Solazyme shoots high with algae makeover

NEW YORK Wed Feb 22, 2012 4:24pm EST

1 of 2. Undated promotional photo shows Jeff Villari, Senior Research Associate - Strain Development, screening algal fuel strains in Solazyme South San Francisco R&D lab.

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NEW YORK (Reuters) - Like a speedboat's advantage over a cruiseliner, small and medium sized businesses can navigate new waters and change direction more quickly than larger firms, says author Kaihan Krippendorff.

Case in point is Solazyme Inc., a South San-Francisco-based biofuel company that made over its product line and is now selling beauty products and nutritional supplements in addition to fuel that can be used in ground and air transportation. But how quickly the new model pays off is to be determined.

On Tuesday, Solazyme posted a wider-than-expected net loss for Q4 2011 of $15.6 million on a GAAP basis, compared with $2.9 million in the same quarter in 2010.

Revenue dropped to $14.9 million compared with $23.2 million in the fourth quarter of 2010.

But with the recent expansion of its Algenist anti-aging skincare line in partnership with LVMH's Sephora, the company's outlook for 2012 and 2013 was set for commercial expansion.

"If you're selling to a different customer it's easy to create a different brand," notes Krippendorff, author of "Outthink the Competition: How a New Generation of Strategists See Options that Others Ignore".

Solazyme was born nine years ago with a malleable goal, says CEO Jonathan Wolfson.

"We were trying to use the power of biotechnology to solve environmental problems, and make money," he said.

But when revenue stagnated, Wolfson and his research and development team investigated alternative revenue streams.

"After the first year as we were scaling up the technology, we couldn't envision how the economics would work to hit high volume and low margin markets. Unlike an academic lab, this is a commercial business," Wolfson noted.

One of the keys to boosting revenue has been the flexibility exhibited by Wolfson. Though its original business plan stressed biofuels as an energy producer, Wolfson could see the handwriting on the wall, years of stagnant revenue, making it difficult to stay in business.

"In order to succeed, we had to pivot. It was adapt or die. We had to make adjustments to our business plan and the technology," he said.

Learning from failure is also critical. "We were right that algae was the best platform to make oil but wrong about how to do it," he said.

"It soon became clear we were making renewable oils," Wolfson said.

A Solazyme food chemist experimented with microalgae and discovered that it could be used as a cosmetic that protects against sunlight or lack of moisture. Moreover algae could also produce ingredients low in saturated fats that can be used in cookies, snacks and other foods.

It was a busy year for Solazyme in 2011, one which saw an IPO floated in May and shares halving in value since then, due to prospects for the renewables industry declining.

Its "advanced biofuel" gained some fame in November when United Airlines, the world's largest air carrier, made its first U.S. commercial flight using a fuel blend including 60 percent petroleum-based jet fuel and 40 percent biofuel.

And the company recently expanded its Algenist anti-aging skincare line. In partnership with Sephora, the product launched in 1,100 retail outlets worldwide.

Solazyme adjusted its business model out of necessity, suggested Pavel Molchanov, a Houston-based energy analyst at Raymond James. "Solazyme isn't likely to become in the foreseeable future a fuel-centered business," he said.

Despite having a partnership with Chevron Oil and selling algae-produced fuel to the Department of Defense, its capacity is limited and its costs are too high to manufacture cheap fuel with fuel priced in the range of $3 a gallon.

Solazyme has also been strategic about forming partnerships to reduce costs. For example, its 50/50 joint venture with French firm Roquette Freres produces dietary supplements and food ingredients. Sephora distributes its Aglenist skin care line, and it signed a sugarcane venture with Bunge in Brazil.

Choosing partners makes sense for Solazyme because their "big brothers" capitalize production and bring their customer relationships and distribution to the table, Molchanov said.

Successful small businesses in the future will concentrate less on specific industries and more on core capabilities, Krippendorff says. Google started out specializing in search engines, but segued into a variety of industries today, so Solazyme's introducing new fields may just be the wave of the future.

Larger companies "get protective of their financial performance. They're afraid to make a big bet," Wolfson said.

Start-ups have to explore new opportunities. "Our first business plan looks like nothing we do today. We go where the technology leads us," he said.

(Editing by Carla Tonelli carla.tonelli@thomsonreuters.com)

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