The Inside Story Of How SoftBank-Backed Zymergen Imploded Four Months After Its $3 Billion IPO

On a Thursday in April, the 200-foot tall LED display located at One Times Square displayed a large-scale slogan that read: “We Make Tomorrow.” The business behind the advertisement was Zymergen, a California synthetic biology firm that had just been made to the public market with a value of $3 billion. The three founders of the company -three – Josh Hoffman, Zach Serber, and Jed Dean — appeared on the panel, smiling beneath their masks, decorated with their green Zymergen logo.

The company has attracted over $1 billion of venture capital funding from companies like SoftBank and Baillie Gifford and was able to sell the investors its moonshot concept of creating products typically comprised of petrochemicals, including an optical film for smartphones to mosquito repellent and mosquito repellant, in a way that is more sustainable for the planet. Through “partnering together with Nature,” according to the prospectus of Zymergen, it will engineer microbes that can be fermented into these products, just as yeast is fermented to make beer or bread. Since the beginning of time, companies specializing in synthetic biology have been working in the outskirts of science, claiming that the technology to program cells would transform the world just as the computer revolution has. Zymergen’s April IPO, together with Ginkgo Bioworks’ more significant offering within five months — represented a pivotal moment for the emerging field.

In just four months, Zymergen released a dramatic announcement. It stated that it would generate zero dollars in revenues from its products in 2021. It also noted that it was expecting “product revenues to be insignificant” in 2022, too. In the S-1 offer document, the company stated that it was in the process of evaluating its first product, an optical film for folding LED screens. It also said it had several customers and anticipated revenue in the second quarter of 2021. The company also stated that it had ten more products in the pipeline, with the next due to launch in 2022. In its statement from August Zymergen acknowledged that the optic film was experiencing “technical difficulties” and that its launch was delayed. Hoffman was the company’s 50-year-old CEO, was gone. Jay Flatley, the 68-year-old former head of the genome-sequencing giant Illumina, who was elected the chairman of Zymergen just before its public listing, was appointed the interim CEO.

Zymergen’s stock plunged 69% the following day, taking away almost $2.5 billion of market value. It was a shock for a business that had already raised over one billion dollars of venture capital and $530 million more during its initial public offering. Lawyers are suing shareholders on behalf, and regulators are reported to be looking into the company.

However, according to sources from former employees as well as industry insiders, there were warning signs at Zymergen prior to the crisis in August.

The prospectus stated that its 2020 revenues were only $13 million, and its net losses for 2018 were $262 million. It also said that it was struggling to make Hyaline biologically and that its U.S. contract manufacturer would eventually require replacement. According to an ex-higher-level employee of Zymergen, Hoffman used exaggerated financial data and presented overly optimistic predictions about Zymergen’s capabilities both internally and externally. The former employee who has a stake in the company recalls Hoffman’s reaction when confronted over this conduct: “Never underestimate the power of the fool.”

In an environment of abounding liquidity, companies are taking their businesses to market earlier and at more attractive valuations, particularly in highly demanding areas such as life sciences and technology. For instance, last year, 44 tech IPOs went public at an average price/sales ratio of 13 to the historical average of six since 1980 as per data collected by Jay Ritter, a academician at the University of Florida’s Warrington College of Business. This year, these figures have only risen by 90 tech companies going public with a median ratio of fifteen. This is one of the few times considering the height of the Internet bubble that this metric has been in double figures. In September, Ginkgo went public through SPAC in a $17 billion deal that valued Ginkgo more than 100 times, trailing 12-month revenue.

“You see these bubbles on markets,” declares Sri Kosaraju, the chief executive officer of the synthetic biology company Inscripta who was previously in charge of J.P. Morgan’s Healthcare Capital Markets practice, and was co-lead of its technology practice. “There’s lots of cash floating around but no place to put it. There is room for innovation in technology and life sciences, and that’s where the money is going, so that’s why you’ll find these rising valuations.” It’s become so crazy that instead of considering trailing revenues or even estimates for next year for valuation, researchers from the sell-side “are currently calculating three- or four-year-forward revenue multiples to justify the valuation,” he says. “I’ve never seen valuations as high as these before.”

