NZ BIOSCIENCE INDUSTRY

Bioscience is the development and application of knowledge of the way plants, animals and humans function – to develop products and servicesFootnote ⁴ . Bioscience activities may occur in areas such as aquaculture, horticulture and forestry; agriculture feedstock and chemicals; medical devices and equipment; animal and human therapeutics and diagnostics; research testing and medical laboratories; microbes; biotechnology.

According to the 2011 bioscience survey conducted by the NZ government, 474 organizations were involved in bioscience. However, only 147 of these indicated bioscience as their main activity. The remaining companies were either using bioscience processes to manufacture their products (291) or were conducting research in the space (39). As a comparison, in United States in 2014, 77,000 organizations and 1.66 million individuals were involved in bioscience activitiesFootnote ⁵ . These numbers highlight the relatively small size of the NZ ecosystem.

A large portion of these organizations was working in human wellness (52%) and animal-based biosciences (38%). The Auckland and Northland region had the largest number of bioscience organizations. Of the bioscience technologies being used in 2011, 51% were early stage, mostly conducting research and development (R&D), 26% were in the production process stage and the remaining 23% had developed and were selling a product. These organizations were generating an aggregate income of $677 million, most of which from exports ($376 million).

Interestingly, these bioscience companies declared that capital was a constraint to their R&D and commercialization activities. More than half (59%) of the companies whose primary activity is bioscience reported that capital access was a constraint to R&D, whereas 47% reported it as a constraint to commercialization. In this case, we will discuss both the challenges of LanzaTech in raising capital as well as in commercializing its research.

THEORETICAL BACKGROUND

Do entrepreneurial opportunities exist, independent of the perceptions of entrepreneurs, just waiting to be discovered? Or, are these opportunities created by the actions of entrepreneurs? Alvarez and Barney (Reference Alvarez and Barney2007) identified two internally consistent theories of how entrepreneurial opportunities exist – discovery theory and creation theory. The former theory assumes that entrepreneurial opportunities are objective phenomena waiting to be discovered and exploited. The latter theory assumes that opportunities are created through an iterative process that ultimately leads to the formation of an opportunity.

The LanzaTech opportunity was created and exploited through a series of interconnected but serendipitous steps. This approach was particularly useful due to the rapidly changing environment and radically new technology LanzaTech was working with. In this context, opportunities do not exist until they are created. In 2005, it was impossible to understand what the ultimate opportunity would have been, what resources were needed or information required to estimate the possible outcomes associated with particular strategies. In this highly uncertain environment, Sean Simpson adopted an effectuation logic which is more appropriate than a causal logic.

Read et al. explain that causation ‘focuses on achieving a desired goal through a specific set of given means. Causation invokes search and select tactics and underlies most good management theories. Effectuation focuses on using a set of evolving means to achieve new and different goals. Effectuation evokes creative and transformative tactics’ (emphasis added) (2011: 7).

Effectuation is based on five key principles (Read et al., 2011). The first principle is ‘bird in hand’: An entrepreneur should start with his/her means. It is important to start with what is available rather than to wait for the perfect moment and opportunity. The second principle is ‘affordable loss’: An entrepreneur should evaluate the opportunities based on whether the downside is acceptable. The third principle is the ‘crazy quilt’: An entrepreneur should leverage contingencies and embrace surprises that arise from uncertain and unexpected situations. The fourth principle is called ‘lemonade’: An entrepreneur should form partnerships with entities willing to embrace the technology and that are willing to add value. The fifth and final principle is labelled the ‘pilot on the plane’: An entrepreneur can and should create opportunities. Opportunities can be created by working with resources under control without the necessity to precisely predict future outcomes. This case will show how, using the five principles of effectuation logic, the two entrepreneurs were able to create and exploit a business opportunity.

LANZATECH BACKGROUND

Dr. Sean Simpson was born in Zambia and obtained a PhD in plant science at the University of York. He moved to NZ in 2002 to work at Genesis Research, the first biotech company listed on the New Zealand Stock Exchange. While working at Genesis, Simpson and his colleague Dr. Richard Forster convinced the Board to fund their research into the use of forestry biomass as a feedstock for cellulosic ethanol productionFootnote ⁶ . This technology had the potential to develop a new market for the company, grow its revenues and formulate intellectual property (IP). Unlike corn-based biofuel, cellulosic ethanol did not use food resources, but did require greater processing to transform the biomass into sugar monomers which then were fermented to create ethanol.

