S2 E4: Jason Webber, Principal and Co-Founder at Sustainable Conversion Ventures 

James Mackey  0:00  

Hello, and welcome to Scale by Design! I'm your host, James Mackey and today we are joined by Jason Webber. Jason, welcome to the show, man. 

 

Jason Webber  0:10  

Good to see you, James. 

 

James Mackey  0:12

Yeah, for sure I'm pumped. I'm really excited to talk about biotech and synthetic biology. I've been doing my research so I can have a somewhat intelligent conversation with you today to get up to speed on the topic. It's absolutely amazing and I'm so excited to learn more from you today. Before we jump into this topic, I was hoping that you could share a little bit about your background and experience of what you're doing today.

 

Jason Webber  0:38  

Sure, so I'm originally from the Midwest, went to the University of Illinois where I did a plethora of degrees in aerospace engineering, engineering, physics, Masters nuclear engineering, and also an MBA, which is where I got my first stint into venture capital. Stepped away did a prop-tech startup or started a fintech startup, and then kind of got lured back into VC. 

 

And that's where it took a turn towards biotech. I co-founded a family office VC in the Phoenix area back in 2014, did a number of investments for the first few years, and then kind of got pushed into an operations role. Took over the fermentation facility we had in Oregon, came in as managing director, licensed some tech out in Japan, developed some processes, and then started doing CMO work, onboarding other startups to try and help them commercialize. And that's kind of where we are today.

 

James Mackey  1:44  

I love it. So you've been focusing on biotech, for it sounds like quite a while, right? 

 

Jason Webber  1:46

Better part of eight years now. 

 

James Mackey  1:47 

Okay, cool. Yeah, that's really exciting. I think specifically, we wanted to talk about the applications of synthetic biology. I want to talk to you about that, could you just give us a high level on how synthetic biology has the potential to change the world and, and how many different areas it has the ability to impact the way that we think about solutions, everything from health to producing food to climate solutions to a ton of different problems. I would just love to get your sense on, you know, all the future applications, at least from a high level.

 

Jason Webber  2:28  

Sure. So really, where it starts is about being able to edit the genome effectively. So if you want to go back like 20 years, pretty much the only people that were doing stuff like this, were pharmaceutical companies that had billion-dollar development budgets, just because of the time and intensity it took to do strain development and get something to work. But the Tech has really accelerated things well in excess of Moore's law. And so the cost of editing genomes is dropped to pennies. So what would take a billion-dollar budget, and now I can have a couple of kids out of grad school, doing postdocs come up with a great idea, and try and make a run to the market with it. 

 

So in that, with those cost reductions, just like back in the early IT days, where you need to have rooms full of servers to set up a website. Now it's just like, you know, use Wix or something like that, to do it in like 30 minutes. It's done. It's kind of similar to that. And so the venture capitalist followed suit, and lots of it have been going in over the last few years, like almost 18 billion last year, specifically. And I don't know if you saw but there was a McKinsey Global Institute study that came out I think, last summer or the summer before that, where they expect by 2030-2040, for the market of applications of synbio to go to like 2 to $4 trillion, which is kind of big, it's not a B, it's a T. And 60% of all of the global physical inputs can be made with the synthetic biology. 

 

James Mackey  4:16  

So what do mean by physical inputs? Can you just explain to me what that means?

 

Jason Webber  4:20  

Oh, God, it can be anything from biofuels, specialty chemicals, single-cell proteins, replacement plastics for petrochemicals, or even maybe in fertilizers. That's, that would be really cool if you could do stuff like that. 

 

James Mackey  4:39  

So what industries do you think it's going to I mean, I know it's already out there making an impact to some extent, but what industries do you think are going to change the most as a result of synthetic biology in the next like 10 years 10 to 20 years?

 

Jason Webber  4:55  

Honestly, I would hope that it changes pharmaceuticals the most. That's not really a space that I delve into a whole lot. And that's going to really need more than just synthetic biology. But it's going to require a lot of AI for developing those planes of potential solutions in a fast manner.

 

James Mackey  5:18  

And that's to solve things like cancer treatments and things of that nature or? 

 

Jason Webber  5:25  

Any disease or malady you can think of. There's always going to be a pathway, so a lot of that stuff's done with mammalian cell cultures now, antibody responses to those, if those can be replicated recombinantly in an organism, I mean, that would be in some of it is now but if more of that can be done, that will certainly revolutionize Pharma. But as for a lot of the other things, I think the main focus right now is on the replacement of petrochemicals, right? So you don't have to use as many fossil fuels. So that's the longer-term development path and right now, it's just all the low-hanging fruit. But eventually, all those go away, and it'll be something a little harder that needs to be solved.

