Silicon Valley Is Throwing Money at Food Startups. Can Solazyme Take Advantage?

By Markets Fool.com

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Source: storebukkebruse/Flickr.

It's a great time to be a food start-up. In the 12-month period following the second quarter of 2013, Silicon Valley invested roughly $350 million in food start-ups. That figure has swelled by at least another $100 million just since last December after big financing rounds from Hampton Creek and Soylent. The gravy train has no end in sight, which could be great news for renewable oils manufacturer Solazyme .

Although the company has outgrown the title of "start-up," it could still seize upon the momentum. That doesn't have anything to do with the ability to attract new funding from venture capitalists, but rather the ability to showcase products individual investors desperately need to be successful -- and soon. AlgaVia, the company's portfolio of microalgae-derived food ingredients has yet to attract a major partner or supply deal. Granted, it's still in the early days, but the pressure for early success has increased immensely since a new commercialization strategy was adopted last November.

Can Solazyme leverage Silicon Valley's love affair with food to land its first major food partner?

Algal food isn't yucky
I had the pleasure of tasting several foods baked, mixed, and stirred with Solazyme's food ingredients when I visited the company's headquarters in May 2014. And boy, were they tasty! Store-bought cookies and ice cream using the same ingredients may never taste quite as good (Solazyme employs expert chefs on campus to create yummy foods), but they would likely be much healthier. Why?

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Consider that the AlgaVia line-up comprises three types of ingredients that serve three distinct purposes and boast key advantages over traditional ingredients they replace:

Ingredient

Novel Benefits

Nutritional Advantages

Labels

AlgaVia Lipid Powders, (Whole algal flour)

Replaces dairy fats, oil, and egg yolks

Reduces: fat, calories, cholesterol

Adds: Protein, fiber

Gluten-free, non-GMO, vegan

AlgaVia Proteins, (Whole algal protein)

Fortifies nutrition for challenging beverages, dressings, crackers

Adds: dietary fiber, healthy fats, all essential amino acids

Gluten-free, non-GMO, vegan

AlgaVia Oils, (Algae oils)

Replaces less healthy cooking oils, adds functionality

Reduces: Saturated fats, trans fat

Adds: Omega9 fatty acids

Saturated fat-free

Note: Gluten-free, non-GMO, and vegan aren't why these ingredients are healthier. Source: AlgaVia (Solazyne).

Viewing a table is one thing, but real nutritional labels are tough to compete with. Consider a side-by-side comparison of vanilla ice cream made from traditional ingredients and Solazyme's AlgaVia Lipid Powder:

Source: Solazyme.

The only ingredient differences were a reduction in manufacturing cream, an increase in skim milk, and the addition of AlgaVia Lipid Powder. Not bad. Now, here's how chocolate chip cookies compare:

Source: Solazyme.

Here the only change in ingredients was a reduction in butter and vegetable oils, an increase in water, and the addition of AlgaVia Lipid Powder. The ability to create tastier, healthier food without sacrificing texture, taste, or functionality is a central theme among Silicon Valley's food revolution. As you can see, Solazyme fits right in. The next step, commercialization, awaits.

Why investors need success in food ingredients
Solazyme's three high-margin product portfolios need to gain market traction before shares rebound to former levels. Since Algenist cosmetics already provide nearly all product revenue, investors are pinning their hopes on Encapso drilling lubricants for oil and gas and AlgaVia food ingredients.

However, when oil prices first began falling, the environment seemed to favor Encapso. But now that rig counts across the United States have reached their lowest levels in years, it may be time to reset expectations. After all, fewer wells means a smaller overall market for the drilling lubricants. That leaves AlgaVia to carry the commercial load -- and investors' hopes -- for the next year or two, and carry non-Algenist product revenue over the previously guided $16 million mark.

The good news is Solazyme has the manufacturing capacity today to turn AlgaVia into a very successful brand. If investors only consider American operations, then the company has 20,000 metric tons of annual production capacity to split between food and drilling lubricants (cosmetics are produced at smaller facilities in much lower volumes). Considering that AlgaVia products can sell for over $4,000 per MT with targeted gross profit margins of 40%, food ingredients could be worth over $80 million in annual revenue if produced exclusively at the company's American manufacturing site. That doesn't factor in the time needed to ramp operations, build customer relationships, and gain market traction, but it proves the importance of AlgaVia for Solazyme investors.

What does it mean for investors?
The advantages of Solazyme's food ingredients give the company a great head start into its efforts to commercialize AlgaVia. Whether or not it can take advantage of the momentum in food innovation spurred from smaller food start-ups remains to demonstrated, although many of the right pieces appear to be in place. Investors will likely find out more when the company announces full-year 2014 earnings at the end of the month. Stay tuned.

The article Silicon Valley Is Throwing Money at Food Startups. Can Solazyme Take Advantage? originally appeared on Fool.com.

Maxx Chatsko has no position in any stocks mentioned. Check out hispersonal portfolio,CAPS page,previous writingfor The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.The Motley Fool owns shares of Solazyme. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.