I was recently reading an article from Kyle Harrison, and in it he posited the question: if you had to invest in one startup at any stage today, and hold it for the next 30 years, who would they be and why?
The context for the question in the article is that outsized ambition is very hard to come by, and that while outsized ambition does not always lead to outsized outcomes, outsized outcomes are often preceded by immense ambition. While I think this is true, I found the prompt to be more interesting as a test for where I think the most value will be created in 30 years time, and what sorts of existing startups will even be around in 30 years. Where in the economy do I believe enduring value can be created in the next three decades and beyond, and are there any companies that currently encapsulate my position?
What I like most about this prompt is that it forces you to identify a long term macro trend, but make a decision today about that trend. These are two very opposing forces, as most of our macro predictions are best articulated as themes and movements to be played out over time, not companies executing on that vision today.
For example, most who believe in technological progress believe that enduring value will be created in AI over the next 30 years and well beyond, but at this juncture, particularly in what feels like peak exuberance in the space, it would be very difficult to place a bet in a business that captures the value of a trend you believe will materialize consistently for the next 30 years. I also like this question because it is at odds with not only venture investing time scales, but really any private capital, where a fund life exists around ~10 years.
So to answer this question, I go back to the oft repeated Bezos quote asking not what will change, but what will still be the same 30 years from now.
Although we are in the tumultuous transition from the Industrial Age to the Information Age, our physical world is still defined by Industrial Age technology and processes and will likely be for decades to come. What will stay the same over the next 30 years? The core physical products that became abundant over the course of the Industrial Age will continue to determine how we live. We will continue to need increasing amounts of energy, heat, chemicals, agricultural products, plastics, metals, and building materials like steel and concrete. We will need all of these commodities and more of them.
What else will stay the same? Global temperatures will continue to rise despite declining emissions in the US. The foundational materials and processes of the Industrial Age gave us immense wealth and increased our standard of living, but they are also the main drivers of our warming planet.
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The last piece that will stay the same is how we structure the mechanics of our global economy. We live in a globalized market based economy, and will continue to do so. In this economy, teams win by providing cheaper, higher quality, and safer products and services.
For all of these reasons, among all the technological trends and hype cycles, I have the greatest conviction that enduring value will be created by technology companies that fundamentally change the underlying cost structure and carbon footprint of the commodities at the foundation of the industrial world. These are some of the largest markets in the world (food, chemicals, cement, energy, etc), and they have largely stayed the same for the last 50 years. To be clear, the markets for these industries will not be changed via a green premium. Climate is a prompt or a lens through which to apply technology, but it is cost, quality and speed first, carbon impact second.
The venture ecosystem parlance for this space is “deep tech,” but I think of it as “industrial tech.”
There are other more operationally focused reasons I look to industrial tech for my 30-year buy and hold. Much of this comes from my experience building and scaling Bowery Farming, and seeing first hand how supply chains are built founding Mammoth.
Industrial Tech companies may be more capital intensive, but they have incredibly defensive moats at scale. It takes time, money, and scale to get the machine to a place where it can be repeated over and over again. Building a facility that is 30x the size, or even 3x the size of your pilot is a massive undertaking where everything that can go wrong typically does go wrong. But once a company has reached scale, it is not only the technology, but the operational and supply chain knowledge and processes to scale a novel technology that is not easily replicable and becomes highly defensible. These businesses actually are very capital efficient, as they become highly repeatable and predictable, and thus financeable, at scale.
One key characteristic to look for in Industrial Tech companies is minimized market risk. SaaS investing is almost always a question of market risk, not technical risk. In Industrial Tech, these companies rank very high in technical risk, and because they are often selling essential Industrial Age products, it can be easy to assume that they will be serving large markets. If an Industrial Tech is not laser focused on upending the cost structure of the large market they are serving, then they are taking market risk in addition to technical risk. Said another way, it should not take many years and immense capital to demonstrate large scale market pull. In the Industrial Tech world, this often takes the form of the existing industrial giants becoming early partners or even investors.
Given the above, my 30 buy and hold would be Solugen.
Let’s get into the details.
I usually try to first be as simple as possible when explaining to myself what a business does and why it’s compelling. This is it for Solugen: Solugen makes chemicals, one of the largest industries in the world, more efficiently with plants than conventional petroleum based methods, and vertically integrates their supply chain to take advantage of their cost advantage.