When companies with a lot of attention like WeWork or Theranos fall apart, founders of the companies usually assume the blame. For venture-backed companies, there’s a lot of guilt to share. Investors like SoftBank let founders start their businesses and then transfer their investment to the public via IPOs. Underwriters, as well, such as Goldman Sachs and J.P. Morgan in the case of Zymergen could be failing to perform the necessary due diligence (Goldman Sachs didn’t respond to a request for comments as did a representative for J.P. Morgan declined to respond). Additionally, the directors of venture-backed businesses must make sure that their company’s projections and filings are correct and reliable, according to John C. Coffee, Jr., a professor of law at Columbia University.

“In the process of doing the paper-work for the IPO typically, you’d get a significant amount of due diligence conducted by everyone at the legal firms of the company as well as the underwriters. They have not seem to be aware of this issue in any way.” Coffee says. “We could have another example of highly skilled people who aren’t vetting an upcoming company and instead of trusting on the founders’ charming story.”

In the cutting-edge field of synthetic biology to autonomous vehicles and space exploration, the art of separating promising companies from hype or fraud can be a difficult task. These organizations could create the next generation of life-changing technologies. However, the process usually lasts for years, and many businesses will be unsuccessful in the process. In the case of Zymergen’s public listing, it was a further problem the synthetic biology field is so fresh that stock analysts who cover these companies are usually experts in chemical manufacturing where the methods of scale-up and manufacturing are different from those in “synbio” or biotech experts that focus on drugs, which face various marketing and regulatory concerns. According to Pinnacle Associates portfolio manager Randy Baron who has invested in the synthetic biology company Amyris but avoided Zymergen and Amyris, says: “Zymergen is a flashing signal for anyone who thinks you can avoid the pain of a decade.”

Zymergen hasn’t made any public comments on the situation since Hoffman quit in August, except the course of a conference call with investors, during the time that Flatley the acting CEO, acknowledged the importance of concerns regarding the company’s credibility. “I would like to state the obvious truth that we’re taking this matter seriously,” Flatley said during the conference call, stating that the firm had established an oversight committee to oversee the strategic direction of the company and had plans to conduct a thorough review with the assistance of advisors outside the company. “We’re determined to restore trust in both the leadership team as well as the business. We recognize this will not happen few weeks or months but will require consistent quarter-after-quarter execution against a credible plan.” Zymergen has declined to respond to detailed queries to Forbes, but said in a statement that the remains “as confident as ever regarding our platform and ability to bring new solutions to the market” noting “our science and technology are solid.” Zymergen’s board members have either refused to respond to media inquiries or forward requests to the company and so did SoftBank and the majority of its investors. Hoffman hasn’t responded to requests for comment on social media, and his lawyer has declined to provide him with remarks. Serber, as well as Dean, have not yet responded to inquiries for comment. For clarification. Investment management firm Baillie Gifford was the lead investor in the July 2020 round of funding in Zymergen reported that the firm is in good hands “The company has taken swift action by appointing Jay Flatley as interim CEO,” Tom Slater, who is a Baillie Gifford Partner, wrote in an email sent to Forbes. “We have worked closely with Jay as he served as chief executive officer of Illumina and are extremely juttingof his achievements and are looking further working with him and Zymergen’s new leadership team.” Zymergen.”

Zymergen’s Hoffman was a former McKinsey analyst and banker for Rothschild. He first met Serber and Dean when he was working at Amyris, one of the first synthetic biology companies, and where they served as executives. The trio joined forces in 2013 to create Zymergen, which Hoffman founded as its CEO, Serber, 46, as chief scientist, and Dean 43, who is the vice engineer president. The company was named Zymergen to represent a mashup of the words Zymurgy (the investigation of fermentation) and genomics, merge and locating it at Emeryville, California, a hub for biotech startups.