 

James Mackey  6:19  

And so I think one of the things that you touched on was the utilization of AI, and the relationship between AI and machine learning and synthetic biology. From a little bit of research that I did, it sounds like we are still somewhat far out from being able to map that together, there's apparently a lot to do in terms of being able to track datasets and standardizing datasets to be able to pull insights together, useful insights from the AI, do you know anything on that topic? 

 

Or how far along we are in utilizing machine learning with synthetic biology? From what I researched, it's not like there were a ton of papers on this exactly. I mean, people would talk about it high level, but there wasn't really a clear path to exactly saying - Hey, here's how many startups or companies or labs are really doing this right now.

 

Jason Webber  7:16  

Yeah, it's certainly become one of the newer buzzwords. Yeah, you know, because a lot of people are doing synthetic biology. Okay, great. How do you differentiate yourself and what you're doing from everyone else? Oh, we use AI. That's fine. But there are actually a few companies that have been doing AI for a long time, we actually did an investment in one of them which is computational biology focused, and they definitely do all kinds of machine learning AI, in addition to their de novo protein design. So always, I'll always be really excited about them and their potential. So there are people doing it now.

 

James Mackey  7:56  

And so what are the ways that AI is currently impacting synthetic biology? What process, what outcomes? Is it accelerating? Or where is it giving the process the biggest lift right now.

 

Jason Webber  8:09  

So all right, if you take a basic cell, we'll just keep it simple, we'll say, just yeast and you're making ethanol or something. This is probably a terrible example. But each pathway in there, there are proteins or enzymes that change whatever the input is into something else. And the hope with synthetic biology, or one of the big draws of a company like RZeta, is it computationally they can ignore the impact of evolutionary pressures, that gave us all the things that we have now. So all those evolutionary pressures selected against certain organisms, because they just wouldn't make it, whether it be temperature or splitting under certain conditions or whatever. 

 

But there exist in a computational space, all those things that have been selected and don't exist in nature, and they can be coded for now. And they may actually do things better in this like very confined environment of some aseptic fermentation where you don't have competitor bugs or anything, and that you have control of food sources and media and it's like a Cabo resort for bacteria. Steady temperatures and everything is perfect there. So things develop a little differently. And so those things are possible now, where they weren't before and they could make whatever it is that the organism is trying to peep out and you're trying to sell more efficiently. You can get more for less input.

 

James Mackey  10:00  

So it's a kind of a crossroads of synthetic bio and climate tech, isn't one of the big drivers to it that there's a lot of application that's going to reduce co2 in the atmosphere. Do you know, are you aware of any of the things that are being done now to any technologies that are being developed to specifically tackle that problem?

 

Jason Webber  10:23  

So certainly, decarbonization is a big part, of all of this on the climate tech side. So if you burn fossil fuels, you're emitting co2 into the atmosphere. So the hope is, if you have like, certain processes that are anaerobic, that you're not going to get that co2 molecule off. Ethanol production, whether it be beer, wine, or even fuel does give off a co2 molecule, still, but there are other avenues of getting around that. 

 

So you can recapture that. And ultimately, if you have a pure source of co2 coming off of that, I mean, there are other applications and capture that you can do for that that aren't as readily available in a petrochemical process. I mean, the industry is always working to change things. So maybe they'll find a way to catch up. But right now, that's one of the big draws.

 

James Mackey  11:24  

Gotcha. Okay, cool. And I know one of the things obviously, due to all of the potential applications, we are seeing a massive rise in funding. And I think that one of the bottlenecks we discussed is how startups can actually go somewhere to produce and commercialize. I know that a lot of these experiments as such are happening in labs, but are there maybe limitations and bandwidth to actually commercialize at scale? 

 

I would like to learn a little bit from you on that topic. How do we go from like lab scale to actually producing at a much higher commercialized level? Can you walk us through that process of what needs to happen? And then where are the bottlenecks are the challenges that need to be overcome for synthetic biology to thrive?

 

Jason Webber  12:20  

Yeah, so you've kind of touched on the biggest, which seemed to be emerging? Well, it's emerging now. The problem with synthetic biology is because that these costs have gone down to make all of these new applications the amount of funding just exploded, right? It's basically been doubling every year for the last three, or four years at this point, and last year, was $18 billion. And half of that's going into specific companies that are focusing on fermentation technology, right? 