A slightly more detailed explanation is that Solugen was founded in 2016 by Gaurab Chakrabarti and Sean Hunt. Their founding story is well documented, and is a great reminder of how technological innovation is often derived from a mix of curiosity, intellectual energy, the fusion of multiple disciplines, perseverance and luck. The two also have great natural chemistry together and they’re pretty funny.
The very short version of this story though is that while investigating why cancer cells developed enormous amounts of hydrogen peroxide for his PhD, Gaurab discovered the enzyme (a biological catalyst) responsible for this highly efficient chemical output, as well as how to produce this enzyme.
At the same time, Sam was also pursuing his PhD, but in chemical engineering, and was investigating how to produce hydrogen peroxide at scale using various metal catalysts. Can you put petroleum under an immense amount of heat and pressure to make a chemical, but add a metal catalyst to make the process more efficient, and do so at an industrial scale?
Enzymes don’t require immense heat, pressure or petroleum feedstocks, and are far more efficient catalyzers. They’ve just been historically very expensive to produce enough for industrial scale manufacturing. But if you could find a way to make enzymes cheaper and engineer them so as to produce a wide variety of chemicals, as well as develop the infrastructure and processes to use enzymes at an industrial scale, you’d have the means to completely change how chemicals are produced. This is what Solugen set out to do.
Before launching into greater depth about the technology and why it is able to drive a significant cost advantage, it’s important to understand a bit about the trends that have made this technology viable, and likely will ultimately define the intersection of biology and manufacturing.
Solugen’s approach to using enzymes as a more efficient, cleaner catalyst isn’t a new idea. The issue is that enzymes have historically been prohibitively expensive.
In 2018, Frances Arnold won the nobel prize in chemistry for her work on enzyme engineering and use in chemistry - work that she had begun in the late 1980s. Her research was centered on the idea that if she could “catalyse the chemical reactions that occur in the Earth’s organisms and, if she learned to design new enzymes, she could fundamentally change chemistry.” The gating factor for her work in the 90s was that selecting for random mutations in enzymes that were particularly good at catalyzing specific chemical reactions was a slow and laborious process. With the advent of modern genetic engineering, and ultimately CRISPR, paired with modern computing, Arnold began to not only hypothesize but also physically create an enormous quantity of genetic configurations, making the ability to generate a wide variety of enzymes for specific chemical reactions incredibly cheap and fast.
If interested, you can read more about her work here. From an investing perspective, Solugen is at the forefront of commercializing a major technological tailwind that will likely only compound as companies employ AI to search for new potential genetic combinations for enzymes. I believe many new companies will be built in the next 5-10 years off of the foundation of Arnold’s work and the success of Solugen’s approach.
Okay, so now that we know 1) enzymes can be engineered to catalyze specific chemical reactions, and 2) these enzymes can be developed and produced cheaply, why does that matter?
The answer is Yield and Throughput. This is not unique to Solugen. Yield and Throughput are the key operating metrics for any physical manufacturing operation, whether it’s chemicals or machine parts or farming. During my 5 years at Bowery, yield was the core driving metric behind economics, and Solugen, despite being in a different field, has very similar levers to work with to make the business a success. ****
Yield is the amount of product you get out for a certain amount of resources you put in. A 50% yield means you get 1 widget for every 2 widget raw materials you put in. For the more financially minded, free cash flow is kind of like the yield of an entire business. Throughput is the rate at which you can repeatedly produce that widget at the desired yield.
For typical chemical manufacturing, yield is 60%. On top of this the other 40% is either waste or other products that require additional and separate processing and distribution costs. Assuming the labor involved as well as the final market price are both fairly optimized entities, the only ways to really move the needle on the economics are to increase yield, decrease waste, or decrease input cost/lb, with the most impactful lever being to increase yield. Solugen’s technology does all three.
The industry today achieves 60% yield using a fossil fuel based feedstock (oil, natural gas, coal, etc) under immense pressure and heat (800 degrees F) and with significant waste. But enzymes can achieve the same chemical reactions at near perfect yields at low pressure and low heat (250 degrees F) using water and sugar as a feedstock, and with zero waste. The result is a proprietary process leveraging proprietary enzymes to make chemicals at a 90% yield with zero waste, lower energy costs, and lower input costs using materials like corn syrup. Yield is the ultimate driver of economics here, as higher yields mean that a facility is pumping out more product per square foot at a lower raw material $/lb and a lower labor $/lb, increasing the cashflow of an individual facility and driving ROI higher. ****
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In essence, if Solugen can engineer enzymes to react with specific feedstocks and specific metal catalysts to produce an array of chemical products and scale that process to industrial levels at the same yields they are achieving today, they will have built the technological basis for the next generation Dow Dupont.
