What a time to start a business. Lab and university shutdowns, travel restrictions, stay-at-home orders, nervous investors, and social distancing—the novel coronavirus has created a lot of uncertainty. How can scientific entrepreneurs plan and execute what may be the biggest move of their professional lives when no one even knows what next week is going to look like?
The monthly number of deals raising venture capital for young and start-up companies dropped 38% for the two months starting March 4, as compared with the four months before the COVID-19 crisis, according to a recent Harvard Business School study from Sabrina Howell of New York University, Josh Lerner of Harvard University, and colleagues (SSRN 2020, DOI: 10.2139/ssrn.3594239). The study has not been peer reviewed.
Most of that decline was in early-stage deals, and the deals that did happen were more cautious. “Venture groups fund less innovative firms during recessions,” the authors write.
That notion is corroborated by reports from companies participating in America’s Seed Fund, a program at the US National Science Foundation that provides grants to scientific start-ups. Senior program director Ben Schrag says a large number of firms in the seed fund’s portfolio have delayed or canceled fundraising rounds, and others have had them go poorly.
The Wall Street Journal reported in January that venture capital firms had a record $276 billion of “dry powder”—cash in hand that they were not investing. “It’s not that there’s not money out there,” Schrag says, it’s that investors are waiting for company values to drop so they can get a better deal.
Starting a company based on chemistry is a multiyear endeavor, and few such ventures have the luxury of waiting for the investment climate to thaw. For many firms, seed money is dwindling, but new investors want more data and progress than normal to feel secure putting up capital. It’s scary, with a silver lining. New firms that learn to run lean, develop discipline, and find the right partners can come out of the pandemic stronger than if they’d been born during more normal circumstances.
Ingrid Fung of the agriculture-focused venture capital firm Finistere Ventures says companies in Finistere’s portfolio that started during or just after the 2008 financial crisis are doing well today because they learned to be efficient with money, including by outsourcing some R&D. “They typically have lower burn; they can dial up or dial back,” she says.
C&EN spoke with three chemistry start-ups making big moves in the midst of the pandemic. The leaders at these firms have had to get creative to raise funds, build their teams, and move their products forward, all while keeping up staff morale at a time when it’s harder than ever to make a personal connection.
C16 Biosciences uses biotechnology to produce sustainable alternatives to palm oil. Cofounder Shara Ticku says palm oil is the most popular vegetable oil in the world, appearing in 50% of the products on supermarket shelves. “It hits all consumers,” she says. “It’s used in everything from soaps and shampoos to makeup products, to packaged foods like frozen pizza, ice cream, and margarine. It’s also used as a feedstock for biodiesel.” Overall, Ticku says, palm oil is a $60–90 billion-per-year industry.
The problem is in the production. The oil palm tree grows only near the equator, and increasing demand—including from well-meaning pushes toward biobased products—motivates farmers to cut down tropical rain forests to make room for plantations. One cost of that deforestation, Ticku says, is an additional 0.5–1.5 billion metric tons of CO2 emissions per year.
C16 ferments a wide range of feedstocks into what Ticku calls a palm oil biosimilar. The result consists of triglycerides with roughly the same fatty acid profile as palm oil: about 50% saturated fats, with dominant chain lengths of 18 and—you guessed it—16 carbons. The firm also makes other components of palm oil such as β-carotene.
“We’re still in the early days of research and development,” Ticku says, as the firm engineers its oleaginous yeast to eat industrial waste streams and excrete something indistinguishable from palm oil. “Our metrics are ‘Make more stuff—high rate and yield—and make the right stuff.’ ”
The timing of the COVID-19 crisis could have been a lot worse for C16, but it still gave the firm trouble. It closed a $20 million series A financing round in February with the goal of doubling its team and speeding up work. “We found some people, we extended offers, and then everything ground to a halt in March,” Ticku says. She had to close the firm’s New York City labs for 2 months.
“Hiring right now is really hard, mostly because cities and states continue to be shut down,” Ticku says. She’s trying to recruit for some management positions, but candidates don’t want to leave stable jobs or travel for an interview. “There’s a physical fear and an emotional, psychological fear and desire for security.”
Five new technical employees finally started in late June and early July. “Their first day, half of the team is there, half is not; everybody’s in masks. It’s very strange,” Ticku recalls. Two more will start in August.
Construction shutdowns and slowdowns have also delayed C16’s expansion into a new 1,800 m2 space, where Ticku plans to add downstream R&D. “We grow the bugs, they make oil, and we have to extract it. Then when we get the oil, we want to play with it.” She’s now looking at 2021 to make that move.