 

So it's great in the beginning. It's really cheap to have a couple of postdocs in a lab, doing shake flasks stuff, and then eventually, you go into like a two-liter fermenter and see if you can replicate things at scale, and how it changes. But eventually, you're going to have to make the product and sell the product to people and the economics of doing it in a shake flask is just impossible. So the main drivers always get larger and larger. And you know, while VC is very happy to fund those moon shots early on because it's a good risk-reward ratio at some point when you get beyond say, 20 liters and even 20 liters, not many startups even have that capability, right? Because at that point, you've got to have steam, sterilization, and other chemicals, bigger autoclaves. 

 

James Mackey  14:00  

And how much does it cost to get to that level of production? I mean, could they still leverage other facilities? Or, I mean, are those facilities readily available that they can rent or lease? I mean, how does that process work? And what level of scale is actually required to commercialize? I think just providing the audience with some context there so we know at what stage of the company is at this, do they have access to it? Are they commercializing at this point, basically?

 

Jason Webber  14:25  

It's not a big deal to get like two liters and you know, maybe 20-liter fermenters two liters refers to like run 30-40 grand autoclaves and some ancillary stuff, so you know, 100. 

 

James Mackey  14:37  

And is that enough to commercialize at all or is that testing?

 

Jason Webber  14:41  

That's just gonna give you probably enough to be able to do some rudimentary purification to get to the final product, and that depends on whatever product you're making, hopefully. Okay, so 2 situations, one, if you have a product that exists now and you're just making a bio acquittal But hopefully there are some specifications out there that you can lean on like, this is the level of purity we need to hit so that we can actually do this a commercial scale. Can we do this effectively? The harder one is, if it's a new product, say like a replacement meat or something where there is no specification, so you got to work with regulatory bodies to kind of figure that out. 

 

So much more complicated, plenty of people are tackling that. But we stick to the ones where it's a known commodity. Say, for example, we in-licensed a tech and had to develop the purification process. And we had a potential customer that was like - Yeah, we want this. So we'd make it and we would make our best attempt to purify it and send it to him. And they're like - not good enough. Because they didn't send us a specification because it was too highly regarded secret internally. So I try again. So, you know, we shop for food grade the first time and made it but that apparently wasn't good enough. So I'm like, let's just go all out. Let's just do USP standards, US Pharmacopoeia and we got there and sent it off to him, they're like - still not good enough, but close enough that we will now share with you our specification. 

So then we made further changes in hitting it and then you know, the big order comes through is like - we'll buy it, all you can make. Well, we can't make anything unless you give us contractors. So a lot of capital goes involved with that sort of thing. So most of this stuff was done up through 1500 liter scale, which is still pretty small, right? And even though there wasn't a whole lot of that stuff floating around, there's like a number of universities that are jumping on the bio bandwagon and are opening this kind of like piloting facilities up through like 1000 liters. So it's a lot more common now, easier to do, and not a whole whole lot of expense, but some of them are even getting better at having a big component of the downstream processing or purification process involved there. But once you start getting around 10,000 liters, you're down to like a handful of places in North America that can even touch it. In general, they don't have downstream purification. 

 

James Mackey  17:29  

And by downstream purification, it's they just lacked the physical technology in order to do that?

 

Jason Webber  17:37  

Right, unit operations. So say like, in the case of an amino acid, you'd have a fermentation, then you have a centrifuge to separate out the cells. And then you might do an activated carbon and then a crystallization step. And then if it’s heat sensitive, you might do a vacuum drying step as well on top of that, so like the fermentation facilities just kind of have fermentation in the cell separation, and then you got this broth that you got to send someplace that broth is generally diluted, so maybe it needs to be concentrated up before you can actually crystallize it, or the activated carbon removes impurities. Maybe it's harder, and you need to actually do something like an ion exchange or chromatography system to get where you need to be. But you can be going to three or four different sites.

 

James Mackey  18:28  

Okay, so from a business perspective, it's like going doing the transportation like a logistical nightmare and, obviously increased cost of production significantly. So I mean, the unit economics of that sounds like they would just be hemorrhaging cash. It's not a sustainable model without a ton of funding. And then it's like you get to what you're saying is like a commercial scale, which is what we discussed like 150,000 liters or more. They actually commercialize a lot of these chemicals that are being produced. And that's where there's really a production shortfall. Where would companies go to produce this is there? How many options do they have for that?

 

Jason Webber  19:13  

There's really like a handful globally outside of China. And there are three or four in Europe. There are some places if you really intend on going to very large scale, like food proteins there, there are people that will entertain it, but generally, they want to be involved in the production. If they bring you in to do that anyway, they just don't want you to come in and then leave. So between this 15,000 150,000 liter scale, there's really not many options in North America, which is gonna make it a day of reckoning for the venture capital industry, maybe in three, or four years.