Solugen’s opportunity is not simply a cleaner, cheaper, faster method of chemicals manufacturing. Like many innovative technologies, Solugen’s new method of manufacturing has unearthed the additional opportunity of collapsing a large portion of the traditional chemicals supply chain under one roof. No, this is not Ben Thompson’s Aggregation Theory applied to the physical world. However, the concept of using technology to change the economics of an industry by bundling previously unlinked components of a supply chain, is consistent here.
The below is an extremely simplified view of how the chemicals supply chain works today:
https://miro.com/app/board/uXjVKXLjXo4=/?share_link_id=525428729667
The key thing to take away here is that in order to make cheap chemicals, the entire chemical supply chain has historically been built around the economics of absolutely gargantuan production facilities. Chemical plants are expensive to build and energy intensive, and are built at a large scale to optimize their operating unit economics. However, in order to generate a competitive ROI, a given facility needs to be constantly running and generating enormous output. Such facilities can only economically ship the largest volume possible - tanker trucks worth of chemicals. As a result, when a customer places an order directly from a producer, the best they can do is promise to ship the truck in the next 3-6 weeks and call a few hours before the truck arrives. Incredibly, it sounds worse than when you ask your cable company to come fix the internet.
It is no wonder that such an industry has an NPS score of < 10.
Herein lies Solugen’s additional opportunity and strategic positioning. Solugen’s facility (the Bioforge) achieves unit economic cost parity for the chemicals it produces, but it also does so at a fraction of the physical footprint of a typical chemicals plant. Solugen’s Bioforge in Houston produces 15K metric tons of hydrogen peroxide per year. Large industrial plants produce 1.5-3M metric tons, and a 100K metric ton facility is considered small.
Because of its relatively small footprint, Solugen is able to co-locate a mixing and distribution facility alongside its production facility. In this way, they are able to add new processing technologies to directly service end customer needs, and consolidate multiple pieces of the supply chain under their own roof, driving an even greater cost advantage.
Not only are they able to outcompete traditional chemicals production on cost, safety, and sustainability, but they are also able to directly reach the end customer and develop a superior customer experience.
Solugen’s technology and business model enables the chemicals supply chain to look more like this:
https://miro.com/app/board/uXjVKTPBf_0=/?share_link_id=194378472631
In this way, Solugen perfectly fits the Keith Rabois’ axiom for startup success: “Find large highly fragmented industry w low NPS; vertically integrate a solution to simplify value product.”
And what is stopping Solugen from co-locating their facilities with existing feedstock sources or with large end customers, or both? They have already done as much with their new 500K sqft plant in partnership with ADM. The Solugen facility will be co-located with ADM’s corn facility, which it uses to produce a number of industrial products, which will use Solugen products as inputs.
Once you see the fundamental shift that Solugen enables in the supply chain, it’s hard to unsee the opportunity. If Solugen can engineer enzymes to more efficiently produce the long tail of all speciality chemicals, the incumbents will structurally be unable to compete.
The blending and distribution business Solugen has developed not only rethinks the existing supply chain, but it also unlocks a differentiated go to market motion that its competitors cannot replicate.
Although the blending and distribution business uses Solugen raw commodities as an input to a finished product, it is not required to only use Solugen products. In fact, there are many molecules that Solugen has not developed capabilities for yet. In order to serve their customers, they will blend and distribute products using chemicals purchased from their competitors. In this way, not only do they develop a deep empathy for the customer experience, but they also create a trojan horse selling technique. Solugen may sell someone else’s product to a customer, but because they have developed the customer relationship, it becomes a very easy sell in process to go back to that same customer and offer them a cleaner, safer, cost competitive version of that same product. Not only that, but these relationships give them a clear roadmap of what molecules to develop next on the production side. Ultimately, customers do not want to buy from a wide variety of vendors, and would instead prefer one cost competitive vendor that can meet all of their needs. Instead of racing to reach new customers, Solugen has the opportunity to first expand its share of wallet with their large scale existing customers.
Solugen also is able to leverage their differentiated production method to expand into new verticals with products that their competition cannot replicate:
The chemicals industry is massive, and is an input to almost every physical item we encounter in daily life, whether that be packaged food, diapers, cleaning products, agricultural production, furniture, medical devices, packaging, clothing, toys, auto parts, or electronics. The list is endless, and it should come as no surprise that 1/4 of total US GDP comes from the chemicals industry. Globally, this is a $5 trillion industry, and the global top 50 chemicals companies do $800Bn in revenue annually.
