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BRIAN KENNY: Here’s a little Cold Call trivia for you. What do lipstick, pizza dough, and biodiesel fuel have in common? And the answer is palm oil. Palm oil is one of the most widely used ingredients in the world. You’ll find it in 50% of the products on supermarket shelves from laundry detergent to cookies. Americans consume about eight and a half pounds of this stuff every year. 85% of the world’s supply is produced from palm trees grown in Malaysia and Indonesia where deforestation is a growing concern. That is precisely the opportunity that Shara Ticku and her co-founders saw when they created C16 Biosciences, a startup whose goal is to be to palm oil users what Impossible Burger is to meat lovers. The opportunity is real and so are the challenges. Today on Cold Call we’ll discuss Professor Jeff Bussgang’s case entitled, “C16 Biosciences: Lab-Grown Palm Oil.” I’m your host Brian Kenny and you’re listening to Cold Call.

Jeff Bussgang is part of the entrepreneurial management unit at Harvard Business School. He is co-founder and general partner at Flybridge Capital Partners, and he studies lean startups as well as strategy and management challenges for founders, all of which is perfectly appropriate for today’s conversation. Thanks for joining me, Jeff.

JEFF BUSSGANG: Pleasure. Great to be here.

BRIAN KENNY: I thought this was a really, really interesting case. I had no idea that palm oil even existed but apparently it’s a real big thing.

JEFF BUSSGANG: It’s amazingly pervasive in our food, in our cosmetics, in lotions everywhere. It’s extraordinary how much use we all have of the oil.

BRIAN KENNY: I think people would really enjoy hearing about C16 and what they’re trying to do, particularly in the wake of the Impossible Burger and other developments like that that seem to be taking place. But let me ask you to start by telling us what would your cold call be to the class in this case?

JEFF BUSSGANG: Well, you teed it up a little bit with your comment about Impossible Burger. This is a company like many tough tech companies pioneering a market where they have to decide what’s my first application going to be? Shara’s initial thinking was, let’s start with the easy application, which is cosmetics, and there are a number of issues with that choice, until she begins to realize and news comes to the fore that Impossible Foods and Beyond Meat have raised an extraordinary amount of capital at extraordinary valuations. Her vision had always been to get into food. That’s where the big use of palm oil is. She had thought, well, I’ll get there in a stepwise fashion, but now with this news, the question that Shara has, and this is the cold call that I asked the class, is: Would you take advantage of the buzz and momentum that’s happening right now and jump into food directly as ambitious as it is, or do you stay focused on personal care first with the intention of going into food later?

BRIAN KENNY: Okay, and that’s what’s going to unfold as we talk about this case. How did you hear about C16? Shara was a graduate of Harvard Business School. Is that how this came to your-

JEFF BUSSGANG: Yes. Shara was not in my class, Launching Tech Ventures. Unfortunately, I didn’t have her in my class. I think she was not able to get in, she told me. But one of my other students who was a classmate of hers recommended her to me. Shara went through the Y Combinator Accelerator Program the summer after graduating from HBS and then pursued, after raising a little bit of money, pursued the business and after a year or so one of my other students brought her to my attention.

BRIAN KENNY: How does this case relate back to the things that you look at as both somebody who’s a practitioner but also somebody who is now doing research on these very same topics?

JEFF BUSSGANG: Well, my class focuses on pre-product market fit startups and many of the classes, the cases in Launching Tech Ventures are focused on technology companies that are software companies and software companies have this magical ability to iterate very quickly. Tough tech companies like C16, a synthetic bio-based company is less easy. It’s less easy to iterate as quickly. You’ve got to make strategic decisions that have longterm implications and market choice is the most important initial strategic decision. So I thought it was a very interesting way of trying to unpack and deconstruct when you’re choosing that first application, what’s the rubric that you go through? And also for a tough tech company how do you step back and reflect on the implications of that choice recognizing that your freedom and flexibility aren’t quite the same as if you’re building an app?

BRIAN KENNY: So let’s talk a little bit about palm oil. I teased it a little bit in the intro but why is it in such great demand?

JEFF BUSSGANG: So palm oil has a number of characteristics that have made it very popular. Those characteristics involve the temperature at which it melts. It retains its shape in warm temperatures. So for storage purposes it’s very effective. So for example, peanut butter on the shelf, you’ll see in the ingredients palm oil in almost all of our peanut butters that help it retain its consistency and viscosity without melting. It’s also incredibly cheap. So there’s a plethora of palm oil forests throughout Malaysia and Indonesia, and there are some unfortunate implications of palm oil which we’ll get to I’m sure, but you can extract the palm oil from the trees and get it into the food products and our personal care products very efficiently.

