to Yes vs Staying at Yes

Some companies just have trouble getting to yes, especially large ones. Other companies have trouble getting to no, companies like Theranos. Getting to Yes, sounds like a sales manual, and that’s usually how it’s thought of. Clients say yes, innovators deliver. 

But it is Staying at Yes that is everything. Yes has to have integrity, resolve, grit. It’s a deep Yes, a bond between client and innovator that is woven, not joined, not adjacent, not scotch-tape. In woven partnerships, critical issues arise earlier, remedies are more real, failure if it must come, comes early.

Too many work on getting to yes, and have the “failure is not an option” culture. You might have heard of it as “real artists ship,” “whatever it takes”, it comes in many flavors, an attitude that represents at its best Apollo 13 and at its worst the Challenger disaster.

Woven partnerships, woven companies

Something you learn in Hell Week, first year in college. If One of Us Fouls Up, We all Foul Up. Shows up in military training circles, too. It is the principle of collective responsibility that defines a unit. Units become woven together.

How many ventures, engagements, partnerships fail because they were just stitched, fastened, or snapped together? The failure to weave does not simply lead to clients feeling they have the freedom to bail, it leads to the freedom to feel you have it nailed when you don’t, the freedom to focus on Task rather than Purpose, the freedom to Revel in Silo Mentality, the freedom to Say Nothing when Skies Darken, the freedom to Ignore the Signs of a Big No coming, the freedom to believe that Stakeholders exist to be Fooled, the freedom to believe that Passing the Buck is a form of Victory.

Who takes basket weaving seriously? It is a euphemism for a course lacking in merit, a slide course, a joke. Yet weaving is, if you ask me, the most important skill of all, when it comes to building a company and the neighborhood it will live in.

A film? It is grounded in the idea of lattice. Did Zymergen weave? Does it weave yet? Does it weave well?