More specifically, the market for specialty chemicals, which is where Solugen currently plays, was a $723Bn market as of 2021, and is expected to reach $1.1T in by 2030. Of the large industrial and global commodity markets, chemicals is one of the fastest growing, expanding at an almost 6% CAGR.
It’s fairly straightforward to simply look at an enormous TAM and assume that a startup can penetrate a tiny fraction of that market. This is a particularly easy mistake to make in the commodities business, where oftentimes companies start at a price premium with the plan to drive cost down over time, and as a result, their actual serviceable market is materially smaller than it might originally appear.
In the world of Industrial tech, the question of scalability is not just about the total possible market size, but also about what economics are required to succeed at each phase of commercialization, and what capital partners can support each stage. For example, what capital is required to reach $1M in revenue? How about $10M?
This is important because it also impacts your serviceable market size. If you need $200M in capital to reach $10M in revenue, that means that it’s likely that the ASP required to sustain a viable business is pretty low, which is going to put a lot of pressure on the economics before you reach a massive scale.
Most Infrastructure Tech businesses sell a commodity, but there are different markets and entry points at which that commodity can sell. If you can build a sizable business in the first few premium pricing tiers, then it is a good indicator that you are entering into a massive market as costs come down. Tesla is probably the most famous for successfully executing this strategy. C16 Biosciences is another in the climate tech world that seems to be on a promising path.
However, no climate tech company has done this as well as Solugen has. The company started its life producing hydrogen peroxide and selling it to the float spa market, capturing 80% of the float spa market and making $12K/month within months. Hydrogen peroxide at its cheapest is sold for $2/gallon, but Solugen started off at $40/gallon from their first experimental pilot. Even within a specific molecule, there are niche markets where prices can vary. So their initial market existed at a premium tier because their customers were buying very small quantities with high cost shipping requirements.
They then shifted to peroxide for cleaning “produced water” (water byproduct from oil and gas process). Produced water is a materially larger market than float spa water, and their peroxide had to be sold at a lower price point than the original peroxide. However, at this point they were scaling the Bioforge to economically meet that pricepoint.
They then further widened their addressable market by expanding their product set, shifting from peroxide to glucaric acid, which can also be used in water treatment, a market they were already in. They were competing against a different molecule (phosphonates), which were largely produced and shipped from China, and as a result they were able to outcompete on price and safety.
As the Bioforge and Solugen’s mixing and distribution capabilities ramped up, they continued to expand into both new end customers and new molecules. The energy sector became their biggest business segment in 2019, but has since dropped to less than 30% of revenue as the company has expanded to concrete, agriculture, industrial water treatment, and household cleaning.
As of the end of 2022, the company had surpassed $100M in revenue, the entirety of which was generated unit economic profitably out of a facility that is 1/10th the size of the smallest typical chemicals facility.
A company can demonstrate that it is on the path to actually capturing a significant share of their large market when they 1) can demonstrate rapid growth and 2) easily expand into new product verticals cost competitively. Solugen has exceeded expectations in both categories, particularly for an Industrial Tech company.
So how big can this really get, and is it worth holding onto for 30 years? If you believe
Solugen already has three critical moats:
The two remaining large questions are will competition be able to gobble up new markets before Solugen can, and will Solugen be able to truly scale their operation with increasingly better unit economics.
As I mentioned earlier, Solugen is at the forefront of commercializing a combination of two large technological tailwinds in synthetic biology and AI. Although this is a moat in and of itself, it also means that as the Solugen model succeeds, others will follow. Many already have, and many even predated Solugen.
There are a host of companies already targeting some of Solugen’s key markets. For example, upstarts such as Zymochem, Mango Materials, Novomer, Microbyre, and Checkerspot are engineering bacteria or microalgae and employing precision fermentation to develop molecules for agriculture, plastics, textiles, and in the case of Carbonbridge, key chemicals like methanol.
On the other hand, there are some established companies like Novozymes leveraging enzyme development for chemical production, as well as newcomers like Cascade Biocatalysts and Enginzyme developing new technologies to further enhance the chemi-enzymatic process enabling them to potentially replicate Solugen’s approach.
Although companies like Mango have some scale, their product offerings are significantly differentiated enough from Solugen’s that I do not believe they will come into competition with each other in the medium term.