BRIAN KENNY: Okay, and how did Shara kind of glom onto this idea? It seems like it’s sort of out of left field.

JEFF BUSSGANG: Yes, it’s a fun one because Shara’s background like many of our students and many entrepreneurs is not a scientific background in this field. She was not exactly a PhD in synthetic biology. She was a liberal arts major, grew up in Texas, worked in investment banking, came to Harvard Business School and took a class at MIT that was an entrepreneurship class that she was inspired to take where one of her classmates was that PhD in synthetic biology and exposed her to this capability to design molecules in synthetic fashion much like computers can design software. She was inspired to address palm oil for two reasons. One, the environmental reasons. There was an incredible negative impact to the environment of deforestation. You’re creating a lot of carbon and pollution in the air and you’re also taking away trees which are in turn absorbing carbon. It’s also many, many people think a human rights issue because of the labor issues. It’s very hard work. It’s very painful. It’s very dangerous work. And Shara, who traveled to Southeast Asia and saw the smog in Southeast Asia as a result of the deforestation, people wearing masks and all these pollution issues, she was inspired to apply this synthetic biology platform and capability to this environmental problem.

BRIAN KENNY: You’ve studied a lot of entrepreneurs, a lot of founders. Is this sort of serendipitous situation a fairly common thing where somebody like Shara who’s inspired because she’s been there and seen it, has a chance encounter with somebody in a class who’s got the science background and then just sort of magic happens?

JEFF BUSSGANG: It is common. That serendipitous and that magical moment is quite common. I think what is inspiring to me is when I see founders, and a lot of our young students have this dynamic, they have the prepared mind. They think about problems in a very creative and analytical way. They use their left brain and their right brain, and so when they get exposed to a problem, they think, well, not just isn’t that terrible for the country? Isn’t that terrible for the world? Isn’t that terrible for the environment? They think, how do I solve that problem? Is there a way to systemically solve that problem, not just in a small way, but in an ambitious way? If you think about it, here’s this young entrepreneur without the right academic or technical background, she learns of a scientific method at a relatively high level, synthetic biology. She gets exposed again at a relatively high level to a meaningful environmental issue, the deforestation of palm trees throughout Southeast Asia, and she has the wherewithal to think big and think, you know what? This massive industry, why isn’t it lab-grown? Why aren’t we just creating this molecule and providing this ingredient in the lab in a perfectly sustainable way?

BRIAN KENNY: Yes, and I think with the advent of Impossible Burger, now everybody sees that it’s possible to do something like this at scale, you know?

JEFF BUSSGANG: Yes. One of the things that’s very interesting, and we talk about this at Flybridge a lot when we discuss our investment decisions, we ask ourselves the question, why now? I think the thing that’s so impressive about this venture that makes C16 so compelling is that it has so many dimensions to the “why now?” question. You’ve got the sustainability movement and this sensitivity now to the environment which is going to create both consumer and producer demand. And you have, as you noted, these examples of synthetic biology companies creating very valuable food products that can raise a great deal of capital and build very valuable franchises. So you have these two very interesting forces, one on the almost cultural side and the other on the technical side coming together at the same moment.

BRIAN KENNY: So let’s talk about the economics of palm oil because the case points out that one of the things that makes palm oil so attractive is that it’s fairly easy to extract and to process and to work into all of these products as you talked about. It sounds though like the scientific method that they’re trying to perfect at C16 is a whole lot more difficult. So how do the numbers work out as the C16 team is thinking about what the opportunity here is?

JEFF BUSSGANG: It’s one of the great tensions for deep tech or tough tech companies. After a lot of time and capital, you think you can get to a point on the cost curve where you’re competitive with the old fashioned methodology. But to get there you have to obviously raise a lot of capital and take a lot of time. So for a tough tech company with an uncertain end outcome and with a great deal of scientific risk, how do you raise that capital? How do you tell that story? And using the lean startup methodology and experimentation design, which we talk a lot about here at HBS in the entrepreneurship department, how do you test your way and iterate your way there? That’s really the tension of the case here. Shara’s initial thinking was personal care, beauty in particular is a niche market, but it’s a way of getting started. Small batches, high willingness to pay, and ability to begin to test out that first product. Food, with all the FDA regulations, with the high volume and the low cost requirements, feels almost too ambitious to begin with. That’s the tension that she has. The vision and the passion she has is to change the industry. If you’re only supplying a few vials of lotion, you’re not really changing and impacting the environment and the sustainability problem. She wants to impact the world, but to get there, it takes this circuitous route and the only way she can navigate that route is to raise the small amount of money to prove the science, raise a little more money to prove the initial market and the initial product and stepwise her way there.