After several years of research, Simpson and Forster concluded that cellulosic ethanol was as globally unsustainable as carbohydrate-based biofuel because it still diverted land and forestry resources from other uses, and that there was no biomass appropriate as a feedstock for biofuel. Simpson questioned: ‘Why are we talking about a solution that is predicated on the use of a crop that doesn’t exist?’ Instead, he drew up a list of requirements for a sustainable feedstock. It needed to be low cost, readily available, produced in high volume, not require transport and not use food resources. The two researchers hit on the idea of waste gases, which were plentiful, produced or aggregated in a single location, and did not need to be transported. Simpson identified the steel industry as a potential feedstock source. Steel manufacturing produced large amounts of CO waste, which could be fermented to produce ethanol. Simpson explained:

EARLY COMMERCIALIZATION

In 2005, leveraging the newly acquired knowledge, Simpson and Forster left Genesis and decided to start their own enterprise: LanzaTech. Their initial goal was to find a way to make biofuel using steel waste gases as a feedstock. As Simpson explained:

They discovered a paper at the University of Waikato library describing a microbe which could convert CO into ethanol. Simpson and Forster bought the microbe from a microorganism and cell culture bank in Germany for $1,000, but soon discovered that it could not process large amounts of CO and that it was expensive to handle and maintain. They began to modify the microbe, utilizing the natural selection process of bacteria by exposing it to a range of demanding environments, isolating the bacteria that survived, then repeating the process, before eventually developing a microbe that could process CO into ethanol in a hydrogen-free atmosphereFootnote ⁷ . LanzaTech’s original IP idea was scrawled on an A4-sized piece of paper and demonstrated how the microbe could function energetically without hydrogen.

Simpson and Forster were unsure on how to fund the project, and were turned down by government research funding bodies and universities as well as local venture capitalists. ‘We had a great idea, but people just don’t start up big biotech companies in New Zealand very regularly’. They eventually raised seed capital from two scientists running their own company, Biodiscovery. The scientists liked and understood the science behind the project. They invested NZ$100,000 (NZ$40,000 in cash and NZ$60,000 in laboratory space), which allowed Simpson and Forster to hire one staff member to continue developing the microbe, while they focussed on raising more capital. They approached the Foundation for Research, Science and Technology (FRST) and raised a grant which matched the Biodiscovery investment. ‘Then we got some actual runway to do some actual experiments, and we managed to produce in practice what we were saying’. At that stage they had no clear idea how a business based around their technology might function. ‘We said, well we will probably license it, but I had no idea what that really meant. It was just a word I knew. But everybody would say it, and the people you’d say it to would accept it’.

After producing 5 ml of ethanol in the laboratory, Simpson and Forster approached entrepreneur Dr. Ross Clark to raise more capital. Clark was a friend of Forster’s from university, and a former Professor of Endocrinology at the University of Auckland. Clark had also started the Californian pharmaceutical company Tercica to commercialize human growth hormone IGF-1, and the company had listed on the NASDAQ in 2004. Simpson considered the meeting with Clark a ‘nexus moment’ in the development of LanzaTech. Clark asked tough questions about commercializing their product that Simpson and Forster had not previously considered:

Clark also emphasized the importance of IP generation and ownership. As Simpson recalled, ‘[Clark said] that IP for a start-up is like a bar of gold. Think of it like bullion. Every patent you add is another bar of gold you have … we think about owning everything we spend our money on’. LanzaTech was operating in a relatively empty IP landscape and there was potential to capture a significant area of that before competitors moved into the market. Simpson focussed on IP generation and protection early in the research commercialization process, and one of the first employees hired at LanzaTech was a full-time patent attorney.

Clark agreed to invest in LanzaTech on the basis that Simpson and Forster would gather enough data on the process to file a patent ‘to the satisfaction of AJ Park’ (a NZ IP law firm). Clark also convinced The Warehouse Footnote ⁸ founder Stephen Tindall to invest, despite Tindall’s initial reservations. ‘Stephen said, this test tube is full of muck. But Ross said, this is interesting, just put a little bit of money in and we’ll see what these guys get’. Clark and Tindall invested in LanzaTech at the end of 2005, which allowed Simpson and Forster to draw a small salary for the first time. They bought a second-hand bioreactor, and in combination with a fermenter, managed to produce a small amount of ethanol (~4 g) at 1 l scale from CO gas. Simpson explained that ‘it was awful. It didn’t really work very well. But it worked well enough for us to have some data’.

Clark believed the project had the potential to make ‘serious money’, so Simpson and Forster approached NZ VC firms again, with no success. Instead, Clark used his contacts and good reputation in Silicon Valley to get Simpson an introduction to billionaire Vinod Khosla. Khosla was the cofounder of Sun Microsystems, who had set up his own VC firm to invest in information technology and clean-tech start-ups. Clark’s role was crucial. As Simpson explained:

In September 2006, Simpson flew to California to meet with Khosla and presented a research case on the project.