“The silver lining—it’s probably a gold lining—was that because we had just raised that round, we didn’t have to lay anybody off, we didn’t have to cut salaries, and we were able to keep morale up,” she says. Many of the firm’s peer companies have not been so fortunate. “We are incredibly grateful,” Ticku says. “The downside is that we’ve hired a bunch of people who want to do wet lab work, and instead they were stuck in their apartments doing computer research work.
“We can’t afford to stop or slow down. Sure, I mean that for the company, but I mean that mostly for the problem that we’re trying to solve. Climate change is urgent.”
By the end of the summer, Ticku will have doubled the size of her team. As CEO, she now has to figure out how to let them do their work safely. She’s making back-up plans for more shutdowns and looking at research facilities that are sitting idle in areas less affected by the virus. “Not exactly the problems I thought I would be working on after closing our series A,” she says. “But that’s the start-up life, I guess.”
Sunthetics is developing easy-to-use, off-the-shelf equipment that can drive industrial redox reactions using electricity instead of heat, expensive catalysts, and harsh oxidizing and reducing agents. The firm pairs its reactors with a machine-learning platform to streamline process optimization. “For a lot of the thermal reactions currently used in industry, there exists an alternative in electrochemistry,” cofounder and chief technology officer Daniela Blanco says.
Blanco and cofounder Myriam Sbeiti incorporated Sunthetics in 2018 after winning a series of business plan competitions when they were students at New York University. Sbeiti has been working full-time at the company since 2018 when she finished her bachelor’s in chemical engineering, while Blanco split her time between the start-up and the last stretch of her chemical engineering PhD.
Blanco went full-time with Sunthetics after she finished her doctorate in May. The firm has $400,000 from the competition and grants, plus letters of intent to pilot the technology. The firm is working with pharmaceutical firms first because scale-up chemists and chemical engineers there are developing new synthetic routes, a lighter lift than displacing an existing industrial method.
“But with COVID-19, it has been tough,” Blanco says.
Sunthetics lost access to its New York City lab space, and the contract manufacturing partners it was working with either shut down or shifted to essential pandemic response work. But what’s affected the firm the most, Blanco says, is on the funding side.
In March, Sbeiti and Blanco were in late-stage talks about moving to a tech incubator in New England that would have taken a stake in Sunthetics. “Their ecosystem is awesome; I really wanted to join them,” Blanco says. As the crisis set in, the incubator stopped pursuing the relationship because of COVID-19-related travel restrictions and other factors and decided to focus on local start-ups.
“It was an important transition point for the company. We were ready to finish making our prototypes, testing them, and offering them,” Blanco says. But Blanco and Sbeiti don’t want to spend money paying their own salaries when they can’t be in the lab. Delivery of some grant funds was also delayed because of closed offices and other coronavirus disruptions at the funders. “Our timeline changed, and we had to use our funds carefully to meet our priorities,” Blanco says.
“We were lucky because we still had money left from all the grants and competitions.” But with conventional investment leads drying up and loans unavailable, they had to get creative about finding sources of funding. They’re seeking US government start-up grants, looking at more competitions, and starting new conversations with investors and customers. In June and July, they landed another grant and raised some private equity funding.
The partners found lab space in Texas, where Blanco wants to get back to finishing the final prototype designs starting in August. “It’s much cheaper than New York, which is great,” she says, and Sunthetics is eligible for state and local economic development incentives. But in late June, COVID-19 cases increased sharply in the state.
“With this whole pandemic, everything is uncertain,” Blanco says. “It doesn’t matter what you plan for; you have to be ready to adapt.”
Locus Performance Ingredients (LPI) is a spin-off of Locus Fermentation Solutions (LFS), a 6-year-old firm that uses bioinformatics to identify chemical-making microbes and then designs custom fermenters to fit the organism. LFS provided the equivalent of angel and seed funding for LPI, which is now conducting a series A financing round.
On July 21, LPI launched its sophorolipid biosurfactants for personal care applications, where they will compete with sodium laureth sulfate (SLES) and other commodity surfactants. Sophorolipids’ edge comes from their low effective dose, absence of contaminants such as formaldehyde and 1,4-dioxane, and lack of reliance on palm oil as a feedstock. These strong emulsifying agents have been around for a while, but LPI says its custom fermenters produce them more efficiently, making them cost-competitive for the first time.