 

James Mackey  19:55  

So it just seems like these startups are gonna scale to the point where they're ready to commercialize, but then they're not going to have production facilities available to actually commercialize. But can't they just pay these production facilities? I mean, isn't it like anything else, right? Like they just lease space and a production facility to do this.

 

Jason Webber  20:16  

Sure, but right now, everyone's pretty much running at capacity, and you got a six-month backlog now. And this is before, a lot of those companies even make it out of the lab and into the larger scales. So in two to three years, it's going to compound. So like, at the facility, we did inbound tech transfer for a number of processes, and we're familiar with how much time they needed to run for their given process based on you know, and you could, you could equivalent that to whether they were a seed, series A Series B, Series C, something like that. 

 

So you take a number of them, you do an average, and then you go on PitchBook, and you pull out all the deal flow at those different stages. And you can kind of track given standard success, and failure ratios at each stage, how much capacity is going to be needed in the industry. And when I did that math, I came up with like 5 million liters in the next five years as a shortfall. And that's not the entirety. If you talk to people like Chris Gaskey and Mark Warner and a few others, they're gonna say it's much bigger than an order of magnitude larger, and the amount, but they're also including like food proteins, which is huge. And I would say, it's not quite fuel commodity level, but it's certainly the margins on it are lower. So you know, for me, if you're off by an order of magnitude on something where you're making pennies on a product, it's in my opinion, not the first thing that I would go after. So I tend to try and stick to specialty chemicals, small molecule applications, rather than the multibillion-dollar market applications, and cultivated meat or stuff like that. So I'm talking just in this range, that's what I think the shortfall is going to be.

 

James Mackey  22:19  

So then how do startups compete, so for VCs that want to invest in synthetic biology startups and they're thinking about whether it be kind of like a supply chain issue or production problem at scale, are there certain ways that some startups can have an advantage over others here? In terms of the types of fermentation process that needs to be produced? Or the length or I don't know, I mean, it's something else I guess, are some areas within synthetic biology that are going to have an advantage considering this bottleneck? Or how do early-stage investors pick winners here to deal with this problem?

 

Jason Webber  23:00  

Yeah, that's a good question. So one of the things that people always especially in VC always push forward is partnerships, with larger strategic companies that can handle some of that production so they don't have to. But I think, honestly, some of the other selective pressures are kind of evolutionary. So a horrible example but let's imagine you got a pool that's too deep. And you've got 100 people in there. And, you know, left to their own devices, basically, everyone gets VC funding, and they float. Now you go and you tie up, a one-kilogram sandbag on everyone's foot, there's going to be some that will not be able to still swim. Now, if you double it again to two, there's a lot more that can't swim. And so the VCs hope is the best will always survive and get the scarce resources. In my thinking, there's like a lot of those people that would drown with the one-kilogram weight, that could easily make lots of money for the VCs that are getting cut out because they're not going to be able to compete with Impossible Foods, the Memphis Meats, or, you know, there's a lot of companies that specifically do that. 

 

James Mackey  24:24  

Specifically because of the firm and the cost of the fermentation process, because of that bottleneck they're basically dying out before they really have the opportunity to be successful because they can't actually go to market.

 

Jason Webber  24:41  

It's harder for them to go to market because it's not as attractive to VC to invest in somebody who's got a sub-billion dollar market potential, like right off the bat or fairly quickly, right? So those that are in the 200 million to 800 million range just aren't gonna get the same amount of love. So they've got to really do bootstrapping. And you've got to have a really talented team to be able to do all this remotely, and then line up the CO production capacity and still make money, right? Because the story isn't as compelling to as someone who's like - oh, my spreadsheet has billions of dollars in it. So I want to do that.

 

James Mackey  25:27  

Right. And there are a lot of these cons like, what can you give us as an example of some of the solutions that can be developed that maybe are companies that could easily be valued at 100, in the hundreds of millions, but maybe not the multibillion-dollar application? Can we get a couple of examples of what those businesses would be?

 

Jason Webber  25:45  

Yeah, so one of the companies that I really like, and we've done a small seed investment in them, is Callian, so they have a glucaric salt that they make that has unique properties. That was a number of product applications and different tiers. But one of the unique things is that it acts like an anti-scaling or corrosion inhibitor in cooling tower water. That may sound rare, but even if you go by a data center, there are generally cooling towers to keep things cool, right? Because its evaporation is still pretty efficient for heat removal. 