BRIAN KENNY: Yeah, and they don’t really have a product to show per se. Is that-

JEFF BUSSGANG: Yeah, you can imagine the investor meetings. You’re not showing anything.

BRIAN KENNY: Right.

JEFF BUSSGANG: You’re pointing to some scientific labs and papers. Your early conversation is a lot about vision and very little about what you’ve actually produced.

BRIAN KENNY: Do investors, do they care about the sort of altruistic side of this? The fact that what they’re trying to do is both going to create prosperity, but at the same time it’s going to address a real serious societal issue.

JEFF BUSSGANG: I would say categorically, no. There are exceptions. There are impact investors and those are exceptions, but if you look at the hundred billion dollars of capital that goes into ventures, it’s all about how do I return that capital as efficiently and as effectively as possible. You think about the fiduciary obligation that those investors have isn’t to do good in the world. It’s to return as much capital as possible so that the owners of that capital can choose what to do with that capital and hopefully do good in the world. Capitalism is now being challenged to also focus on sustainability issues and environmental issues. What really attracted me to this case was that it addressed a hunger that students have, which is to look at ventures that have this double bottom line dynamic. It’s a capitalist system applied to a sustainability venture. There’s no question that Shara is trying to raise capital and return that capital much like Impossible and Beyond Meat have done in a very profitable fashion, but there’s also no question that her mission, the passion that infuses the venture, is the do good passion and the environmental impact it’s going to have.

BRIAN KENNY: I would also think that the customers that they’re selling to, so whether they go into personal care products or to food products, it benefits those brands to be able to say, “We’re not using palm oil anymore. We’re not contributing to the deforestation problem.”

JEFF BUSSGANG: It’s a great point and that was my earlier comment about the “why now?” and the cultural implications. If you thought that this lab-grown palm oil will be 10% more expensive but have every other characteristic the exact same, if consumers don’t care, they’re not going to pay that 10% premium, there’s no business. Today a lot of our large bottled water manufacturers are struggling with this issue. Coca-Cola owns Dasani. Dasani has come up with this plastic that has a portion of the plastic, because everybody’s worried about plastics in the oceans and the impact, a portion of that plastic is plant-based. But consumers are not showing their willingness to pay higher for the plant-based bottle than the plastic-based bottle. I was speaking to some Coca-Cola executives recently who were fretting about that problem, that they feel like they’ve done the right thing, but consumers aren’t reacting in the way they would hope. Now they’re in a pickle with a higher cost bottle and an inability to charge more for that. Even though consumers say they want their companies to behave sustainably, are they willing to pay for it? That’s another tension that Shara faces.

BRIAN KENNY: So does C16 have any competition? Is there anyone else out there trying to do this? Are they in a race to get to the market before somebody else does?

JEFF BUSSGANG: The palm oil industry is so massive, it’s tens of billions of dollars. The real race is, can she finance this and build it in a way that is able to replace the deforestation solution? So there aren’t a lot of other companies. In fact, I don’t know of any other companies that are taking a synthetic biology approach to creating lab-grown palm oil. Your question about competition is also a very interesting one in the context of the cold call because if there’s no competition, if really the race isn’t about beating the three other Silicon Valley competitors that have the same idea, but rather trying to disrupt an industry in a meaningful way that has this double bottom line impact, what’s the rush? Why not stepwise your way slowly, carefully and thoughtfully into the big vision? That’s the tension. The hype and the hoopla and the capital available to go after the food industry is enticing, but there’s not the same competitive pressure to pursue that path. So this tension for Shara is even if the capital were available, is that the right thing to do or is the right thing to do to stepwise your way through the maze of personal care and beauty and niche products, build the team, build the product, get some reps under your belt before you take on the food industry and that incredibly aggressive and low cost curve?

BRIAN KENNY: The other thing that comes across from the case, we talk about deforestation and human trafficking and a lot of the terrible things that seem to come along with the palm oil industry. At the same time, what C16 is trying to do would disrupt an established industry that employs many, many people around the world, how do you replace that part of the economy if you go on a different approach?

JEFF BUSSGANG: It’s an interesting question and it’s one that we discussed in the class. When you try to do good in this fashion and you disrupt an industry, there are some unintended consequences. We’ve seen this from other disruptors in other industries. In this example, you’ve got entire villages and communities that are very dependent on the palm tree business, many jobs, a great deal of wealth and wellbeing. If you were to eliminate this, even though it might be good for the environment and globally, it might be terrible for the communities locally.

BRIAN KENNY: Is it a capital-intensive endeavor what they’re trying to do?