Further, companies like Cascade and Enginzyme, if successful, may provide better picks and shovels for the technological tailwinds behind Solugen, and may be future acquisition targets.
My greatest hesitancy is in Solugen’s ability to scale operations. Solugen’s next facility will be 25x the size of the Bioforge. For anyone who has scaled a first of its kind project of this magnitude before, you know that almost everything that can go wrong will go wrong. It is not as simple as just “doing it bigger.” 25x requires a completely different set of operational considerations, project management, and supply chain management. It requires operational manufacturing expertise that the company hasn’t truly built a muscle for yet.
Time will tell how this consideration will play out, but Solugen’s approach to partner with ADM, an operationally sophisticated company with decades of experience building, ramping, and operating projects of this size, makes me more confident. When scale up risk is at its greatest, it is important for any Industrial Tech company to try to reduce commercial and supply chain risk, and that is what they have done with their ADM partnership.
Solugen has the opportunity to be not only the defining chemicals company of the next several decades, but also a new kind of chemicals company that will look very different from the Dows and BASFs of today.
The tech world has largely been preoccupied with the notion of decentralization and re-centralization of bits for the last 15 years, from the advent of the internet, to the Software is Eating the World thesis, to Aggregation Theory, to the beginning of Web3.
Nonetheless, we are also at the beginning of a new shift toward decentralization, but of one in the physical world. Our modern memory of the physical world has been defined by the industrialization processes first begun in the mid 1700s in Britain and expanded to a truly global scale in the post World War II era. If you are looking for a wonderful overview of how this world emerged and a broad perspective of where it is headed, I recommend Albert Wenger’s World After Capital.
To summarize briefly, our industrial era physical world has been characterized by the centralization of resources and capital, as centralization enabled economies of scale and unlocked the relative abundance of the modern world. You can see this in your own life - the most impactful physical goods to our modern world are concentrated around a few large, centralized entities, whether it be electricity, heat, travel, agriculture, and of course, chemicals. No, it is not a conspiracy theory, but rather a reflection of the economic realities of the technologies we are using.
This thesis is worthy of an entirely separate post, but we are beginning to see new technologies enable a decentralizing force amongst these industrial sectors. The most salient example of this for people will be the growth of solar and wind energy paired with batteries. Instead of massive, always on, fossil fuel based centers of electricity production, we are now seeing the economic viability of distributed, intermittent solar and wind sources paired with further distributed battery storage.
Solugen poses the same opportunity in chemical production.
Gaurab, Solugen’s co-founder and CEO, has described Solugen’s roadmap as such:
In my view, Solugen is still migrating from Phase 1 to Phase 2. They have proved the economics at a medium sized scale, which is more than most Industrial Tech companies can say, but Phase 2 will be an entirely different beast that we’ll see play out with their ADM partnership in 2025.
That said, Phase 4 paints a vision squarely in the decentralization of atoms trend. As discussed above, the largest chemical plants today produce 1.5M metric tons of chemicals per year, and the smallest produce 100K metric tons. But Solugen can produce chemicals profitably on a significantly smaller footprint.
Instead of centralized, behemoth chemicals facilities, Solugen has the opportunity to install a small, modular Bioforge right next to or near the ultimate customer of the chemical itself, further eliminating steps in the chemicals supply chain and reducing transport cost. It has already proven this out by being its first and best supplier to its mixing and distribution business.
This was the sort of thesis we had at Bowery as well, however the limiting factor in food was that in consumer goods, power resides with the grocery stores, and thus locating farms near the consumer does not impact the consumer experience as much when the farm still needs to abide by the constrictions of the grocery supply chain. Additionally, grocery stores sell a wide variety of products, and leafy greens are typically not the highest volume items. For Solugen, it is not unrealistic to dream that every concrete, fertilizer, and cleaning supplies company can have a Bioforge nearby, and that Solugen will continue to produce new molecules for each customer need.
Another way to view Phase 4 is not through the lens of decentralization but rather verticalization.
If chemicals are a major driver of COGS for the production of materials like cement and fertilizer, there is a world in which Solugen’s ambition moves from not just producing, mixing, and distributing decarbonized chemicals, but also brings the production of the final product under their operations as well. This is easier said than done, but Solugen has the foundation from which to realize this vision.
Regardless of which direction the company heads in, my 30 year bet is that we’re going to be using plants as the key input to many of our chemicals. If this bears true, Solugen will be leading this generational shift.