 

So existing cooling tower amendments are generally phosphate-based, and there is a definite push to eliminate those in the future. And so there's not a viable alternative except for this. So right now, that market is nowhere near a billion dollars. But you know, maybe in 10 years, it could evolve to be that, with some regulatory incentive, but even by itself, it'll eventually get there. But immediately, no, and so it's just not as sexy for some VCs to look at, even though there are definite market applications, and there are strategic buyers who want it. And so it's really kind of threading that needle. And I think they're going to make it so I saw the process up close and personal. 

 

And I'm a true believer in them but their struggle in this intermediate scale of like, we need to do runs at 100,000 liters, where can we do that quickly and cheaply to continue to build up the market because the buyer is always going to. This is another rarely talked about problem is a strategic buyer will generally qualify the process at a specific scale at a specific facility. So just because you can make it in Oregon doesn't mean that they're going to buy the same stuff that you're making in Europe, because everything is different. So they have to go through the whole qualification process all over again. So that makes jumping around a kind of like an on-demand, sort of gig economy for contract manufacturing, really hard to do. 

 

So lots, lots of struggles, but you know, that 5 million liter shortfall turns out to be like 16+ facilities at this scale. And some people will wave the magic wand, like, oh, we just need one huge facility, it's like - that doesn't solve the problem, because you have one huge facility, everything's to get it dedicated, and you tend to go larger scale. And really, it's like, you need lots of these 15,000 or 30,000 liters, or 150,000-liter fermenters, you don't need like 300,000-liter fermenters because you're gonna run for like, one run a year, and then you're idle the rest of the time. So a natural evolution that we thought of was like - Okay, you got this facility that's in this scale, Why run as a CMO at all? Why not just make it a venture operation, because merchants or CMO are not spectacular, of course, they're gonna get better as the mark gets tighter.

 

James Mackey  29:32  

And when you say CMO, though, I want to tell the audience what you mean by that. Just make sure everyone knows. 

 

Jason Webber  29:37  

Contract Manufacturing Organization, so someone you pay to run your process, in the way that I talk about is typically for fermentation, and downstream processing, although those typically happen at different locations. But if you had one of these places that could take care of it, I think it's a better idea than rather than have one customer or run for a month and then be idle for 11 months, which never makes economic sense. And then in year two, they run for two months at some scale and four months, and you know, the slow progression of making market penetration on a new product. 

 

Why not just have a venture fund and just try to bring four to six of these startups through a year? And as they get to that next scale, you put them into bigger tanks. And they save time and money, because one of the biggest things that you do is you're constantly out raising money as a startup, right? And if you don't know how much it's going to cause because you don't know how long it's gonna take for you to get through these runs. You're really not spending time building business, right?

 

James Mackey  30:56  

I guess my question is that these production facilities are needed. There's a huge bottleneck here, that's going to become more and more evident over the following years, we're probably going to see viable startups start to fail at an even greater rate because they're bottlenecked and ultimately run out of cash. At least that would be my prediction. And so, in terms of developing, and creating more production facilities, I think you mentioned on average, these facilities cost 65 million-ish to start, did I remember that number right, or?

 

Jason Webber  31:27  

Yeah, that's about what ours cost. So any of those similar in scale, which is I think, what really is needed in North America specifically, yeah, you’re anywhere from 40 to 80 million depending on what kind of purification you need.

 

James Mackey  31:44  

So I mean, I think particularly given all the opportunities for failure, working with different vendors and providers and considering the shortfall, it would seem obvious, it would be ideal to own one of these production facilities. But then the issue becomes, as you said if it's not in a specific industry of the specific application, is it going to reach a valuation above a billion, that VCs may not be willing to make the investment into the startup to build the facility? Unless they see a multibillion-dollar play? 

 

So how do you see the future playing out in the next five years? Do you see your next 5 to 10 years? Do you see independent companies building more production facilities because they're looking at this bottleneck and they see that as a good business venture? Do you see the cost of developing a production facility going down so it's more accessible to startups? How do you see this kind of evolving past the bottleneck it is today, what's the path out of it?

 

Jason Webber  32:47  

There's never one answer for anything. And there should always be multiple answers

 

James Mackey  32:55  

Wait you don't have like one easy answer to solve this incredibly complex question? Haha.

 

Jason Webber  33:00  

And if anyone has a single answer to anything run away because they're overlooking a lot of other avenues to doing things. So venture is waking up that this is a problem. There are lots of paper studies on think tanks, trying to analyze them and come up with solutions. The government, I think, through close to a billion dollars in the Inflation Recovery Act to stop and bail, stopping inflation by spending more money doesn't make sense. But certainly, the vendors that fight that need have a shortfall of this fermentation capacity. 

