Major Research Project

Integrative Strategy Case Study

Integrative Strategic Case Study Page 1 of 18

Executive Summary

LanzaTech has in its grasp, patented technology that is a potential game

changer in the biofuel industry. Not only does the process produce a low carbon fuel,
but it does so by utilising a low cost supply stock (industrial waste gas) that enables
ethanol production at very competitive rates. Additionally the utilisation of the
industrial waste gases reduces the carbon emissions from industry in line with public
preference and increasingly tightening worldwide legislation. LanzaTech has a
significant competitive advantage over its competitors and has changed the shape of
the gasification process thus creating a new niche market. LanzaTech is in an
enviable strategic position to take advantage of increasing oil prices, strengthening
global legislation and public pressure around carbon emissions and global warming.

The significant challenge facing LanzaTech is the transition from laboratory

and pilot plant trials through commercialized full scale success that provides revenue
streams back into the company. While the technology is in its infancy, there is no
revenue stream other than from LanzaTech investors. Gaining market confidence
and penetration through client partnerships in the short term is seen as a lower risk
option to ensure sustainable viability of the technology and the company.

To achieve the desired commercial success, the current patented gasification

process development completion timeframe of two years is recommended along the
addition of two independent directors with proven success in market penetration and
growth of new technology. Sean Simpson should step down from the Board of
Directors to concentrate on maximising the technology potential within the allotted
timeframe. Appointment of a VP Business Development North America is a strategic
recommendation to tap into a large developed market and fits well with the subsidiary
company in the USA. Once commercial success is deemed to have been obtained
(positive cash flow) then the firm should review growth strategies through IPO or debt
funding.

This approach will support the LanzaTech vision to be the “Dominant

technology provider in the industrial bio-commodities market”.

Integrative Strategic Case Study Page 2 of 18

Business Description

LanzaTech is an entrepreneurial company at the leading edge of new

technology developing a process by which waste industrial gases from industry can
be transformed into usable ethanol fuel. The process developed is patented and the
company is seeking to commercialise the product and generate revenue. A pilot test
of the technology and process has been established at the Glenbrook Steel Mill since
November 2008 (LanzaTech, 2010). The company has established a different
technological process from competing organisations within the bio-fuel industry
through production of ethanol without the ethically challenging need for land based
crops or the high hydrogen gas content as required by closer industry competitors.
This gives the company a competitive edge that must be capitalised upon in order for
the business to succeed.

To date the company has obtained investment grants from government

agencies and latterly from investment venture capitalists along with some smaller
investments from various individuals. Each of the investors will have differing reasons
for investment and thus will be seeking differing returns and exit strategies. This will
produce a complex path forward as the company strives to satisfy the requirements
of its investors. The company is yet to return a profit and cash flow is primarily
outward thus presenting the biggest challenge for the company to commercialise the
technology to produce positive cash flow.

The company originally started in Auckland, New Zealand and now has
expanded operations into California, USA and has established a partnership with
Baosteel in China. A board of directors has been established with four directors, two
of whom are part of the management team namely the Chief Scientist / Co-founder of
LanzaTech and the Chief Executive.

The challenge for the company is to transition from the government grants and
venture capitalist funding to become a commercially sustainable business generating
cash flow and returns for its investors and provide growth for the organisation.

Integrative Strategic Case Study Page 3 of 18

The Market

The market is which LanzaTech is competing, has in recent years, received

significant investment worldwide as the effects of global warming and limited fossil
fuels have driven a need to find alternate fuel sources and reduce the carbon
footprint across humanity. The biofuel market is diverse with numerous sources for
alternate fuel development of which bacterial ethanol production from gasification is
just one. The biofuel positioning map (Appendix One) demonstrates the relationship
between LanzaTech gasification ethanol production and that of other energy or fuel
sources.

The gasification process developed by LanzaTech is new technology and

currently the company will be enjoying the benefits of a Blue Ocean Strategy through
creation of a niche market within the biofuel industry. Competitors also developing
similar technology and it may be first to market advantage at this early point of the
technology adoption curve (Appendix Six) for LanzaTech. This technology also
challenges the argument that LanzaTech resides in solely the biofuel market. The
process they have developed which reduces carbon monoxide emissions from
industry (Steel mills, coal gasification etc), so one could argue that LanzaTech also
resides in the carbon reduction business potentially competing within the carbon
credit industry.

The LanzaTech gasification process does not require high levels of hydrogen
gas and therefore differs to existing gasification technology. While this provides a
differentiation to LanzaTech competitors, it is not the primary driver within market
forces. A PESTTG analysis (Appendix Two) of the biofuel industry demonstrates that
the two leading forces shaping the environment are political and technological. It
could be argued that there is a general consumer preference in the developed world
for a reduction of carbon emissions due to global warming as demonstrated by a
Mellman Group poll of 1000 voters in the USA (Pew, 2010) where 82% of voters
favoured action to reduce carbon emissions. This preference however must be
supported by government incentives such taxes and carbon credits to induce
change. These economic incentives are why the political element of the PESTTG
analysis is elevated alongside technology advancement as the primary drivers

Integrative Strategic Case Study Page 4 of 18

identified in the market. As the technology develops in the biofuel and carbon
reduction industries, the game constantly evolves as we can see today with
LanzaTech at the forefront of this change.