Khosla thought the project fitted within the Khosla Ventures ‘wheelhouse’, and in November sent a group of scientists to Auckland to perform due diligence on the company. In March 2007, Khosla Ventures announced they would invest US$3.5 million in LanzaTech, the first investment the company had made outside of the United States.

However, Khosla wanted LanzaTech to take advantage of funding available for bioethanol and syngas research within the United States, so the company opened a small research office in Colorado. As Simpson explained, despite the United States being ‘awash with cash’ the office proved hard to establish:

In October 2008, the US sub-prime mortgage market collapsed, causing a global financial crisis and economic recession, and Simpson was pushed by his investors to reduce the LanzaTech ‘burn rate’ and cut costs. He closed the US office, and refocussed on NZ. ‘Pulling the guys out of the U.S. was part of [reducing costs], capping off hiring and battening down the hatches while the financial storm was blowing up. So we were able to survive until we raised our next round of cash’. By that stage LanzaTech’s NZ operations had scaled up, and Simpson’s focus was on the construction of their first pilot plant in Glenbrook, South Auckland.

DEVELOPMENT

Immediately after investing in LanzaTech, Khosla began to push Simpson and Forster to build a pilot plant and test the microbe on a large scale.

Simpson cold-called NZ Steel, whose Glenbrook manufacturing plant was the only steel plant in NZ and emitted up to 1,000,000 m³ of waste gases per hour, but the company was uninterested. Forster had a contact within Bluescope Steel (NZ Steel’s parent company) who was equally dismissive. NZ Steel said ‘we don’t like to have microbes on our steel mill. We don’t like to have flammable liquids. They hated the whole idea’. Simpson and Forster ‘came back with a bunch of thermo-dynamics’ to further prove how the microbe might work.

NZ Steel was finally motivated by a change in policy. The company was lobbying the Labour Government to exempt steel manufacturing from the incoming carbon emission trading scheme, and needed to find ways to reduce their emissions and have a ‘good news story, other than the fact that they were just burning a bunch of carbon’. Stephen Tindall and Ross Clark both lobbied NZ Steel on behalf of LanzaTech, and they finally agreed to the project.

Simpson hired engineers to do the basic plant design and outsourced the detailed design to New Plymouth company Fitzroy. At that stage, Simpson was unsure whether the plant would work effectively, and uncertainty was high. ‘The results in the lab weren’t that flash. Lots of issues, going down blind alleys and trying to pull a team together. It was chaotic, it was really nerve wracking’. They did not know whether the microbes would tolerate the changeability of the steel mill or whether there would be variations in the steel mill they had not anticipated that would kill the microbe. When they eventually switched on the pilot plant in November 2008, it did not work. The microbes coped well but the design of the plant was wrong. It took a further 12 months to redesign and rebuild the plant. Simpson and Forster were ‘devastated’ when the plant did not work but Khosla was unconcerned. As Simpson recalled, Khosla ‘was completely prepared for it not to be working, but obviously they weren’t going to tell us that. We were sufficiently naïve to think that it was going to work … but often the mistakes are things that end up driving you to the right place’. This setback could have been fatal. If LanzaTech was not able to test and prove itself viable in a steel plant, it would have been a deal breaker for the survival of the enterprise. Simpson was also distracted by hiring new staff and dealing with the legal aspects of setting up a company in NZ.

The uncertainty was exacerbated by the speed in which the project moved. Within 2 years, the fledgling company had moved from a test tube of data to running a substantial pilot plant. In addition, in 2009 Forster had left the company due to unrelated health reasons. LanzaTech’s business model was also relatively undeveloped. Simpson believed that the company would have to find a way to raise enough capital to build reactors to attach to existing commercial steel plants, as they had done at Glenbrook.

The $5 million Glenbrook pilot plant eventually produced 58,700 l/year of ethanol, and proved the microbe could function in the unpredictable steel mill environment, tolerate changes to gas composition and cope with gas contaminants. The process worked successfully with converter gas (40–50% CO) and blast furnace gas (minimum 15% CO), due to its ability to produce its own hydrogen. All production targets at Glenbrook were achieved, and the predicted revenue from ethanol was almost twice that from power generation, which was the only other option available to generate revenue from steel mill gasesFootnote ⁹ . However, the cost of the plant was much larger than originally anticipated. Simpson raised another US$5 million from Khosla and in July 2008 received a 3 year, $12 million grant from the FRST Low Carbon Energy Technology fund, based on LanzaTech’s potential to reduce NZ’s carbon emissions. The $12 million grant was the largest administered under the scheme.

