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Challenges in valuing Synthetic Biology companies
I am writing this post in response to https://commonstock.com/post/3a23055e-1364-4c1e-b712-3fdb2cedd7db by @markpaddey and a following comment by @growthinvesting.
It is great to see interest in synthetic biology companies. I know the founder of a synthetic biology startup who had to shutdown his company. But this is from a time when synthetic biology was not a cool buzzword. They were the first to design micro-organisms that can produce acetaminophen (Tylenol) by fermenting sugar. I will share 2 key concerns he had raised before understanding if a synthetic biology company will be successful.
- Synthetic biology platforms are not like software: Despite all the claims that input specifications of an organism goes in and the genetic code for an organism comes out from their "proprietary platform", there is a broader set of challenges here. Biology is much more complex than software, biological processes in the organism are interacting in ways that we do not understand all of it and thus it has not been modeled in software. This in turn leads to predictions being off, and the only way to verify if a predicted genomic code being correct is to extensively test them in the lab by designing the organism and going back to the drawing board again. This leads to much slower turnaround times before you hit an eventual success. A key indicator of this: the list of genetically engineered microorganisms will remains relatively stagnant or grow very slowly for these companies.
- Unit economics do not line up: Genetically engineered microorganisms are desired because they can replace an industrial process or chemical production. Hence the competitor in this space is then the chemical industry, who have tuned their industrial processes over decades (some even centuries) to be very cost effective. To get customers, a biological process has to be more reliable and cheaper than the existing industrial counterpart. Simply producing a chemical in a lab conical flask won't sufficient. It needs to give the equivalent output in the same space at lower cost.
This is by no means a bear case for new generation companies like Ginkgo Bioworks, etc. I am just sharing some challenges that these companies have to overcome, and as investors some points we should keep in mind. It is very well possible that maybe these companies are working on these limitations.
Disclosure: I do not have any positions in any synthetic biology companies.
Thanks for the response! I do not currently have a position in Ginko, but do look forward to following their progress as they attempt to ride do cost declines over the coming years. I've listened to several interviews with Tom Knight (one of the founders) that make me cautiously optimistic on the prospects of synthetic biology as we move through the 2020's.
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