Competitive Analysis

LanzaTech is in a unique position with the development of new technology

providing a significant competitive advantage over their competitors in the niche
market of ethanol production from waste industrial gases. While the biofuel industry
is competitive due to significant investment and growth in recent years, LanzaTech
patented technology gives them a head start on their competitors and is effectively
the result sought when adopting a blue ocean strategy. Appendix Four demonstrates
where LanzaTech sits in the biofuel industry and then the Porters Five Forces argues
the attractiveness of the industry as being medium.

Potentially the strategic position for LanzaTech is far more attractive that that
for the industry in general. The patented process does not solely produce an ethanol
biofuel but it also reduces the carbon emissions where the process is applied. There
are reduced ethical issues to resolve unlike those producing ethanol from crops
which tends to drive up the cost of the raw materials and consume arable land for
biofuel production rather than support food generation. The Porters Five Forces
industry rivalry is indicated as ‘high’ simply due to the rapid industry growth rate and
the anticipated growth for future years. LanzaTech are somewhat shielded from this
rivalry while they retain a technological advantage over their competitors.

The financial backing and Board of Directors membership by venture capitalist

Vinrod Khosla is strategically a wise move by the founders of LanzaTech. Khosla
brings with him an impressive success record and a dedication to the biofuel industry
as can be seen through the investments made via his venture capitalist company
Khosla Ventures. Use of his expertise on the Board of Directors is key to driving
LanzaTech through to commercialisation of the technology developed. As the major
shareholder, Khosla has secured a controlling interest in the company and his

Integrative Strategic Case Study Page 5 of 18

director leadership lifts LanzaTech to be a genuine market threat to any potential
competitors.

The strategy I recommend to make LanzaTech a successful company is to

continue the product development and accelerate partnership programs with clients.
The partnership strategy has already begun but the company must actively pursue
further partnerships to obtain market penetration and provide further proof to the
market that LanzaTech has a viable, sustainable and profitable solution that reduces
industrial greenhouse gas emissions and provides an additional revenue stream from
the ethanol produced. The ethanol revenue stream can be derived through direct
sale of the ethanol or if utilised within the client’s plant thus reducing addition spent
on further energy requirements, reduce carbon emissions and provide multiple
benefits from environmental responsibility through to reduced carbon taxes that may
apply.

Organisational Structure

The current Board of Directors has four members of whom; two are
entrenched in the company management structure which introduces some significant
agency conflict. The company is seeking to commercialize the LanzaTech patented
gasification process for ethanol production and the number of board members should
increase to seven – the maximum number in accordance with LanzaTech’s
constitution dated 19 March 2010. The four member board in place today while being
experts in their own right may not have the required contacts or experience to tap
into the market at such a critical growth phase of the company. Additional directors
sought must bring experience and success in providing governance for the
transformation of patented technology into commercial success.

Two of the directors are part of the management team – CEO Jennifer
Holmgren and Co-founder / Chief Scientific Officer Sean Simpson – both are likely to
have Board of Director’s decisions influenced by the management positions held.
While the two managers will have the capability to bring accurate and timely
information to the Board of Directors, the decision making process that evolves is

Integrative Strategic Case Study Page 6 of 18

unlikely to be conducted at arms length due to the agency conflict in play. A
recommendation from me is that Sean Simpson step down from the Board of
Directors leaving LanzaTech CEO Jennifer Holmgren as the management
representative. This will allow Sean to concentrate on producing the required results
as Chief Scientific Officer within the company. To ensure board continuity however,
at least two of the three additional directors allowed by the LanzaTech constitution
should be appointed for a minimum period of six months prior to Sean’s removal as a
director.

A seven member Board of Directors will provide greater continuity and stability
as directors are appointed and removed per LanzaTech constitution. Additional to the
seven directors, the board should consider appointing up to two additional
independent directors allowed for in the constitution to provide specific governance
leadership if and when required. It may be that as part of LanzaTech growth into
other countries, recognised directors with experience in those countries may be
appointed to the LanzaTech Board of Directors for a defined period of time to provide
suitable governance. A key question current and future directors need to keep in
mind “Does the LanzaTech patented gasification process have commercial viability”

Almost 67% of LanzaTech is owned by Khosla Ventures II and as the majority

shareholder, holds controlling interest in the company. The history behind Vinrod
Khosla and the current portfolio suggests a vast amount of experience is available
from within Khosla Ventures and should be utilised where possible to support
LanzaTech through to commercial success. Leverage of this experience should be
established as soon as possible with Khosla Ventures likely to have an exit strategy
plan in place.

Financials

Analysis of the financial statements shown in Appendix Three, show a number

of issues that require attention. Ability to generate revenue at this early stage of the
company is always going to be of concern and the negative cash flows demonstrate
this. Five years into the venture and the largest revenue to date is $3.1m due to

Integrative Strategic Case Study Page 7 of 18

favourable Fx but this gain could just as easily have gone the other way. It does
highlight a risk for the company that Fx could have dramatic impact on cash flow and
if the business does proceed to take up large scale projects or ventures, then
hedging foreign currency should be considered particularly where Fx volatility is
significant or projects run over lengthy periods of time.

