Arzeda Gets Federal Grant to Make Renewable Enzyme for Tires, Sidesteps VC Funding Model

12/8/09Follow @xconomy

Arzeda is finding out what it wants to be when it grows up. The Seattle-based startup, which designs custom-made enzymes on computers, has pocketed a grant from the National Science Foundation to see if it can create an enzyme that can turn plant biomass into one of the key ingredients in synthetic rubber tires.

The Small Business Innovation Research grant isn’t really that big, at just $149,000 for six months of work on an enzyme to produce butadiene. But it’s a sign that Arzeda’s science can pass muster with the tough-minded peer reviewers for the NSF, that it has focused on two primary themes in its business strategy, and it is finding ways to operate much leaner than originally envisioned, says CEO Michael Martino.

Back in July, Arzeda clinched a two-year partnership with the Pioneer-Hi Bred International subsidiary of chemical giant DuPont that put it squarely in the business of agricultural biotech, by trying to create novel enzymes to help engineer better yielding corn, soybeans, rice, cotton, and canola. The new grant from the NSF will enable Arzeda to build up related capability in making specialty chemicals like butadiene, from renewable plant sources instead of from oil. Butadiene is one of the key ingredients in synthetic rubber tires, a specialty chemical that’s worth $5 billion to $6 billion a year worldwide, and it’s just one of three such chemicals that Arzeda thinks it can make from plant biomass, Martino says.

“The great news is that we can do a lot of things, and the bad news is that we can do so many things,” Martino says. “What we have now are two strategic paths that we think are related and highly leverageable.”

Arzeda has been on my watch list as one of the most intriguing startups in town, since I first profiled the company in September 2008. The company has its roots in the lab of University of Washington biochemist David Baker, who uses pooled computing power from around the world to help design brand new enzymes that don’t exist in nature. The list of opportunities for these things is practically endless, given how many processes enzymes perform in nature. The job of putting these ideas into practice has fallen to a few bright young Baker protégés—Eric Althoff, Daniela Grabs, and Alexandre Zanghellini.

Two things are clearly missing from the Arzeda business strategy. There are no immediate plans to develop either enzyme replacement therapies, like Cambridge, MA-based biopharmaceutical giant Genzyme (NASDAQ: GENZ), or enzyme catalysts that might hold the key to efficiently breaking down cornstalks or other biomass, for what is known as cellulosic ethanol biofuel. Those are just a couple of potential uses of designer enzymes with multi-billion dollar potential.

The reason to avoid them is simple. Martino, a former biopharmaceutical executive at Bothell, WA-based Sonus Pharmaceuticals, knows that it takes a decade or more, and hundreds of millions of dollars, to develop a new drug before it can reach the marketplace. New biofuels also look like they are long way from reaching the marketplace, and the space is “crowded” with competitors and has no clear leader, Martino says.

But if Arzeda can create a nifty synthetic enzyme to turn biomass into a key ingredient in rubber tires, that could be just three to four years away from reaching commercial scale, he says. The ag biotech applications are similarly closer to market reality, he says.

Some of this sharpening focus has been born of necessity. Back in February, I reported on how Arzeda had recruited Martino as CEO, was working to license its technology from the UW, and that it expected to close a $12 million Series A financing round in a couple months. WRF Capital and OVP Venture Partners had committed to lead the way, while it sought a third backer, Martino said.

Turns out that round didn’t come together quite as planned. WRF Capital provided the company with an undisclosed bridge loan, Martino says, while OVP didn’t invest. “We’re still friendly with them,” Martino says. By mid-July, the Pioneer deal provided some industry validation to what Arzeda was doing, and enough upfront capital to pay the salaries of the five-person staff, get set up in office space, and put critical infrastructure in place. It also set up some concrete goals for milestone payments and product royalties in the future, Martino says.

Interestingly, Martino says the team went back to the drawing board on its business model and found it didn’t really need the full $12 million at this stage anyway. Instead of buying expensive servers and paying for security, power, and data backup to do all its enzyme computational work, it now relies on cloud computing. That essentially means it rents server space from Microsoft and Amazon Web Services at a fraction of the cost of what it would take to buy the capital equipment and operate it on its own, Martino says.

If Arzeda can do what it told the NSF it intends to do, then the company will be able to apply for a second-phase grant worth another $500,000, Martino says. The company is also likely to do an equity financing “in the near future,” Martino says, although it will likely be smaller than what was envisioned before. But that doesn’t mean the company has reined in its ambitions for what it can do with designer enzymes. It’s really about how to accomplish something big in the reality of an economic downturn.

“We’ve figured out how to be smarter with our money,” Martino says.

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