LFS CEO Andy Lefkowitz has launched three other firms focusing on probiotics, agriculture, and oil-field chemicals. LPI can draw on that base of expertise and infrastructure, which would normally be a draw for investors, Lefkowitz says.
“When people come and touch it and feel it and meet our scientists, that’s a big advantage for us,” Lefkowitz says. COVID-19 has muted that advantage because few people are willing or able to travel. The firms shot a video to replicate some of the experience a visit might give, but a video is not the same as spending multiple days seeing the process and getting to know the team.
Long-standing industry connections are helping bridge that gap for LPI. Before SARS-CoV-2 dawned, Lefkowitz brought in fermentation industry veteran Timothy Staub to be the new company’s CEO and lend it credibility. “People go, ‘If Tim’s saying it, there must be some reason. He’s not going to jeopardize his 30-plus-year career by making claims that can’t be backed up,’ ” Lefkowitz says.
Still, “it’s always hard to raise capital, and it’s harder during a pandemic,” Staub acknowledges. “It requires a compelling value proposition or unique intellectual property—and in a perfect world, both.”
A strong track record and good team are crucial, Staub says. But they don’t exempt you from proving your case to investors, and that’s usually done in person. “It is kind of tricky doing due diligence on Zoom,” he says. Staub himself wasn’t convinced of LFS’s approach when he first met Lefkowitz at a conference. It was a site visit that brought him on board.
Staub says most commercial fermentation vessels are big, tall, and round. “They’re massive; it’s $100 million to build one,” he says. That kind of scale is necessary for processes with a lot of downstream processing after fermentation. Biosurfactants generally don’t need that.
The units LPI builds in-house are modular, and sometimes even square, making it easy to add more capacity as demand increases. “If it’s just concentrating and purifying, or something that’s not crazy complex, it’s a game changer. You don’t have to finance in 3 or 4 years of losses before you break even,” Staub says.
LPI has eight full-time employees—five on the technical side and three on the business side. If fundraising goes well, Staub and Lefkowitz will staff up their Richmond, Virginia, applications lab, which is sitting empty right now. Despite the delays brought on by the pandemic, the team is moving where it can. Staub says he’s in talks with 27 potential customers.
Between the two executives, LPI has deep roots in the industries it is trying to penetrate, which has helped it advance despite the difficult timing—an advantage a lot of start-ups don’t have. “I think about that a lot,” Lefkowitz says.
The fundamental challenges of starting a business are mostly unchanged, but COVID-19 has reprioritized them and made them harder. More than ever, he says, “You need to find a partner. You need to find someone who can do the things you can’t do or don’t want to do. Build a team to scale your idea.”
Not every deal is stalled. At some point, venture capitalists will need to invest that $276 billion, or their investors will come knocking.
In June, right in the middle of the crisis, Enko Chem, which is adapting small-molecule discovery methods from the pharmaceutical world to pest control products, raised $45 million in a second round of funding that Finistere participated in. The venture capital firm likes to be the “first institutional investor in,” focusing on series A and B investment rounds, according to Finistere partner Spencer Maughan.
“Not too much has changed, in that we’re looking for stellar, credible teams with a big vision,” Maughan says. He adds that the firm looks for “a good body of work that has de-risked and gotten that science ready to be a true technology.” And right now, he wants to see pragmatism. “Are they sensible,” he asks, “with value inflection points that can be reached on the capital given?”
Enko’s success may be the exception, though, and over the next 8 months, Lefkowitz expects more than the normal number of start-ups to fold. Leaders will be under a lot of pressure as cautious venture capital investors hold them and their firms to a higher standard.
Fung advises that firms should be looking to secure 2 years of funding to increase chances of getting through this period. The crisis seems to have halted a trend toward 12–18 month funding cycles. NSF’s Schrag is likewise recommending his grantees to plan to make the money last 2–3 years.
“The ability to build a great company often comes because lean times mean you have to be very pragmatic and sensible about what you’re building,” Maughan says. “There’s always a positive to a downturn or difficult period. I think it’s a really great time, actually, for people to be thinking about starting businesses.”
NSF’s Schrag also, ultimately, has a positive outlook. “Assumptions that anyone made in January are completely obliterated,” he says. “If you don’t really need to raise traditional funding in the next 12–18 months, I don’t see any reason why you would hesitate to start something.”
Although venture capital funding has retreated in the pandemic, he says, support has grown in recent years in the form of state and municipal programs as well as tech incubators, creating a better ecosystem for science-based start-ups. “As far as I know,” Schrag says, “there’s never been a better time to be a scientist or engineer who starts a company.”