10th August 2012
A lot has been made of the negative impact that listing a company on the stock exchange can have on innovation – see the euphoria and comedown of the Facebook IPO.
The point of listing, however, should not just be to pad the pockets of executives but to allow the market to judge the prospects for a business idea. As such should we complain when investors find fault and send the share price tumbling?
Case in point
In September 2010 private company Amyris (AMRS), a much-hyped biofuel producer, was readying itself for a public listing. It was seen as an exciting, innovative firm at the forefront of the technological developments in its field and backed by increasingly favourable government policy.
At the IPO the group raised $84.8m at $16 a share. Although this was below the target of $18-20 a share the listing was nevertheless seen as proof that significant investment demand existed for green-tech.
Fast forward less than two years, however, and the optimism that greeted Amyris' listing has all but evaporated. In May the company announced that it was it was shuttering or scaling down production at two of its three facilities.
As Adam Lesser writes on GigaOM:
"The original goal had been for Amyris's three facilities to produce 7.5 million litres of product a quarter, though the company has struggled with yield and separation loss, turning out just over 900,000 litres this past quarter. More importantly, the low production runs pushed the average selling price to $7.70 per litre, well above what the market will bear."
Lesser indentifies the major problem as an inability to scale a number of the processes used to produce the biofuel. That is as may be, but behind the scenes Amyris' problems reflected an internal cultural battle as much as flaws in the business model.
Before joining in 2007 John Melo, its chief executive, worked in the oil industry and in the run-up to the IPO he built a sales pitch that reflected his experience in the commodities business. He set ambitious production targets based on the as-yet-unproven ability to scale the fermentation process used to turn cane syrup into the biofuel farnesene.
The team of scientists charged with meeting these goals, however, proved less than enthusiastic about Melo's attempts to drive the business forward. Daniel Grushkin at the Fast Company quotes Melo as saying:
"They didn't want to be measured. They said, 'Metrics? What metrics? You can't measure this stuff. It's science–it's about innovation, about us having space, about us thinking. Just leave us alone, and we'll do great science for you.'"
Failure to meet these targets began to weigh on investor sentiment and from a high of over $20 in October last year Amyris' shares dropped to under $4 in May. By this point tensions inside Amyris were made manifest with the dismissal of its chief technology officer Neil Renninger, one of the founders of the business, along with the president of global operations and its general counsel.
What lessons should be learned
Markets are not necessarily the enemy of the investor. Indeed looking at the history of a company's shares can reveal a great deal about its fortunes, although this should form only a small part of any analysis.
Sure, the story of Amyris speaks to the dangers of investing too early in unproven technologies. Many investors appear to have been lured by the promise of large scale production of biofuels before the model had even been tested. A slick sales pitch does not necessarily equate to real world results.
Yet for investors even the sniff of a divide between the management and employees charged with delivering production targets should have set alarm bells immediately ringing. If the premature IPO was not itself responsible for undermining innovation it certainly helped to widen the cracks between the creative and executive branches of the business.
If seen in terms of a long term investment, the story of Amyris and that of biofuels is far from over. After all the United States Environmental Protection Agency claims that 9% of all fuel used in 2012 should come from renewable sources and set a target of "at least 1 billion gallons" of bio-diesel to be produced in 2013.
Whether it can recapture its initial lustre will now depend on the company proving that it is capable of delivering. Melo's team should be under no illusions; those investors who have stayed loyal are no longer blinded by the sugar rush.
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