LanzaTech CEO Jennifer Holmgren with Sir Richard Branson at the Innovation Summit in New York in 2017. Photo / Getty Images
ANALYSIS:
My gut reaction to LanzaTech's planned US$2.2 billion Nasdaq listing is pretty negative, though several VCs called me out on LinkedIn when I said so, and in follow-up comments to the Herald.
I conceded some of their arguments, but others not so much.
First, to quickly recap: LanzaTech began in New Zealand in 2005. It uses microbial technology that converts industrial pollution into fuel.
After a successful trial creating ethanol at New Zealand's Glenbrook steel mill in 2008, LanzaTech demonstrated the technology using live emissions from a steel mill in China in 2008.
The Auckland startup received more than $14 million in no-strings grants from various Crown agencies before American venture capital company Khosla took majority control in early 2014 and it decamped to the US state of Illinois - where the local government was dangling tax credits (it's a similar path to Rocket Lab, which also moved its headquarters to the US following an investment by Khosla). China's Sinopec has also become a major investor.
Earlier this week, LanzaTech announced plans to list on the Nasdaq through merging with a special purpose acquisition company (Spac) in a deal expected to value it at US$2.2b ($3b).
LanzaTech is targeting jet fuel and other multi-billion dollar markets for its jet fuel, but it remains essentially at a pre-commercial phase. Last year it deregistered from NZ, so it no longer posts accounts locally, but its 2020 numbers showed a US$40.3m loss on US$17.1m revenue.
The company has two commercial plants operating, with seven others under construction, but it's still barely into its commercial phase, and research funding still looms large on its balance sheet, including a US$19m grant from the US Department of Energy toward a LanzaTech demonstration refinery in Georgia).
LanzaTech has 315 staff today, and it's currently advertising 38 high-end roles - most of them are in its adopted home-time of Skokie, just north of Chicago, but a handful are located in Georgia, the Netherlands, England, India and China.
An investor deck for the Nasdaq listing estimates 2021 revenue will be $26m (2021 numbers are still preliminary), and 2022 revenue at US$65m - before a series of big jumps that take it to US$996m by 2026.
The presentation predicts more red ink for 2021 (with an operating earnings loss of US$50m) then larger losses each year through to a US$91m operating loss in 2024 before a swing to a US$208m ebitda profit in 2025, growing to US$403m in 2025.
Iit's worth noting at this point that some of LanzaTech's tastiest potential business - airline fuel - was spun out as LanzaJet in 2020. Shell, All Nippon Airways and British Airways are partners in the venture. LanzaTech says it has a 25 per cent stake and a "path to majority ownership" through its contribution of IP.
According to the deck, LanzaTech's addressable market is worth US$1 trillion.
So it does burn me a bit that the intellectual property that was funded with substantial help from the NZ taxpayer is now benefiting mainly offshore investors, and creating jobs (and, all going to plan, big profits) in the US.
And more so because there's been such a string of tech sales during the pandemic - albeit with most, such as Sir Peter Jackson's Weta Digital, whose core tech division was sold to US company Unity for $2.3b in November, or Christchurch geoscience software company Seequent's year-ago $1.45b sale to Nasdaq-listed Bentley System, involving pledges to keep jobs onshore.
Although LanzaTech is lost to our shores, New Zealand taxpayers, and private investors, will still benefit from its listing on Wall Street.
According to its latest portfolio disclosure statement, for its direct investment holdings as of June 2021, the NZ Super Fund holds a chunky stake.
In 2014, the fund bought a parcel of shares worth US$60m. With further purchases, including participation in a 2020 Series E round, it has spent a total US$87m to build a 12 per cent holding.
If LanzaTech lists at its target valuation, the Super Fund's stake will be worth US$181m ($264m) - a tidy return that could increase further if the fund keeps its shares.
Ahead of the listing at least, Super Fund even has a seat on LanzaTech's board through its representative Nigel Gormly, who has been a director since the fund first invested in 2014.
And a 2021 filing shows Sir Stephen Tindall's K1W1 holds a 5 per cent stake. Sir Stephen was an early backer, and continued to put more money in. K1W1 was also a participant in the 2020 Series E round. It's not known how much the knight's fund paid for its shares, but if LanzaTech lists at its anticipated level, its holding will be worth US$75m ($110m).
With the Nasdaq listing, retail investors will be able to join Sir Stephen through platforms like Sharesies, Hatch and Stake.
Greg Sitters, a managing partner at local venture capital outfit Matū Group, said it was all about generated funds that could be reinvested in the local ecosystem.
LanzaTech was, "Further proof of NZ's ability to create/found groundbreaking science/tech tackling some of the world's largest challenges and go on to global success," he said.
"It creates an ability now to reinvest benefits and returns in due course to the next generation."
Sitters has a point. It's hard to find any local tech startup where the ubiquitous K1W1 has not taken a slice of shares. Indeed, Tindall, literally stumbled over Rocket Lab back in the 2000s, at a time when founder Peter Beck and a couple of staff were working out of a cramped office next door to LanzaTech.
And while early-stage companies are too small for direct investments from the NZ Super Fund (with $57b in investments, anything under $100m isn't really going to move the needle), it did chip in $270m to the $300m now being injected into to startups by Crown agency NZ Growth Capital Partners with its Aspire and Elevate funds that have so pepped up the local venture capital scene over the past 24 months.
There are many stories of funds sloshing back into the system, including Trade Me founder Sam Morgan becoming a key early backer of Xero and Vend. And although Beck's firm now has a focus on expansion in the US, the Rocket Lab founder has put money into a number of fast-growing, local startups, including HeartLab, Halter and Partly.