LanzaTech’s investors remained supportive because Simpson was utilizing synthetic biology to experiment with the original microbe and fermenting process to produce chemicals other than ethanol, and expand the company’s IP portfolio. As Simpson explained:

The original microbe (LZ-1561) was eventually modified to produce butanol, acetone, isopropanol, succinic acid and the chemical 2,3 Butanediol, which could be ‘dropped in’ (blended) with aviation fuel.

Simpson had also seen an opportunity to commercialize LanzaTech technology in China, which he felt had the right mix of energy and opportunity. China was the largest steel manufacturer in the world and the microbial technology would reduce carbon emissions without compromising the outputs of a steel plant, plus produce an economically viable biofuel. In 2010, China manufactured 44% of steel produced globally, and output was predicted to keep growing at a compound annual growth rate of 18.1% by 2015Footnote ¹⁰ . However, rapid industrialization and double figure economic growth had caused extensive environmental degradation, including air, water and ground pollution, associated health problems and civic unrest. The Chinese government had set targets for tackling environmental problems without compromising economic growth, and was scheduled to invest US$268 billion in renewable energy projects by 2020 (Fang, Reference Teece2006), while Chinese biofuel consumption was forecasted to rise to 30.4 million barrels by 2030. Simpson believed the true value of the market opportunity could not be validated without visiting the country first-hand. ‘The complexity of the opportunity and the interplay between all the pieces can’t really be appreciated’.

In November 2009, Simpson travelled to China for the first time, and was impressed by the willingness of Chinese businesspeople to do deals, take risks, and try new technologies. However, he needed a ‘meaningful’ way of getting into the market and meeting key people within the steel industry. Vinod Khosla introduced Simpson to James Zhang, a Chinese-born scientist who had done his PhD in genetics at the University of California, and had cofounded Mendel Biotechnology, a San Francisco plant biotech company which developed new technologies for increasing crop yield and stabilityFootnote ¹¹ . Zhang joined Khosla Ventures in 2009, and accompanied Simpson on his second trip to China. ‘We were his new project. We went around with James and he had great relationships with the Chinese Academy of Sciences (CAS), which had great relationships with Baosteel’. CAS was a research and development centre in Beijing which Simpson visited in November 2009. CAS executives subsequently visited the LanzaTech laboratory and Glenbrook pilot plant in March 2010; a month later, LanzaTech and CAS signed a letter of intent to collaborate on a number of projects. CAS executives introduced Simpson to Baosteel, the second-largest steel producer in China, which had revenue of US$29.8 billion in 2010Footnote ¹² and a strategic focus on the research and development of innovative steel-making technologiesFootnote ¹³ . Baosteel was interested in LanzaTech’s microbes to reduce carbon emissions, maintain technological leadership in the local and global market, and maximize profit margins. As Simpson recalled: ‘Fundamentally they want to make more money than they do now, with the gases they emit’.

In early 2010, LanzaTech and Baosteel began negotiations to commercialize the LanzaTech microbe. Simpson initially led the negotiations for LanzaTech, before being joined by new CEO Jennifer Holmgren, who was appointed in June 2010. Holmgren was previously Vice-President of the Renewable Energy and Chemicals unit at UOP, a division of Honeywell, and had experience in commercializing chemical technology in the energy industry. Holmgren helped to refine LanzaTech’s strategy in the negotiation, which was to retain exclusive rights to their existing IP plus any IP developed during the commercialization process. Simpson explained that her influence ‘gave real clarity to the negotiations, because she would say, we’re not going to accept any [loss of IP], but we want to do a deal. We will bring the technology, you’ll bring cash and we’ll commit to certain milestones that describe whether or not this thing works’. In June 2010, LanzaTech and Baosteel announced the creation of a new joint venture company, the Shanghai Baosteel LanzaTech New Energy Company Ltd. The intention was to build a demonstration plant in Shanghai by late 2011, before scaling up the technology to a commercial level. LanzaTech retained the IP and any future IP developed within the field. Any profits realized from the sale of ethanol produced by the plant would be split between the partners. Shortly afterwards, LanzaTech completed its second VC round, raising US$18 million from a preround valuation of US$70 million. The round was led by Shanghai investors Qiming Ventures, who were joined by Khosla Ventures, K1W1 and Softbank China Venture Capital. The capital raised would go towards the commercialization of the technology with Baosteel.

