The first wave of publicly traded engineered biology companies hasn't exactly served as a shining example for the field. Unrealistic expectations, unrivaled mismanagement, poor investments, awful technology and business strategies, and worse have pushed several companies to the brink of insolvency. If industrial biotech companies such as Gevo, Amyris, and TerraVia haven't considered bankruptcy or selling off assets, then they're simply operating in denial. Each has reduced the hard-earned money of investors to pennies on the dollar. Meanwhile, the one public company that has avoided these missteps has problems of its own.

The very public face-plants and lack of meaningful execution have had broader consequences for the field. Even the most promising private companies have no firm plans to go public anytime soon. Meanwhile, many deep-pocketed companies in the industries that could potentially benefit from engineered biology have been burned too many times to take the technologies seriously, which has threatened large sources of much-needed funding for platforms looking to make a commercial splash.

That said, there may be a relatively low-risk strategy for patient investors that want to make money from engineered biology.

Seedlings positioned in an ascending row representing growth.

Image source: Getty Images.

Follow the money

Would Tesla exist today if it launched out of the gate attempting to mass produce the Model 3? Probably not. It began by selling low volumes of high-value niche products, which bought it time to learn the ins and outs of regulatory, technology, and manufacturing hurdles. Only after gaining experience did the automaker attempt to ramp up production and sell a high-volume, mass-market product.

Industrial biotech did exactly the opposite -- and achieved the opposite result.

The first wave of industrial biotech stocks focused on products that had the largest markets (by volume), such as fuels and commodity chemicals. Unfortunately, volumes were the wrong metric to chase, especially considering that these products were accompanied by the lowest selling prices. The never-before-commercialized technology platforms simply couldn't come close to reining in production costs to make money -- or even ramp production -- selling fuels and low-value chemicals.

Those that managed to survive pivoted to the opposite end of the value spectrum: cosmetics, flavors, and fragrances. Amyris and TerraVia even created their own cosmetic brands, with the latter's achieving cash flow-positive operations before being divested. Indeed, many of the most promising privately held engineered biology companies were created to target high-value products first, with the idea they could use experience and technology gains to walk down the value chain to larger volume markets over time. Just like Tesla.

GEVO Chart

GEVO data by YCharts.

There are a few happy coincidences to focusing on high-value products with engineered biology. Many ultra-expensive flavors and fragrances are rare because they're currently sourced from inefficient agricultural production methods. So if organism designers could efficiently produce saffron or vanillin or stevia in engineered yeasts via fermentation, then they may be able to 1. generate profits without an optimized process, 2. smooth out production inefficiencies for existing supply chains, 3. avoid the use of artificial ingredients, and 4. expand the markets for specialty ingredients. There are several companies stuck using expensive and rare ingredients that are more than willing to invest in new technology platforms that could potentially solve their problems. In fact, there's an entire industry.

Therefore, investors looking to make money in engineered biology may want to consider investing in these generous and (so far) committed partners that will be among the first to benefit from the emerging technology platforms. Givaudan (GVDNY -0.22%), International Flavors & Fragrances (IFF -0.98%), and Symrise are among the largest in the flavor and fragrance industry -- and they've been great long-term investments.

IFF Total Return Price Chart

IFF Total Return Price data by YCharts.

They make many of the scents and flavors of your favorite household products, from laundry detergents to air fresheners to your morning yogurt, but have operated mostly behind the scenes for decades. You may not even know they exist. But don't mistake that with a lack of opportunity. The three companies above achieved combined revenue of $10.2 billion in 2016 and represented over 40% of the market. 

In fact, most companies in the flavor and fragrance industry are partnered with engineered biology platforms. Amyris and Ginkgo Bioworks, one of the most promising private companies, are collaborating to bring at least 20 cultured ingredients to market in by the end of the decade and have a combined portfolio of over 70 cultured ingredients. Many will be for partners in the flavor and fragrance industry, including those above, in addition to Firmenich, Robertet, and Takasago. 

Other cultured ingredients will be for food companies such as Archer Daniels Midland (ADM -0.93%), which has continued to invest in the field despite past failures. The company is partnered with Ginkgo Bioworks for several food ingredients, and recently launched a fish and animal feed protein ingredient that is created with microalgae through a partnership with Synthetic Genomics. It was previously a manufacturing partner of TerraVia and owns industrial fermentation assets for potential partners to utilize down the road, which could avoid hundreds of millions of dollars in upfront capital expenditures.

Investor takeaway

There are still a lot of hurdles for industrial biotech platforms to overcome, but investors can use the flavor and fragrance industry as a gauge for success. If next-generation industrial biotech platforms are going to succeed, then they'll very likely need to pass this test first. Only then will the field be able to move onto high-volume, lower-margin industrial products as originally envisioned. Plus, flavor and fragrance companies are large enough to withstand a complete failure from smaller engineered biology platforms. In other words, investors may be able to reap the rewards of success without suffering the risks of failure, as has been the case with direct investment in industrial biotech stocks to date. If you really want to make money in engineered biology, then you should give the field's committed partners a closer look.