 

Now how that money gets allocated or spent, I don't know. But there are a number of startups that are working on this. Mark Warner, Liberation labs. There's another interesting startup called Synonym that just raised a seed round of a few million dollars. And their idea is to kind of try and marry this investment banking function with some of the startups and facilities to kind of bridge that gap. They've just started so it'll be really interesting to track their progress. 

 

James Mackey  34:20  

Yeah, I actually just pulled them up on Google because I was looking, just trying to Google some articles and they were the first thing to show up. What exactly are they doing there? It looks like they're a financer through their development platform?

 

Jason Webber  34:35  

Yeah, they're trying to marry some of the investment banking functions that you would have it like, kind of more mature startups, right? They might use an investment bank to raise a large round. I think that's a lot less common now than it was say, 5 years ago, but you marry that and then, one of the other problems that a lot of these startups have is, they’ve got lab people, but to run engineering processes and determining what equipment you need and how big it needs to be, really is a whole different skill set that can't really least I don't think it can be solved by just like one person being added to a company to see something that's a whole team of experts in and of itself. 

 

So they also focus on the engineering side of giving true determination. Because they have some great experts and former Meritt people involved with the company too, that really know their stuff, and really trying to give you an actual number of how much it's going to cost to build something. And then the investments, the investors via the investment banking function that can execute to build a right size facility for a single. So that's great. And those are two prongs, that you can have to help solve the problem. Government funding is a third prong, which is obviously going to happen, no matter what. But there's still the gap for the smaller ones. So those groups are generally going to look at larger, bigger dollar things, rather than the smaller ones, maybe they'll do a couple of smaller ones initially when they just start. But longer term, they're going to go for the bigger companies with the bigger markets.

 

James Mackey  36:32  

So that means, that sounds in a sense, pretty typical. And that first off with new technology, it's more expensive, right? And it kind of cuts people out of the market. And then as we build up, it sounds like in this case, not only better technology, possibly, but just better, more infrastructure, just more physical infrastructure to do this process that will potentially open up the market to startups that might not have that multi multibillion dollar application currently. I mean, is that a safe assumption, over time, this bottleneck is going to dissipate, just based on infrastructure continuing to grow as there's more and more application for synthetic biology? Is that a safe assumption? Or what do you think?

 

Jason Webber  37:19  

Yeah, eventually, though, they'll come a point where there will be enough attrition and enough people building stuff, but you know, it's like a predator-prey model. And there's definitely a huge lag in on the predation side, right? A lot of good companies are going to just not be around by the time some of that capacity comes online. So I don't know if we'll be able to catch up on the capacity.

 

James Mackey  37:57  

And it's interesting, it's like, obviously, VCs wanted to be the first solution to the table in order to win, but it's like, when do you shoot your shot? And is it too soon? Based on this bottleneck? Yeah, for some of these companies, right?

 

Jason Webber  38:10  

It's so funny, because in a way, you know, VCs now, so like one solution to this problem that's been tried. And there's a number of failures that I can even send you that slide of all the people that tried to build a singular plant to do that product, and hope they get make it to market. And there are almost a dozen failures in the industry that have people blow in like 50 to $100 million to build buildings, and facilities, and the market dynamics changed or something. So rightfully so, VCs are scared, I'm scared shitless to invest in something that's going to do that. So yeah, but their portfolio risk is to dump money into a lot of different startups and hope that they pick some of the winners. So why wouldn't you just apply that to Capex too if you have one facility? Don't just have one person go through there, have a bunch of the startups go through there any risk?

 

James Mackey  39:17  

Yeah, I mean, it's like either having a strong partnership in place with the facility. Those relationships or possibly, there's gonna be traditional VC in a sense, but yeah, you're right, owning some kind of facility and creating an accelerator to pump startups through that could be, another option, right?

 

Jason Webber  39:39  

Yeah, I think we're to the leading edge in two or three years, people are gonna figure this out, and they'll catch up but right now, they're still just trying to find ways around it because it's not become acutely problematic. Like, hey, we have this killer startup that should just be destroyed trying to market and we can't find production so they're gonna go bankrupt. Like, oh man, we did something wrong. So like sir alright, so VC is not into it right now, who else is their private equity really the only other ones right? They're more known for very late stage and revenue-generating but you know, their risk appetite is starting to creep down.

