3 Questions Investors Are Asking About Start-Up at Solazyme Inc.

January proved to be a great month for synthetic biology. Startups and industry enthusiasts gave a collective sigh of relief last week when Renewable Energy Group (NASDAQ: REGI  ) , the nation's largest biodiesel producer, announced the acquisition of struggling LS9 and its head-first dive into industrial biotechnology. The move offers a new growth opportunity for Renewable Energy Group investors and marks the company's entrance into biobased chemicals, which contrast the current offerings of biodiesel, renewable heating oil, and renewable diesel -- all created in simple chemical reactions.

While a deep-pocketed Renewable Energy Group can expedite development relative to the current pace at the start-up, the biodiesel powerhouse will still need several years to successfully commercialize the technology. Solazyme (NASDAQ: SZYM  ) , on the other hand, is much closer to selling commercial quantities of biobased chemicals -- and it just capped off January with the biggest announcement yet for the field of synthetic biology.

The renewable oils and industrial biotechnology company has begun commercial operations on American soil with its first industrial scale biorefinery in Clinton, Iowa. A larger facility in Moema, Brazil will follow in the coming weeks. Shares are roaring higher on the news -- expected news, nonetheless -- so investors may be asking several questions about what, exactly, the milestone means. Let's explore a few.

1. Is it time to celebrate?
Every major milestone at Solazyme deserves attention. Why? It's among the few companies -- hailing from Synthetic Biology 1.0 -- blazing a path for numerous next-generation start-ups tinkering in lab, pilot, and demonstration facilities today. That being said, many milestones remain ahead. Even CEO Jonathan Wolfson cautioned investors to keep their enthusiasm in check:

Consistent with our stated plans, we are focused initially on ensuring consistent and reliable operations as we build customer trust. While we acknowledge that it is still early days, we look forward to the opportunity to expand our production volume and the slate of oil products available.

I recently outlined a few things to keep an eye on this year as Clinton and Moema ramp operations. It's important to reiterate that, inevitably, equipment and processes at Clinton are going to break or demonstrate inefficiencies. That's why ramp-up takes 12-18 months in the first place: to work through unforeseen obstacles.

Source: Solazyme 3Q13 earnings presentation.

Aside from production and processes, logistics also have to be scaled. Solazyme is working with upstream partner (supplying sugar and utilities) Archer Daniels Midland and downstream partner (processing oils) American Natural Products to ramp Clinton. That means there are a total of three facilities involved -- and American Natural Products operates a facility that is 300 miles away! That doesn't make scheduling impossible, but it certainly adds a degree of difficulty when compared to in-house downstream capabilities.

2. What does start-up mean for customer relationships?
Industrial biotech platforms enabled by synthetic biology are turning many heads in various industries, but customers are still reluctant to give large chunks of their supply chains over to developmental companies such as Solazyme. To do that, the company needs to prove it can reliably produce various oil profiles at a cost target determined by the customer. It will take time to achieve -- perhaps several years -- but the beginning of ramp-up is an important first step.

Source: Solazyme 3Q13 earnings presentation.

A customer's decision to reshuffle its supply chain will ultimately come down to an evaluation of the amount of risk being taken on with new bioprocesses versus the amount of risk being replaced by new bioprocesses. Perhaps on-site tailored oil production mitigates risks related to political unrest, supply volatility, or agricultural growing methods. Customers will need to decide if those risk reductions are offset, and to what degree, by new risks such as feedstock volatility, production uncertainties, volume constraints, and consumer concerns about genetically modified organisms. Risk assessment will be performed on a case-by-case basis, although investors can assume current customers are already factoring in positive futures. Will the benefits play out? Early signs look good, but execution and demonstration will be key.

3. Did you miss the opportunity to invest in Solazyme?
Shares may have popped on the news, but there is still plenty left to prove. Think about it like this: Does the announcement of a start-up -- an expected event -- result in any material changes that did not exist the day before? No. While investor sentiment is a difficult thing to predict, I think recent history has shown that the market is reluctant to crown winners in this industry before results are demonstrated.

I still don't think investors should feel as if they have missed this investment opportunity, especially given the tremendous long-term growth trajectory that will play out over many years. However, if Solazyme executes on commercial goals this year, investors won't be able to catch shares under a market valuation of $1 billion, although possible share dilution (from debt repayment) could weigh on gains, too. I wouldn't change my investment thesis either way.

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