Simpson considered the deal with Baosteel to be:

The agreement with Baosteel also cemented LanzaTech’s IP strategy in China. The company structured its IP access to protect individual elements rather selling the technology as a package. ‘We’ve set up our microbe differently to our control systems to our engineering systems to our chemistries. We sell bits, we license bits in, and other things are provided under confidentiality’. Simpson realized that LanzaTech owned a platform technology (the microbe) which could be built on and refined to produce any number of other chemicals, and maximize their partners return on investment.

After Holmgren’s appointment Simpson stepped into the role of Chief Technology Officer. ‘I’m not a CEO. I knew that when I started the company. I don’t want to be a CEO [and] I’m a limitation to the growth of the company if I’m in charge’. Holmgren implemented a clearer staff structure (including hiring a Chief Financial Officer) and opened two offices, in Chicago and Shanghai. She also provided a: ‘much clearer vision of what kind of expertise we needed in order to scale. One thing that was really lacking in the company before that was people who sat back and looked at the technology from the perspective of where it needed to be’. Simpson also felt that LanzaTech’s transition to commercial company was helped by their international orientation from the outset. The NZ government had no policy around clean-tech and there was no local market for ethanol, so they had targeted international markets from the start. ‘Our approach was, where is the feedstock? And then we developed the technology for that space. So China then makes a lot of sense, India makes a lot of sense, so do some places in Brazil’.

The Baosteel agreement furthered the process of developing a more feasible and ‘capital light’ business model for LanzaTech. Simpson realized that, ‘we didn’t have to spend the money to build our plants, because our partners would. We have a technology in a space where the feedstock provider has a lot of money’. Large steel manufacturers could take on the cost of building the fermentation reactor, while LanzaTech provided the technological expertise and IP access, instead of having to continuously raise enough capital to build the plants themselves. As a result, LanzaTech’s strategy changed, and instead from moving forward in a sequential pattern, they could scale and validate the technology at the same time as forming multiple partnerships to dominate the market. As Simpson argued:

In 2011, LanzaTech signed several partnerships within Asia and the United States. This included a memorandum of understanding with India Oil, to evaluate the viability of the LanzaTech microbe at their refineries; a memorandum of understanding with Posco, the largest steel maker in South Korea, covering the implementation of the technology at their steel plants; agreements were signed with Mitsui and Co (Japan), LCY Chemical Corp (Taiwan), Henan Coal and Industrial Corp (China), and Shougang (Capital Steel) Group (China) to construct demonstration plants and identify new research opportunities; and an agreement with coal producer Yankuang Group (China) to produce biofuels and chemicals from syngas. Partnerships formed in the United States included the U.S. Defence Advanced Research Project Agency to find new ways of producing jet fuel (JP-8) from CO; the US Federal Aviation Authority to assess production opportunities for alternative jet fuel within the United States; and Pacific Northwest National Laboratory to scope the use of the LanzaTech technology within the US market.

In January 2012, LanzaTech announced their third round of VC fundraising, which raised US$55.8 million. Series C was spearheaded by Holmgren, with the purpose of attracting strategic rather than institutional investors. LanzaTech considered several investors before deciding on Petronas, a Malaysian-based international oil and gas corporation and a member of the international Fortune 500. The round was led by the Malaysian Life Sciences Capital Fund, and included the Dialog Group, a technical services provider, as well as Qiming Ventures, Khosla Ventures and K1W1 Footnote ¹⁴ . That same month, LanzaTech purchased a biofuels plant in the United States for US$5.1 million, to work on its gasification technology and convert woody biomass into ethanol using microbial fermentation. In November, China Steel Corporation, LCY Chemical Corporation and LanzaTech formed a joint venture to develop a plant to demonstrate the technology. The trial met or exceeded all ethanol production milestones and the China Steel Corporation Board formally approved the capital to move to commercial scale with a US$46 million investment (formalized in 2015)Footnote ¹⁵ .

In September 2013, LanzaTech had been awarded a US$4 million grant by the Advanced Research Projects Agency-Energy of the US Department of Energy to extend LanzaTech’s core fermentation technology. The focus of the grant was on reducing waste methane emissions from remote oil wells, coal seam and coalmine gases as well as landfill biogas often located in remote areas or released in relatively low volumes making them uneconomical to convert into other products. The ultimate goal of the research was to increase the intensity of the LanzaTech bioreactor to produce fuels and chemicals more efficiently, and economically at a smaller scaleFootnote ¹⁶ .

In December 2014, LanzaTech raised a substantial US$112 million series D investment from various investors including Khosla Ventures, the New Zealand Superannuation Fund, K1W1, Qiming Venture Partners, CICC, Next47 and the Malaysian Life Sciences Capital Fund Footnote ¹⁷ . Although confidential data about investment term sheets and valuation are rarely disclosed, sources speculate that LanzaTech was valued around US$280 million. After the 2014 investment round, Khosla Ventures owned 35% of LanzaTech’s sharesFootnote ¹⁸ .

