Venturing into the Public Space
Industry leaders consistently remark that initial public offerings (IPOs) defined the biorefining sector for 2011. At least five companies, including Codexis Inc., Solazyme Inc., Gevo Inc., Amyris Fuels LLC, and KiOR Inc., have successfully entered the public space, while numerous others have IPOs pending with the Securities and Exchange Commission. As Michael McAdams, president of the Advanced Biofuels Association, recently pointed out to Biorefining Magazine, those that have gone public have done so “with great success.” He says the trend has been amazing and it shows few signs of slowing. In November, BioAmber Inc. became the latest biorefining company to file a registration statement with the SEC for a proposed IPO.
In a recently published analysis, Lux Research noted that several factors—including the IPO trend—demonstrate evidence that certain segments of the biorefining industry are maturing. According to the Lux Research report, “Seeding Investment in the Next Crop of Bio-Based Materials and Chemicals,” big-ticket acquisitions, IPOs and other examples indicate the biochemical field is rapidly maturing. It also indicates that venture capital funding in the biochemical segment will soon peak and start to decline. Mark Bünger, a Lux Research director and lead author of the report, stresses that’s not a bad thing. “That is really just how venture funding works,” Bünger says, noting that when investors start seeing good returns they often want to make additional contributions. In the venture capital space, when investments start making returns, it generally means the field is maturing. But Bünger says it also means companies that go public will begin to crowd out their earlier-stage counterparts.
Most companies go public to rapidly raise large amounts of capital. Pavel Malchanov, an energy analyst at financial services company Raymond James, says the advanced biofuels and biochemicals sector is by definition an early-stage industry. “What we have seen from the five IPOs that have priced in the past 18 months is that investors are open to putting money in early-stage, pre-revenue, and certainly pre-earnings companies,” Malchanov says. More than a dozen additional biorefining firms have filed registration statements with SEC for proposed IPOs, but those IPOs haven’t gotten priced. Malchanov says that is not surprising given what has happened in the broader stock market in recent months.
Greg Lynch, an attorney and chair of the transactional group at Michael Best & Friedrich says success of the biorefinining sector in public markets has been rather unique. “Unlike the broader market, I think this is one sector that has gone reasonably well,” he says. “I anticipate it will continue to do so for the near-term. I also think that the successful IPO market will help attract more venture capital because they can see an easier path to future fundraising.” Lynch notes, however, it may be pre-emptive to try to predict which companies will enjoy long-term success in the public markets. “Successfully is a tough question to answer,” he says. “You may not know, even within the first six or 12 months whether it’s a successful IPO. I think there will continue to be companies who can successfully raise money in the IPO market in the next six months or so. The real issue is whether the money they will raise will be sufficient to get them to cash flow break even [if] the public markets sour on advanced biofuels.” If that happens, Lynch says that it could be very challenging for companies to raise capital in public markets.
Lynch also says companies filing IPOs might face slightly different investor expectations. “I think it will be much harder in the future for pre-revenue companies to raise significant amounts of money in the public markets,” he says. He also points out that companies with flexible platforms in both the biobased chemicals and fuels markets will continue to see an advantage. He also stresses companies that are further along in technical development will be attractive to investors since they require less capital to realize commercial success.
Some biorefining companies that have filed IPOs feature these multiplatform production abilities, but others are pure players focused on one market segment. “As more companies in the space go public it will provide investors an opportunity to leverage whatever specific markets that they want,” Malchanov says. The chemicals industry represents a multitrillion dollar global market. “There is a tremendous variety of products in the chemicals industry that individual renewable chemical companies can focus on,” Malchanov says. “There is a lot of diversity in this industry and that will continue to be visible as these IPOs are getting priced.”
There are several factors beyond raising significant capital that make filing an IPO attractive. Lynch says for one, earlier investors may be looking for a liquidity event or ability to sell their shares. “I’d caution companies to not overemphasize that reason for going public at this point,” he says.
Drawbacks and advantages of going public should both be considered. “Currently there are attractive valuations and in some respects it’s easier to raise money in public markets in this sector than it is through venture capital and private equity markets,” Lynch says. “Some of the downsides are that it is significantly more burdensome from an accounting and legal regulatory oversight [perspective].” For example, the disclosure requirements are much more significant. “If the company either can’t follow through on its expectations from a commercialization strategy, or if the overall markets go south, it could be very hard.” In essence, a company could be stuck with the burdens of being a publically traded entity without enjoying some of the most significant benefits.
Bünger says companies considering going public need to offer more concrete business plans to potential investors. “Your funding opportunities better be more closely tied to revenue than to just a good idea or technology,” he says. Malchanov also stresses it is imperative to understand how potential investors evaluate IPOs in the biofuels space. First, he says that a company must have evidence its concept has been proven out at pilot or demonstration scale. Also, a company should be prepared to answer questions by investors regarding yield and technology, and how close those figures are to what’s required to be commercially competitive.
Malchanov notes investors expect to see a credible, transparent roadmap of scale-up activities, and how they lead to positive cash flow and profitability. This involves disclosing details regarding target production economics and capacity expansion costs, and how expansion will be funded along with scale-up timing and cost reduction plans. Investors will evaluate the existence of strategic partners, including those who offer financial support to expand production capacity and those involved in offtake agreements. He also says investors will want to know about any exclusivity provisions in partnership agreements. Finally, Malchanov says access to feedstock will be a concern. For traditional feedstock such as sugar or oilseeds, investors want to know if it can be obtained at preferential pricing, or if long-term contracts are viable. If the feedstock is cellulosic, he says they want to know if the pricing structure is clear. Malchanov says these criteria provide an evaluation framework for how investors assess IPO candidates. He says that companies should ideally meet all of these elements before deciding if an IPO is right for their operations.
While advanced biorefining companies are relatively new to the public markets, Lynch notes that several first-gen biofuels firms went public in the past. One of the most significant differences between those and the current crop of advanced biorefining companies filing IPOs is that the first-generation companies were already profitable when they filed IPOs. The same is not true in the advanced biorefining sector. “While [these companies] have significantly more potential than some of the first-generation IPO companies, they are also much further away from commercialization and profitability,” he says. Only the future will tell to what extent that potential is realized.
Author: Erin Voegele
Associate Editor, Biorefining Magazine