Advanced Biofuel IPOs Offer Market Advantage During Volatile Times

|
 |  Includes: AMRS, GEVO, KIOR, TVIA
by: Kevin Quon

It's common knowledge that the boom-and-bust nature of the financial markets has typically yielded the greatest opportunities for new companies to ground their roots during recessionary periods. Input costs for establishing businesses (resource costs, cost of capital, service costs, real estate prices, etc) tend to be depressed, resulting in an established foundation at an opportune time.

Unfortunately, what often tends to drop as a consequence to the macro-economy environment is the demand for new IPOs, which, having been severely stifled over the past 3 years, has only picked up in the past year. Venture capitalist firm Harris & Harris Group, Inc. (NASDAQ:TINY) knows this all too well. Despite having a portfolio of blossoming nanotechnology and other "small-tech" firms priming themselves for public offerings, it wasn't until 2011 when they were able to see their interests go public via NeoPhotonics (NYSE:NPTN) and Solazyme (SZYM), despite having no IPOs for the 5 years prior.

Now, yet again, the IPO window appears to be closing with the dawn of this past summer in light of recent market instabilities and fears over a European breakup, the ever present fear of a Chinese real estate market crash, and the possible grinding slowdown of the US economy led by political polarization. Recent IPOs have also seen their share prices fall at astonishing rates, compounding the diminished interest at the prospect of a robust IPO market. And yet, what is often dismissed by the financial industry as being a poor headwind indicator to stay out of particularly new equities, often becomes the most opportune time to investigate further the investment viability of such companies that have gone public.

Such companies that have managed to slip into that brief window of capital-raising prior to a volatile period of market instability have the comparative advantage of new cash on hand. These are the companies that now have the ability to take advantage of recessionary-like environment circumstances with the upper hand of new capital. Not only were they able to take advantage of higher IPO prices in light of higher investor interest at the time of their IPOs, but they also retain another advantage in that a closed IPO window suppresses their private industry peers from keeping up in terms of their operations advancement.

Such is the case in the advanced biofuels market, which stands as a new industry on the cutting edge of tomorrow's hope. Many of the companies in this industry have proven themselves on a demonstration scale but need the infrastructure capacity to be built on a commercial scale in order to be cost-comparable to the price of conventional fuels and chemicals. Consider the following advanced biofuel companies that "made it" into the IPO window:

Company IPO Price Amount Raised Current Price (12/21/11)
KiOR (NASDAQ:KIOR) $15 $150 Million $10.19
Gevo (NASDAQ:GEVO) $15 $107 Million $5.65
Amrys (NASDAQ:AMRS) $16 $85 Million $10.6
Solazyme (SZYM) $18 $227 Million $10.79
Click to enlarge

We see that the advanced biofuel industry as a whole has suffered in light of the recent market volatility as all four publicly traded companies have fallen to levels well below their IPO prices. This can only go to further diminish the ability for other private companies to raise capital, such as Genomatica and OiriginOil, which recently filed for an IPO. Even further, it discourages other private companies such as LS9, Sapphire Energy, REG, VIRENT, Logen, and etc., all of which are unable to truly implement their business plans effectively apart from a significant influx of capital.

Ultimately, what we see in light of a macro-economic picture is the development of a first-to-market advantage in a new industry. It stands to bear in mind that advanced biofuels significantly differ from conventional biofuels and hold the best promise of unsubsidized production in the future. In some respects, the advanced biofuel industry itself could be broken up into separate sub-industries based on the varying forms of technologies. KiOR, for instance, uses expendable woody biomass to create drop-in biofuels and therefore wouldn't be competing with Solazyme's sugar-eating algae technology input needs. This in turn could signify several different market leaders over time in their own respective sub-industry processes.

In light of currently depressed market capitalizations, one begins to wonder if the market has become too short-sighted to understand or even consider the future profitabilities of a budding industry starving for new capital today. More importantly, instead of rewarding those which have successfully passed the largest barrier of entry by raising large sums of capital, we find that general investor pessimism could be discounting the very companies that are simultaneously being propped up as future market leaders in their respective industry.

Disclosure: I am long SZYM, TINY.