More, LanzaTech staff who chose not to migrate to Illinois have founded a clutch of promising startups. Avertana, which extracts minerals from waste slag produced during steel manufacturing, features LanzaTech alumni Sean Molloy and James Obern on its Auckland-based team, while LanzaTech's cofounder and chief science officer Sean Simpson (now based in Skokie) is its deputy chair.
Mint Innovation - also based in Auckland, was founded by LanzaTech veteran Will Barker. Mint extracts materials like copper and gold from e-waste such as discarded laptops and mobile phones.
And Dotterel Technologies - a Kiwi maker of noise-dampening technology that allows drones to be used for filming on Hollywood sets - boasts no less than four ex-LanzaTech staff as co-founders: Shaun Edlin, Matt Rowe, Samuel Rowe and Shaun Pentacost.
Inevitably, Sir Stephen's K1W1 is an investor in all three startups.
Both companies seem poised for success. But are they also poised to be snapped up by offshore buyers?
Why can't we have more hardware-based technology companies that remain in New Zealand hands? After all, Tait Communications, Scott Technology and Fisher & Paykel Healthcare have shown you can develop global markets from NZ. F&P Healthcare, with a market cap north of $15b, is now the most valuable company on the NZX.
But Rocket Lab alum turned investment advisor Ralph Shale weighed in, "I am not sure if it started today, [F&P Healthcare] would remain in NZ, because of the globalisation of venture capital."
And American venture capitalist Mark Bregman - who is based in San Francisco, told me to pull my head in. It was just maths, or "math".
"New Zealand, with a population and GDP smaller than the San Francisco Bay Area, will never be a large enough market to satisfy the ambitions of Kiwis who want to have a global impact," he told me during a conversation on LinkedIn.
"But with intellectual capital, grit, and drive they have can build great companies that will move offshore when they graduate and leave behind a heritage of innovation to fuel future great New Zealand companies.
"LanzaTech has spawned Avertana, Dotterel and Mint and probably many more companies that I'm not even aware of."
New Zealand investors who helped launch LanzaTech will gain financial returns which they will, hopefully, reinvest in growing the innovation economy, he said.
"This should be viewed as a major win. It's much better than remaining 'World famous in New Zealand'."
While there was a logic to Bregman's arguments, I was a bit miffed to get a lecture from a Yank.
I later asked him what the heck he knew about NZ. It turned out to be quite a lot.
The American first came to NZ as a teenager on a family holiday in 1974. Then after he gained a regional role with IBM, he started to come here for business on a regular basis during the mid-1990s.
"I was doing a lot of competitive sailing in the US then), and I tried to organise an IBM technical sponsorship for TeamNZ," he said. "That didn't work out but it led me to spend more time in NZ."
He ended up buying a share in a central Otago vineyard (Amisfield) and started watching the NZ startup scene. That led his VC firm, Quidnet Ventures, to make investments in a number of early-stage Kiwi companies, including Dawn Aerospace, PressPatron, PowerOn and Herald favourite Winely.
Bregman says he spent around a third of his time in NZ in 2018 and 2019 before border restrictions shut him out.
The American thinks globally, and maybe so should I.
At the National Party's recent online tech scene pow-wow, Beck said "Right now, the tech sector in New Zealand is raging. I have a lot to do with venture capital, and it's the best I've ever seen it and funding a lot of startups. And I have to say that the quality and quantity of startups in New Zealand right now is the best I've ever seen it."
Those quotes probably didn't make the Nats' highlight reel (not that there was one; leader and tech session convenor Judith Collins was dumped the next day).
But the Rocket Lab founder also made a broader point about parochialism.
"Fundamentally as Kiwis, we are good at tech. But we also have to acknowledge that we're a small country, and we need to bring the best here as well," Beck said.
"We need to create environments where people can think and go big. And when our tech companies are successful, we also have to be cognizant that when they need to go global. And when they go global, we should celebrate that and not lament that we lost another New Zealand company."
Kiwi Innovation Network CEO James Hutchison echoed that theme as he told me, "NZ was never going to be a big enough market and have the domestic capacity for LanzaTech to be successful. As a nation, we need to get comfortable with our deep-tech thinking global from day one, which may involve going offshore. We get loads of indirect benefits from companies like LanzaTech being successful offshore, including reputation, and producing entrepreneurs that go around and do it all again."
Yup. And it wouldn't surprise me if Avertana, Dotterel and Mint all the other children of LanzaTech on to global success. Or, once they reach a certain point in size, they get bought by Americans or leave our shores.
Is that our place in the world, to be a perpetual business incubator for the Nasdaq (or, with the $65m in subsidies to Hawaiki Cable, Singapore investors)?
The intensive industrial scale of LanzaTech meant it was always going to have to base most of its operations offshore. But Beck has shown you can expand your logistical operations in NZ at the same time you invade the US, and that it's possible to keep a lot of management and R&D local.
Could or should others do the same? Part of the problem is that it's just being discussed by our policymakers.
Various Government agencies have pointed to money being recycled into the local ecosystems by offshore sales, but one of the key recyclers - Sam Morgan - has said quality startups will always find private funding or a buyer. He is against the Crown trying to pick winners with any type of subsidy.
"What are the Government's objectives around its funding programmes to support early-stage companies and innovation?", Shale asks.
"What is defined as success?"
There is half an answer. The Government wants to help create more high-paying jobs that suit a modern economy, and generate more R&D here. But what happens next, when Silicon Valley comes knocking?
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