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Thursday, May 26, 2011

BFD: Biofuels boom or bubble?

The next few weeks will bring two more IPOs by California biofuels companies: Solazyme (of South San Francisco) and Ceres (Thousand Oaks.)

Francis Gaskins of Seeking Alpha analyzes the Solazyme IPO (SZYM, due Friday) while Jim Lane of Biofuels Digest (BFD) analyzes that of Ceres. By my count, this will mark five IPOs by US biofuels companies in 15 months, following Codexis (CDXS, April 2010) Amyris (AMRS, Sept. 2010) and Gevo (GEVO, Feb. 2011). All but Gevo are based in California.

Gaskins is bullish on Solazyme while Lane has a healthy skepticism about the industry, especially the pre-revenue companies. In fact, Lane’s treatment of the Ceres S-1 is the funniest (or at least snarkiest) S-1 analysis I’ve seen in years. (Lane was equally through but a little less cynical when he analyzed the Solazyme S-1.)

The best part of Lane’s analysis of Ceres is when he reads between the lines on the discussion of risks:
In IPOspeak: We have a history of net losses; we expect to continue to incur net losses and we may not achieve or maintain profitability.
In English: Our investors are tired of losing their money, and may wish to lose some of yours before reaching profitability.

In IPOspeak: The markets for some of our dedicated energy crops are not well established and may take years to develop or may never develop and our growth depends on customer adoption of our dedicated energy crops.
In English: If biofuels and biopower do not scale globally, we are toast.

In IPOspeak: We are at the beginning stages of developing our Blade brand and we have limited experience in marketing and selling our products.
In English: Sir Richard Branson doesn’t work here.

In IPOspeak: Our principal competitors may include major international agrochemical and agricultural biotechnology corporations, such as Advanta, Dow Chemical, Monsanto, DuPont and Syngenta, all of which have substantially greater resources to dedicate to research and development, production, and marketing than we have.
In English: Big Ag may swoop in and take away all our toys.

In IPOspeak: A significant portion of our revenue to date is generated from government grants and
continued availability of government grant funding is uncertain.
In English: Uncle Sam is out of money.
Profits are scarce among this crop of young companies:
  • Ceres is in the business of developing seeds for sweet sorghum that are optimized for making biofuels; it is essentially pre-revenue.
  • Gevo was also pre-revenue.
  • Amyris IPO’d after it had significant revenues.
  • Codexis had revenues but with $150+ million in accumulated losses, about 3x that of Solazyme.
As it is, at the close of business Wednesday, Amyris was up 80% from the IPO price, Gevo up 20% and Codexis down 30%. Three is not a large enough N to generalize, but it does suggest the risks of the segment.

Solazyme has a better story to tell than Ceres. In 2010, it had losses of $16.2 million on revenues of $37.9 million. So the “history of net losses” comment from Ceres (and Lane’s translation) might also apply to Solazyme, but their revenue growth certainly provides more of a track record for investors. Solazyme is also #2 on the Biofuels Digest top 100 list of 2010, or #4 in the expert’s list — after Amyris, LS9, POET and ahead of Gevo. (Ceres is #13 on both.)

While biofuel IPOs are happening now without profitability, for most of the past 30 years, a new company had to be at least cash flow positive (or positive EBITDA) to IPO. A firm that’s coming out pre-revenue (or at least pre-profitability) suggests it believes that it’s more urgent to get the cash sooner from newer investors rather than waiting to solve its profitability problems and thus command a higher multiple. That also suggests that the current owners think there is a chance that the company won’t make it to sustained profitability, or (as Lane put it) “we are toast.”

The only time I remember that tech company IPOs were dominated by money-losing (or pre-revenue) companies was the late 1990s. And we all know how that turned out: there were a few winners and lots of losers. A case can be made for any of these companies being the survivor, but the odds are most will be gone (or merged away) in 5 years.

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