From this moment, LanzaTech growth and success pick up through a number of international deals and recognitions. In 2015, LanzaTech was included in the Global Cleantech 100Footnote ¹⁹ . In the same year, LanzaTech partnered up with ArcelorMittal, the world’s leading steel and mining company, and Primetals Technologies, a leading technology and service provider to the iron and steel industry, to construct Europe’s first-ever commercial scale production facility to create bioethanol from waste gases produced during the steel-making processFootnote ²⁰ .

In March 2016, the company sold exclusive rights to its technology to Aemetis. The technology was to be adopted for the conversion of agricultural waste, forest waste, dairy waste, and construction and demolition waste to ethanol in CaliforniaFootnote ²¹ . Curiously, despite the initial intention to license the technology, Aemetis became the first licensee of the LanzaTech technology in North America. The agreement provided for 12 years of exclusive rights in California based upon achieving certain milestones.

In July 2017, Lanzatech signed two partnerships. It agreed with Indian Oil Corporation Limited, India’s flagship national oil company to construct the world’s first refinery of gas-to-bioethanol production facility in IndiaFootnote ²² . It also agreed with South African Swayana to use its proprietary technology to capture carbon. Swayana had signed a Memorandum of Understanding with LanzaTech to collaborate on developing projects for the production of ethanol and higher value products from waste gases in the ferroalloy and titania smelting sectors in South AfricaFootnote ²³ .

WHERE TO FROM HERE?

LanzaTech had a seemingly meteoric rise. Sean Simpson and Richard Forster began the company in 2005 with the idea of using waste gases as a feedstock for ethanol production. With support and financing provided by Dr. Ross Clark, Stephen Tindall and Vinod Khosla, the pair developed the technology and built a pilot plant at the Glenbrook steel mill. Over the following 4 years the company went through two further VC rounds and signed partnerships with large steel, oil and coal firms in China, India and South Korea. LanzaTech was operating in a relatively empty IP landscape and owned more than 100 patents across two proprietary microbe families, with a strategy to ‘own everything we spend our money on’ in the form of IP. Ultimately, Simpson wanted LanzaTech to be a chemicals company and the research strategy was focussed on refining the original technology and finding new ways of making more lucrative chemicals from the same process.

However, LanzaTech remained high-risk. Simpson originally estimated that the company would require at least $250 million in VC before it would realize a profit. This prediction proved to be correct, with the company’s fundraising to date (2017) reaching a total of more than $200 million. LanzaTech is now expanding globally with a series of partnerships in the United States, South Africa, China and India. LanzaTech also begins to see competition from start-up companies in different industries that are finding new uses for the same waste gas feedstock. The company had successfully negotiated the early stages of research commercialization, but now faces the challenges of scaling and growing the company, making sure that it captures value and retains its competitive advantages vis-à-vis new entrants.

TIMELINE OF KEY EVENTS

2005:

– Founding of LanzaTech by Dr. Sean Simpson and Dr. Richard Forster

– Biodiscovery invests NZ$100,000

– Ross Clark and Stephen Tindall invest in LanzaTech

– Successful grant application to the FRST raising NZ$100,000

– Successful production of 5 ml ethanol

2007:

– Khosla Ventures invests US$3.5 million

– Opening of small research office in Colorado, US

2008:

– Closing of research office in Colorado, US

– Khosla Ventures invests US$5 million

– Successful grant application to FRST Low Carbon Energy Technology fundraising NZ$12 million

2009:

– Forster leaves the company due to health reasons

– Simpson travels to China for the first time

2010:

– LanzaTech and CAS sign LOI to collaborate on some projects

– Dr. Jennifer Holmgren is appointed CEO and Simpson becomes CTO

– Founding of Shanghai Baosteel LanzaTech New Energy Company Ltd, a joint venture between LanzaTech and Baosteel, to build a demonstration plant in Shanghai by 2011

– LanzaTech raises US$18 million after preround company evaluation of US$70 million

– LanzaTech opens offices in Chicago and Shanghai

2011:

– LanzaTech starts various cooperations in Asia and the United States

2012:

– LanzaTech raises US$55.8 million from Malaysian-based Petronas

– Acquisition of biofuel plant in United States for US$5.1 million

– Baosteel china, in the precommercialization stage produces 100,000 gallons a year

– LanzaTech purchases a cellulosic plant in Scoperton, and renamed the facility Freedom Pine Biorefinery

2013:

– LanzaTech is awarded a US$4 million research from the US Department of Energy

2014:

