Mendel Biotechnology: The Road Less Taken

Environmental
Written by G. Jeffrey MacDonald
Monday, 31 December 2007
CEO Neal Gutterson explains this biotech company’s unorthodox approach to financial backing and the biofuel market. A standard formula for launching companies in Silicon Valley assumes big rewards require big risks. It says entrepreneurs begin with ideas, round up venture capital, and race to turn quick profits that will make equity investors happy. But a Hayward, Calif. biotechnology company is demonstrating that this standard approach isn’t the only one with promise. In fact, because of the firm’s extended period in research and development, an alternative type of financing partnership seems to have provided precisely the stability it needs. The company, Mendel Biotechnology, fittingly bears the name of Gregor Mendel, a 19th century Eastern European monk and early geneticist known for his research on the properties of peas. Mendel Biotechnology walks figuratively in the monk’s footsteps both by researching plant genes and by working on a timeline so drawn out that it helps, especially in the impatient world of Silicon Valley, to have the patience of a saint. Mendel’s orientation, however, is anything but cloistered. The company tackles some of the world’s most pressing environmental problems by isolating genetic codes for seeds that thrive in challenging settings. One code, for instance, tells engineers how to design a seed so resistant to drought that it generates abundant yields even in parched conditions. Mendel’s stock in trade is to collect patents, some of which contain multiple gene sequences for commercially viable seeds. The company has more than 100 pending patent applications and numerous issued patents since inception in 1997. Meanwhile, Mendel has been breaking even financially since its third year—an impressive feat for a cost-intensive start-up—in part through funded R&D collaborations with a company that’s been one of its core investors from the beginning: Monsanto, a leading developer of genetically engineered crops. And as seeds developed with Mendel’s help make their way to market, Mendel is positioned to receive handsome royalty payments in years to come. “This approach allowed the organization to focus on the work rather than on financing,” said biochemist Neal Gutterson, president and CEO. “With most equity venture capital, in early stages you have to go back and do financing within a couple of years, and this technology just doesn’t mature that soon. So it allowed for greater sustainability for our business than we otherwise would have had.” Understanding the scale With a stable model in place, Mendel could sit back and wait for the royalties to start streaming in. But Gutterson has other plans to build on the current model and take his firm to new heights. Mendel’s emerging opportunity comes in the form of biofuels. Alternative fuels are commanding attention on Capitol Hill and in capital markets as the price of crude oil flirts with record highs. Perceived linkages between fossil fuels and global warming are also fueling the quest for alternatives. For Mendel, widespread interest in agriculture-based fuels spells big opportunity for those with experience in engineering seeds. To underscore the scale of possibilities, Gutterson notes that today’s market for ethanol (a clean-burning fuel derived primarily from corn in the US) is about 7 billion gallons per year. Demand for a more efficient biofuel, derived from cellulosic grasses, is expected to reach 50 billion to 60 billion gallons by 2030. Mendel is taking steps to capitalize on this trend by partnering with British Petroleum (BP). The relationship guarantees Mendel plenty of up-front capital for research and development as the company ferrets out which cellulosic strains hold the best promise in the marketplace. It also ensures a market for Mendel’s product since BP ultimately plans to bring related fuels to market. But this time around, Mendel is going further than it has in its relationship with Monsanto. Rather than license others to develop seeds and reap the harvest, Mendel is planning to produce the seeds inhouse and sell them directly to farmers. This positions Mendel to own both the patents and the derivative products that could be in great demand, especially if its Miscanthus genus of grass proves to be among the most viable and efficient ones for making fuel. “We’re becoming a seed company,” Gutterson said. “We think we can sell seed to farmers and feedstock solutions to refiners that cover that part of the chain that isn’t quite as jazzy as the enzyme-processing technology that would be developed for a conversion to liquid fuels but is equally as essential to this industry’s success.” Start with seeds Approaching the “clean tech” world in this unorthodox fashion has a couple of advantages, according to Gutterson. He noted that many companies are vying for a piece of the clean fuel processing market, that is, the arena that will use new technologies to bring crops from field to pipeline and fuel tank. Yet without the right seeds, he explained, the rest of the process will go nowhere. Gutterson also noted that the alternative fuel market still includes a range of unanswered questions. Example: whether the nation will ultimately depend on crop-based butanol (another biofuel) more than ethanol remains an unsettled issue. By focusing on seeds with several possible applications, Mendel is, in effect, hedging its bets and staking out a position that bodes well under several likely scenarios for the next quarter century. “It doesn’t really matter to us whether it’s ethanol or butanol or some other gasoline-like molecule that’s produced from a plant,” Gutterson said. “The biomass that has to be produced in the initial conversion is probably going to be the same.” Branching out has its advantages and challenges, Gutterson said. The company is now more diversified since it no longer depends almost entirely on a single customer for its prospects. Mendel also has a chance to reap big profits in an age of eagerness for eco-friendly solutions. But in the short-term, Mendel had to scramble in 2007 to keep up with the demands of expansion. Staff size grew by about 27% in 2007 to 70 employees. A management team that used to oversee just one California facility must now keep track of research sites in China, Alabama, and Illinois. Executives also need to maintain a relationship with a partner company in Germany. Even after a decade in business, Mendel is looking at several more years of breaking even before its investments start to pay off in a big way. That’s a long timetable by Silicon Valley standards, but agriculture-related enterprises take time, and Gutterson is not complaining. After all, he’s overseeing a sustainable business that’s poised to capitalize on a few mega-trends, and it’s happened with much less risk than entrepreneurs commonly must bear. Perhaps reward and risk don’t have to exist in direct proportion after all. E G. Jeffrey MacDonald is a correspondent for the Christian Science Monitor. Based in Newburyport, Mass., he can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

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