 

James Mackey  40:24  

Also they're looking at unit economics and looking at a path to profitability and stability. And it's like, they might be interested in later stage growth, growth equity or stuff like that. But, I mean, it seems like the risk, if VCs are scared of the risk, I feel like PE’s are going to be. Yeah, I don't know. I mean, not until they've been able to prove out any kind of realistic path to profitability and if there's a $65 million problem between startup and profitability, or at least even commercializing, yeah, that's a significant hurdle. 

 

I actually, have one question for you if it's cool, but just because we're coming up on time, I wanted to ask you if you can demonstrate a successful product, right? Not at scale, but you have you've been able to use synthetic biology to influence a change to have an application that can be commercialized. Could you then sell that to an enterprise company that does have access to production and distribution, and basically sell that proprietary technology that you've developed? Is that one avenue for startups to exit without having to deal with a production bottleneck?

 

Jason Webber  41:44  

Yep, absolutely. And that's a number of companies. The general business model is to do out-licensing of the tech. Sometimes what you will see is a startup that will, you know, they're coming into it, they know they can't, they know what they don't know, or they know that they don't know what they don't know. And so they want to license this stuff out rather than build facilities and are trying to do all the marketing side of some big product. So they'll make a partnership. They'll get a lot of non-dilutive capital. 

 

There'll be some milestones and at the end of two years or so, there's a sweetheart deal for whoever the strategy is that gave him all the non-dilutive capital. And so they hit all the milestones like yeah, high five each other, and like, let's go on and do the next product. So they go back out in the market and try and raise more capital at a higher valuation like, Hey, where's the progress that you did? It's like, Well, we did all this stuff. Yeah. But you just gave the license away. And all the value that the company generated to that company that you got this non-dilutive capital for so? No, we're not giving you a higher valuation. And so some of them play out. Yeah. Captive Audience. It's also very dangerous.

 

James Mackey  43:07  

Yeah, I think one of the targets for this is done, because I put it you know, I obviously don't know this face. But I think one of the things is if you're well connected to the production and distribution network, specifically for this, and you at least have LPS like limited partners and your fund that are, then it's like your whole fund strategy is creating this flywheel of early stage. Synthetic bio companies that literally you are coming in at like a maybe pre-seed round, helping to sign like, hey, let's get what's really cool, like your application or something, what's a really cool, something that you can create? 

 

Let me help you with the go-to-market strategy and help you figure out how to commercialize that or at least prep it for commercialization to show that path forward. And then I'm going to leverage my partnerships and get you to help us exit before we hit, so the goal isn't to produce and so it's maybe not these sweetheart deals, but it's still tapping into existing relationships to find a successful exit. I mean, are we seeing VCs do that consistently as a fund investment thesis or fund strategy?

 

Jason Webber  44:33  

If it's out there, I could have missed it, because I've been playing more on the ops side of scale-up for a little bit now. But, you know, one of the big overlooked problems is, for the most part, fermentations pretty standard. There's certain amounts of sugar and a certain amount of air and other things that go into it and you make stuff and you remove the cells, hopefully, the product isn't in the cells because that's more complicated. But people do that all the time too. But for every product, it's pretty much a bespoke solution for purification. Even in amino acids, like alanine purification is not the same as valine, and purification is not the same as threonine purification. And they all basically use crystallization, active carbon, and vacuum drying for the products. But they're all different settings and every one of them because now you're doing it biological process, as opposed to how it was done before. I think alanine was done somatically, in a somatic reaction from aspartic acid or something like that before. So all that process has to be developed. And it's really hard to guess the economics until you do, right?

 

James Mackey  46:02  

So what you're saying is all these different companies could have very different unit economics, even though it's just based on, it's accurate to say, the fermentation process or how you're going about the product, right?

 

Jason Webber  46:16  

Yeah, um, we did a couple of products internally, one, we in-licensed when we developed in-house, and the one we developed in-house was a crop node. And so that was something that was produced inside the cells, then you've got to lyse the cell, break the cell wall so that you can extract it. And you know, it's a complicated extraction process, we use supercritical co2. But we weren't getting the extraction efficiency that we thought for the product. So then we had to go back and redevelop the imagination to lyse the cell so that we can get the product out, because it wasn't the economics weren't going to work out if we did it. half-assed, like it, was right.

 

James Mackey  47:01  

Yeah. So that's another, really, and I'm sure that scares the season of investors in general as well, because it's like, the production costs can be so drastically different. And I think it's really interesting that most VCs are not scientists, with PhDs in biology.

 

Jason Webber  47:22  

But you know, a Ph.D. is just like an over-specialization. So one side of the set of what you've done.