– LanzaTech raises US$112 million series D from various investors

2014:

– The Freedom Pine refinery pilot program manages to process 125/tons a day of dry wood residue

2015:

– LanzaTech is included in the Global Cleantech 100

– LanzaTech partners up with ArcelorMittal and Primetals Technologies to construct Europe’s first-ever commercial scale production facility to create bioethanol from waste gases

2016:

– LanzaTech commercial product achieves production levels of 10–30 million gallons a year

– LanzaTech sells exclusive rights to its technology to Aemetis to convert agricultural waste, forest waste, dairy waste, and construction and demolition waste into ethanol in California

2017:

– Lanzatech agrees with Indian Oil Corporation Limited to construct the world’s first refinery off gas-to-bioethanol production facility in India

– Lanzatech agrees with South African Swayana to collaborate on developing projects for the production of ethanol and higher value products from waste gases in the ferroalloy and titania smelting sectors in South Africa

TEACHING NOTES

EFFECTUATION VERSUS CAUSATION

1. – The case discusses the different logics involved in the effectual and causal logics.

2. – It shows how, in uncertain environments, effectuation is a more appropriate lens.

3. – Effectuation also leads to opportunity creation, rather than opportunity discovery.

4. – From this moment on, causation might be more appropriate to discover new opportunities.

RESEARCH COMMERCIALIZATION

1. – Commercialized science from lab to the market. Displayed through four distinct stages (early stage, development, market introduction, growth).

2. – A multidisciplinary approach to research commercialization illustrated through the interaction between several key aspects of research commercialization (marketing, IP, accounting and finance, research focus, organizational development, collaboration).

3. – The inherent nature of uncertainty, complexity and risk related to research commercialization.

ENTREPRENEURSHIP

1. – How entrepreneurs create and exploit opportunities.

2. – New venture creation.

3. – Entrepreneurial finance: the value added of investors and the challenges of raising VC.

BIOSCIENCE INDUSTRY

1. – An overview of the bioscience industry.

2. – Managing risk in a rapidly growing biotech enterprise.

3. – Introduction of a new product to a new market.

4. – The importance of an IP strategy and the risks and benefits of expanding into a ‘white paper’ IP area.

In addition, this case could also be used as a starting point for discussion on the challenges and benefits to commercializing in China; the changing role of an entrepreneur as their business rapidly expands; the challenges and benefits of international capital raising; and the entrepreneurial ecosystem in NZ.

1. CASE SUMMARY

LanzaTech was established by Dr. Sean Simpson and Dr. Richard Forster in 2005, to develop a method of making biofuel using nonfood feedstocks, like waste gases. Simpson spent two years modifying an imported microbe to create a patentable product. He raised seed funding from local and international entrepreneurs to fund the construction of a pilot plant at the Glenbrook steel mill in South Auckland, which proved the commercial potential of the microbe. Simpson looked at China to commercialize the product. He established academic partnerships in Beijing, before signing a number of joint venture agreements with large steel-making firms in China, India and South Korea. LanzaTech eventually employed a US-based CEO and established an office in Illinois, and undertook several rounds of VC raising, worth more than US$200 million. This figure is in line with the initial expectations of Simpson who, in 2012, considered the venture to be high risk, and anticipated it would require US$250 million of capital before it would realize a profit. In fact, a large funding round was achieved in 2014. From this moment on, the company initiated a phase of rapid growth and internationalization. The case builds upon effectuation logic to explain the steps necessary to create and exploit the LanzaTech opportunity. However, students could discuss whether, at this stage, a causation approach would be more appropriate to discover new opportunities. A key strength of the case is its multidisciplinary focus. The case discusses various entrepreneurial phases including capital raising, developing a business model and forming partnerships.

2. STRUCTURE OF THE CASE

The case is structured around Tables 1 and 2. Table 1 connects the five effectuation principles with the events described in the case.

Table 1

Effectuation principles, concepts and events

Table 2

LanzaTech development stages and themes

Note. IP=intellectual property; IPO=initial public offering; JV=joint venture; NZ=New Zealand; R&D=research and development; VC=venture capital.

Table 2 demonstrates the four stages of research commercialization and enterprise growth: early commercialization, development, market introduction and growth. The four stages are explored through a number of topics, including uncertainty, accounting focus, IP development, finance and capital raising, marketing, research and collaboration and alliances. The case demonstrates that development in each area is dependent on development in another (e.g., development of an IP portfolio is partially dependent on raising capital and developing research focus). Likewise, the interdependence between topics is designed to demonstrate the relationship between resource availability and uncertainty. Typically, an increase in resource availability corresponds to a drop in uncertainty. However, since LanzaTech required large amounts of capital to prove and commercialize its technology, uncertainty remained high. In 2017, after several funding rounds and joint ventures, the technology proved itself and uncertainty declined.