In the past, they were betting on the potential of biology to produce eco-friendly products for industrial use like cellphones. They may not have realized the difficulties in developing products for this market, according to Tom Baruch, a long-time investor in the area of synthetic biology via Baruch Future Ventures. Baruch Future Ventures. “Industrial customers are extremely fickle,” Baruch says. “Anybody that has been in the field of materials selling electronics is aware of how difficult it can be.”

The issues began to surface before that company’s IPO. At an all-hands conference at the beginning of 2018, Hoffman was on stage to give the status report to his employees of around 500. The company had just purchased Radiant Genomics, a genomic database company, following more than a year of courtship.

Based on the information provided by the previous Zymergen employee, the co-founders of the two Radiant co-founders -Jeff Kim and Oliver Liu Jeff Kim and Oliver Liu agreed to acquire the company after seeing Zymergen’s internal pipeline, which included the projected size of contracts worth billions in 2021. In the year before the acquisition, Radiant posted revenue of just less than $10 million, as per the employee who was made acquainted with the two companies’ financial statements as part of the process of due diligence. Before the transaction was concluded, Radiant was told that Zymergen was poised to record triple that amount in 2017. The employee claims. Liu did not respond to requests for comments, or Kim did not respond to requests for comments.

The affable Hoffman delivered his address at the event and shared Zymergen’s employees Zymergen’s annual revenue of less than $10 million. “Wait for a second,” the former employee recalls thinking. “That’s Radiant’s figures. It’s exact Radiant’s figures — which told me that Zymergen was a non-profit company.”

Despite the absence of income generated by its operations, Zymergen continued to raise funds to expand. In less than a year following it completed the Radiant deal was completed, Zymergen successfully courted the Vision Fund at SoftBank, the Japanese technology investment fund managed by billionaire Masayoshi Son. The firm, which is famous for placing huge bets in Silicon Valley companies, led an investment round of $400 million at Zymergen in December of 2018. While the investment was modest relative to that of the Japanese business’s previous $4.4 billion stakes in WeWork, the round almost tripled the venture-backed value of Zymergen at 340 to $900 million. The cost of the investment is only $5.56 per share per Pitchbook, which is $16.68 following the reverse split this year of 3:1, which puts it in a position to earn a profit at the $31 price per share. The company still holds its stake. However, after the split, the investment has fallen into a state of disarray. A spokesperson from SoftBank and Travis Murdoch, director at SoftBank and a member of Zymergen’s board of directors, did not want to comment on the deal.

In April, Zymergen announced a multi-year collaboration with Japanese company Sumitomo Chemical to develop new materials used in the consumer electronics industry. In the fall of 2019, it signed a lease for 305,000 square feet in Emeryville that was previously a Novartis lab. The expansion was just one part of a plan to increase the number of laboratory and office space square feet in Zymergen’s portfolio. There are 1200 more jobs in the pipeline, according to a report published in . Zymergen also set up a design software wing in Seattle. Zymergen also established a design software department in Seattle and hired about 250 computer engineers.

In April of 2020, the company announced Hyaline which Zymergen declared in its prospectus, an opportunity worth $1 billion. With the outbreak disrupting supply chains worldwide, Zymergen was forced to lay off approximately 10 to 15 percent of their employees one month later as per ex- Zymergen employees who were fired in the course of. “Layoffs have begun,” read a Glassdoor review written in May of 2020. “Just another startup that has been spending more than they put into.” However, despite the issues that have been brewing, the investment management firm Baillie Gifford was the leader of a financing round that brought in 350 million dollars for Zymergen in July last year.