JEFF BUSSGANG: It is a very capital-intensive endeavor, particularly if she wants to vertically integrate and be a manufacturer. So if she were simply interested in licensing the technology or providing the recipe so to speak, and the basics that then she would hand over to the large palm oil companies, it would not be as capital intensive. But as you can imagine, rather than allow the entrenched companies to either squash the technology or use it in only niche situations, her aspiration is to really be transformative and disruptive. Therefore, the long journey is the capital intensive journey to create a manufacturing capability.

BRIAN KENNY: What does C16 mean by the way? Where does the name come from?

JEFF BUSSGANG:

C16 Bio is, as I understand it from Shara’s description to me, is a particular description of the chemical compound that’s comprised of palm oil. It’s one of the palm oil derivative chemical descriptors.

BRIAN KENNY: Okay, and she doesn’t intend for this to be a secret sort of brand that nobody knows about. She wants C16 to be present even in the products that when it starts to become part of a group of products.

JEFF BUSSGANG: Yeah. If you think about the end game, if you want consumers pulling on this cultural trend to be willing to pay more or at least the same and appreciate and choose a synthetic or lab-grown palm oil-based product, you see the no GMO movement is another example of this sort of a thing where consumers from a cultural standpoint get swayed to choose one product over another cause they think it’s the right thing to do, her hope is that she can create a similar movement around synthetic palm oil.

BRIAN KENNY: Okay, so what are some of the challenges that they face as the case unfolds?

JEFF BUSSGANG: Well, this tension about what to focus on first, what market to focus on first, whether to build your own brand as you were hinting at and alluding to a minute ago or to partner in a white label fashion, whether to work with large partners or to work with smaller partners or challenger brands, those are the choices that she has in front of her. So it’s a market choice, it’s a product choice, and a business development choice all in the context of this financing environment where one approach, food is very hot and very enticing, but perhaps a siren song for her to, at the risk of going too far in my mythology metaphor here, crashing into the rocks by pursuing it too hard.

BRIAN KENNY: What is the success rate of these science-based kinds of startups? It sounds like it’s a difficult, in terms of startups generally speaking, this isn’t like launching a particular service or selling a consumer product. This is a little more intense.

JEFF BUSSGANG: When researchers look at startup success rates, the numbers realized look something on the order of 20 or 30% success, 70 or 80% failure. In the case of C16 and other companies like it, you’re compounding that risk with tech risk and with financing risk. So the success rate is even lower than that. So it’s a really highwire act that she’s pursuing. And as I mentioned earlier, this notion of lean startups and experimentation all sounds very good when you’re designing an app and you can change it every day. When you’re building a synthetic biology-based product biology and chemistry are not as easy to change. So her design cycles and her iteration cycles and her learning cycles are much longer. So the choices you make have really profound strategic implications.

BRIAN KENNY: Does that make it a lot harder to get investors to want to take a chance on something like this?

JEFF BUSSGANG: Absolutely. If you look at the vast majority of investors and where they’re putting their capital, they would as any investor, much rather pursue equally attractive markets and business models with lower risk. So if you’re presenting yourself as many tough tech companies do as a higher risk venture because of the tech risk and because of the financing risk, then you need to make the argument that you have a higher return. So that’s part of the magic of this case I think also, which we talk about in the class, which is at the end of the day it’s a commodity. So if she’s wildly successful, as big as this market is, it’s still a commodity market and how valuable is a commodity company at the end of the day? Can she articulate a value proposition that is such that it’s a platform, not just a commodity, that it’s a product with some features that might make it more attractive to really command a more valuable enterprise at the end of the day.

BRIAN KENNY: So, a one final question for you. What do you want people to remember from this particular case if there’s one thing that stands out?

JEFF BUSSGANG: So I think if I were to focus the takeaway, and I try to do this at the end of class and sometimes the next day, in this case the takeaway for me is about the fact that your choice of the experiments that you run is your strategy. In a company like C16 it really brings home the point that your selection of your experiments, your test selection, your sequencing, that is your strategy. So be very, very thoughtful and strategic and really look inside in terms of your own personal passion and ambition, what kind of a company are you trying to create and that will lead to a better design and sequencing of the experiments you need to run.

BRIAN KENNY: Great advice to all the entrepreneurs who are listening. Jeff, thanks so much for joining me today.

JEFF BUSSGANG: Pleasure it’s super fun to be here.

BRIAN KENNY: If you enjoy Cold Call, you might like other podcasts on the HBR Presents Network. Whether you’re looking for advice on navigating your career, you want the latest thinking in business and management, or you just want to hear what’s on the minds of Harvard Business School professors, the HBR Presents Network has a podcast for you. Find them on Apple podcasts or wherever you listen. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School on the HBR Presents Network.



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