Lecturers can use the structure to discuss the LanzaTech case in either by theme (horizontally) or by development stage (vertically). Stages I–III build on the concept of innovation pipelines, Stage IV builds on organizational life cycle theory.

Figure 1 summarizes and simplifies the technology.

Figure 1

LanzaTech technology

The LanzaTech Process converts CO containing gases produced by industries such as steel manufacturing, oil refining and chemical production, as well as gases generated by gasification of forestry and agricultural residues, municipal waste, and coal into valuable fuel and chemical products. The gas enters the gas reception container and it is then compressed and transferred into the fermentation tank, also called LanzaTech reactor. The reactor contains a liquid medium enriched with LanzaTech proprietary microbes. Next, the net product is withdrawn and sent to the recovery tank, also called Hybrid Separation System. This system uses an advanced system to recover the valuable products and coproducts from the fermentation process. The products are collected for downstream use in the product tank. In some cases, these products can be used for fuel or chemical products. In other cases, they need to be further refinedFootnote ²⁴ .

3. STUDY QUESTIONS

What was the impact of working from a small country like New Zealand (NZ)?

This question encourages students to think about the advantages and disadvantages of doing business in NZ. On the positive side, the World Bank ‘Ease of doing business’ 2016 report, shows that NZ is the best country to do business in the world. NZ regulation makes starting a business very easy. The ecosystem is also protective of minority investors, a crucial factor in attracting external equity capital, especially from abroad. However, NZ biotech companies face several challenges.

First, NZ is a small country with a limited number of potential clients. In the case of LanzaTech, the company identified a very small number of steel plants to begin with. In fact, NZ Steel Glenbrook manufacturing plant was the only steel plant in NZ. Hence, the initial rejection from NZ Steel represented a major setback. This lack of potential clients was one of the main reasons that pushed the company to internationalize rapidly and find collaborations in China and the United States.

Second, funding challenges emerged. LanzaTech faced local barriers in raising substantial VC from NZ investors. The New Zealand Private Equity and Venture Capital Association (NZVCA) shows that, in 2016, the total VC/private equity investment value was NZ$1,2 billion (US$820 million). This figure declines significantly if we include only early stage deals. In 2016, NZ early stage companies across all industries, raised NZ$92.3 million (US$ 63 million). Yet, health and bioscience received only a third of this sum. As a comparison, US VC firms, in 2016 (PriceWaterhouseCoopers Money Tree data), invested a total of $61 billion. The gap is emphasized if we only include seed and early stage investments which amounted to $13 billion. Therefore, it is not surprising that LanzaTech relied on international investors for its funding needs.

Third, R&D investments in NZ are below international standards. Figure 2 shows that NZ persistently invest in R&D below G7 countries and significantly below the Organization for Economic Co-Operation and Development (OECD) average. For example, in 2015, NZ invested only 1.27% of its gross domestic product in R&D. This compares with 2.38% for the average OECD country, 3.28% for Japan, 2.92% for Germany and 2.78% for the United States. The only country with comparable levels of investments is Italy with 1.33%.

Figure 2

Gross domestic spending on research and development investments as % of gross domestic product; 2000–2016. G7 countries, Organization for Economic Co-Operation and Development (OECD) average in black and New Zealand in red. Source: OECD.

Fourth, NZ has structural issues also in relation to the number of researchers available in the country. This can represent a significant obstacle for an early stage technology company trying to develop its product. Figure 3 shows that NZ has the second lowest proportion of researchers across G7 countries. In 2015, NZ employed only 7.89 researchers out of 1000 employees. This figure is below the 8.29 OECD average and below countries such as France and Japan which employ approximately 10 researchers. Italy, with 4.93 researchers, is at the bottom of this ranking. The NZ gap with other countries might be explained by the below average investment in education. According to OECD data, in 2014, NZ spent on tertiary education US$15,100 per student. This compares with US$29,328 in the United States. The only G7 with lower investments is, again, Italy with US$11,510.

Figure 3

Researchers per 1000 employees; 2000–2015. G7 countries, Organization for Economic Co-Operation and Development (OECD) average in black and New Zealand in blue. Source: OECD. Researchers are defined as professionals engaged in the conception or creation of new knowledge, products, processes, methods and systems, as well as in the management of the projects concerned.

Therefore, it is crucial for NZ companies to consider international opportunities from the outset. National barriers related to funding, human capital, R&D and commercial opportunities make NZ a particularly challenging environment to start and scale a company.