Hoffman and his co-workers began to prepare for Zymergen’s IPO in the autumn of 2020. Zymergen was burning through cash at over $250 million per year the same way it was the year prior as per its IPO document and offering document. Hyaline was bringing just $13 million in income in 2020 through R&D services agreements or collaboration arrangements. If Zymergen continues to be burning cash, Baillie Gifford-led funding was likely to be gone by year’s end in 2021. “If we do not fund capital or sign these agreements when necessary, we may need to delay, cut back or cease the development, launch, or commercialization of any of our products and other strategic initiatives,” Zymergen warned when it filed its preliminary IPO application.

The global head of HSBC’s chemical research Sriharsha Pappu (who started covering the company with “hold” and has since lowered it at “reduce”) inquired of Zymergen executives the reason for making an IPO “they stated that they considered that the IPO opportunity was there for companies that were not yet profitable like theirs and that it would be an inexpensive source of capital which is the reason they chose to proceed with the IPO,” Pappu told Forbesby in an email. On April 20, 2021, the Zymergen IPO raised $530 million in IPO, greater than 200 times the 2020 revenue.

CEO Hoffman has set a positive tone regarding the company’s business operations during an interview at the time of the IPO’s day in Forbes, claiming that the market potential for its initial ten products in the fields of electronics and personal care and agricultural was $1.2 trillion. “I’m not saying we’re going offer $1.2 trillion, and let’s just not make this too crazy, but it’s a commonplace across different product classes,” he said.

“When you come across these Silicon”Silicon Valley businesses, you’ll find people who are promotional and [Hoffman] came off as being a bit promotional,” said Les Funtleyder, the portfolio manager for healthcare as well as a partner of E Squared Capital, who ended up not taking a stake in Zymergen and taking part with it in the IPO. Zymergen’s business model swayed him away from Funtleyder. “We were unsure of the way they would earn money,” he says. “We were able to see that the valuation was, to our eyes, very high, but there were no tangible outcomes.”

It was also reported that the Securities and Exchange Commission had issues, too, as previously reported by Forbes. Correspondence with the SEC revealed that the regulators were unsure of Zymergen’s plans for increasing revenues and profits, as well as its financial health as well as its outstanding debt including a credit facility of 100 million dollars prior to the IPO. The SEC also asked the company to not compare its products with Kevlar, which is a durable and heat-resistant fabric made by the chemical giant DuPont which is found for bulletproof jackets, tire, and many other things “as it is not believed to be an appropriate comparability,” according to a letter from Katherine Bagley at the SEC’s Division of Corporation Finance. It is SEC did not respond to this story or confirm or deny it is currently investigating Zymergen.

Alongside the leadership of the interim CEO Flatley, a well-known biotech executive who helped build Illumina to $1.3 million in sales in 2000 to a $2.2 billion sequencing company in 2015. Zymergen also has plenty of cash — totaling $578 million, including the proceeds from its IPO on June 30. Cathie Wood’s Ark Investments, which already held shares of Zymergen, purchased more following the company’s collapse, buoying the company’s shares. The Ark Genomic Revolution ETF now has 3.7 percent of Zymergen’s stock, as per Morningstar. Its shares have risen by nearly 40% from their previous lowest of $8 and are currently $11.23. Wood hasn’t responded to inquiries for comments.

Zymergen’s management has announced it will have to reduce expenses, and analysts expect considerable reductions in staff, possibly 50 percent or more. According to its most recent quarterly data, the company’s September quarter saw Zymergen cut 120 of its employees. By June 2021, Zymergen had accumulated total losses of $959 million.

What Hoffman stated to Forbesin the course of an interview in the year 2000 may be much more pertinent to his previous company now: “The idea of using biology to make industrial products/services has been around for a long time as a wish. If you’re not able to achieve it at the scale of a factory, it’s a concept with great appeal. However, it’s not likely to be a reality.”

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Adam Collins
Adam writes about technology, business and economics. With master's degree in Economics, he's presented six papers in international conferences. As a solivagant in the constant state of fernweh, curiosity is the main weapon in his arsenal.

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