 

James Mackey  47:32  

I mean, yeah, it's like how beneficial I mean, I feel like you need to have a high level of expertise to pick winners here. And even when you do have a high level of expertise as you said, you still can't necessarily predict unit economics, or path to profitability, or what issues you're gonna have when trying to develop a product here. It sounds like there are just so many areas, and it's just so complex that, I would say, this is probably why we're seeing more funds that are specializing in biotech or synbio. 

 

Because we're seeing the level of specialization required in order to pick effective winners if you're a generalist VC, and you're just playing around saying - hey, this is a growing sector, let's dump some money into this. I don't see how they could possibly pick a winner effectively without just getting lucky unless you have a high level of expertise here.

 

Jason Webber  48:31  

Yeah, over a decade ago, there were a number of those big-powered VCs, I won't name some of the names so that they can remain unknown right now. But they were more general, focused on the tech side, and they got into bio and were throwing tons of money at it, and really did not understand the costs of commercialization. And eventually, they said - We're out and left a lot of companies high and dry. And maybe rightfully so because they were throwing good money after bad and didn't really have the unit economics where they were today, and where they can realistically get to soon enough. 

 

James Mackey  49:21  

I know we’re running up on time, do you have a couple of extra minutes, I go on a little bit over? Okay. Do you think the way that VCs are investing in synbio, biotech, and climate tech - are we as a VC community doing proper due diligence in these deals? Or do you think they just see like, oh, you know, some bio, this is the future, right? This is going to change the world. This is the next kind of revolution, right? 

 

This is going to be the most important shift we see in our lifetime. And so we want to get in with as many copies as we can. I'm just curious. The level of due diligence and expertise that you think is going into funding right now with this huge spike in funding that we're seeing.

 

Jason Webber  50:07  

So it's a double-edged sword. I mean, if you ask them, they're definitely doing it the right way. But if you ask others, if it's really outside of their scope, they'll bring in a subject matter expert, some Ph.D., they'll come in as a consultant and go visit the site and look at the lab and watch some fermentation runs. And you know, they'll get a general set, GO, it looks like it's working. And yes, I validated this on HPLC. But do they really understand the entirety of the process? 

 

Because honestly, we've had a number of people come through the plant, and it was all lip service on purification. “Oh, yeah, we have, yeah, we have a process, we're going to do this step, this step in this step. And we're going to have a product”. And like - Okay, well, what are the specifications on any equipment that you are going to do for that, we have done those tests, where you don't have a processor, you can get most of them can get through to fermentation which is really the big hurdle. 

 

But after that, it's just kind of an assumption that if it's similar to another process, it'll work the same. And I've certainly seen some CBD companies come through, that come through with a soup of CBDs. And they're just so chemically similar, that you can't even separate them with chromatography. And so they're just hopeless, don't ever make it, they need to send the product back up to the strain engineers to get rid of the side products. So it's tough, and they raised some money. But you know, it's like an afternoon - Hey, this is not going to work. Alright, it was a couple of days of thinking. But you know, gut reactions are generally pretty good.

 

James Mackey  52:00  

Gotcha, gotcha. Well, this is this has been fascinating. Thank you for walking me through this and our audience. I really enjoyed this topic this week, we covered a lot of high level about what's happening in the industry, as well as we got very technical. So I appreciate you doing that with me today. 

 

Jason, I just wanted to say thank you for joining us on the show. I know a lot of investors listening into this, essentially just got a masterclass on fermentation and the process to bring these products to market. And I know that's going to be super helpful, as well as for founders considering building products in this space. So thanks so much, man, I hope you had fun on the show with me as well.

 

Jason Webber  52:39  

I did, I want to leave you with one thing. So there's a saying in science, that science progresses only at the speed at which the previous generation dies off that are kind of locked into the previous box of what's real and what's not real. I think the same thing is probably true with financiers and that as the older generation dies off, those that are open to new funding models will take their place and progress will continue.

 

James Mackey  53:06  

I love it. I love it, and Jason for people that want to engage with you, maybe your firm, or you directly, what's the best way that they can find you?

 

Jason Webber  53:17  

LinkedIn is always the easiest. I can get an email, but it gets kind of tricky over that. So jason@scvco.com But LinkedIn is probably the primary at Jason Webber. 

 

James Mackey  53:29  

And for everybody listening we're gonna put Jason's LinkedIn profile at the bottom of the episode description so you can find it there. Thank you again Jason, and for everybody tuning in - Thank you for joining us and I will see you next time. Take care!