The venture capitalists will be seeking a return on investment and will take
risks in business that many others may not contemplate. This will place additional
pressure to the financial performance of the company to provide a return. The limited
funding available requires LanzaTech to form partnerships with clients to assist with
both funding of new ventures and to establish commitment to each project. It is this
avenue that LanzaTech should continue to pursue while establishing an
understanding from Khosla Ventures on the intended exit strategy from LanzaTech.
Through use partnerships to get the technology into the market, risk is shared and
capital investment required by the partnering company.

Cash generated in the business to date is primarily though issues of shares

and some government grants. The LanzaTech constitution details rights and
privileges of the investors in a well structured legal document. Options exist for the
company to fund future development through further equity or through debt. Given
the elevated risk involved efforts to commercialise ground breaking technology, my
recommendation is to remain funding through equity. To fund through debt will add
pressure for the business to generate cash flow in the short term to meet interest
payments despite the tax shield available for interest repayments. Additional to this is
the actual value of the R&D that has been capitalised and I doubt capitalised R&D
would be accepted security for any debt funding.

The breakeven point of the company is some way off with expenses over
running revenue by a considerable margin. The longer the business goes on without
turning any profit from successful commercialisation of the LanzaTech gasification
process, the higher the business overheads will push the break even point. Once a
number of partnership ventures have been established, the company will be in a
good position to contemplate IPO. If the partnerships have been successful then an
IPO may be attractive to increase funding availability for accelerated market

Integrative Strategic Case Study Page 8 of 18

penetration. To target an IPO at this early stage risks investor heavily discounting the
stock value due to risk assessment and thus underachieving required funding. When
the time is right for an IPO it should be based upon the LanzaTech constitution with
an underwriter of the IPO identified to sell and/or promote the offering.

The financial records show two receivables write off’s in recent years which
could indicate a lack of financial process management. The company must review its
receivables and payables processes to reduce risk of financial mismanagement.
Robust reporting and measurement processes through to the Board of Directors will
provide the directors the necessary transparency for good financial management.
The financial reporting must also include the write down of any R&D that cannot be
commercialised through failing to meet the objectives detailed in the LanzaTech
constitution.

The company is currently domiciled in New Zealand with a subsidiary based

in the USA. Strategically these countries may not offer the lowest tax rates and in
particular for a venture that is a start up operation. I argue that to move the
operations to another country for tax rate benefits or closer to primary markets is a
low priority at this point in time and should not be considered. The government grants
previously received by LanzaTech will likely preclude any such move.

Should the partnership ventures fail to provide the desired returns to the
business as either financial or market penetration, then an exit strategy must be
identified by the business owners along with the directors fiduciary responsibility to
ensure the company remains solvent when trading. The LanzaTech constitution
details the rights and obligations of owners and should such an occasion arise,
potential takeover bidders should be identified, likely to be a competitor or a business
looking to vertically integrate in the supply chain.

Integrative Strategic Case Study Page 9 of 18

Development / Action Plan

There are three critical areas for the LanzaTech development plan to address
until the business begins to experience a continuous income from commercialisation
of the patented gasification process.

Product Development - Market Development - Organisational Development

Through addressing each of these areas, the company will be able to reach its
goal of commercial success with the technology and secure the required returns for
its investors and growth for the company. Approval to proceed with this plan will be
required from the Board of Directors.

Product development has been the key area of investment to date and must
continue to drive through to commercialization of the technology. Without the product
– the company does not exist. A target deadline of two years should be enforced to
prevent increasing funds being consumed. If the technology developed cannot be
commercialized within this time frame, take over or sale of IP will need to be
considered. Co-founder, Chief Scientific Officer and Director, Sean Simpson should
step down from the Board of Directors to enable the product development to be
completed with the required timeframe. This should be scheduled six months after
the appointment of at least two additional independent directors detailed in the
organisational development. Once commercial success has been established, R&D
should look for adjacencies where the same technology can be utilised for increased
application and revenue generation.

Market Development is an opportunity for the company to control though the

patented technology developed and a congruent ethical approach adopted through
the company. Potential clients will look at the ethical behaviour of LanzaTech so the
Board of Directors must ensure company ethical policy is documented and promoted
throughout all levels of the business. The additional independent directors must be
appointed to with a background of providing success in business market penetration
and market share for new technology. Key to successful commercialization will be a

Integrative Strategic Case Study Page 10 of 18

differentiation strategy and the creation of the perception that the LanzaTech process
is unique. Appointment to the management team of a VP Business Development
North America is required to manage the strategy development and putting the plan
into action in a region that has a potential client base. This will need to be co-
ordinated with the product development and the partnership programs established. In
the short term, partnership formation with clients is the low risk strategy through until
commercial success is obtained. IPO or funding through debt should then be
assessed to take the company to the next level and provide the necessary returns for
investors.

Organisation Development starts with the search and appointment of two

independent directors to increase the board governance experience at such a critical
development phase of LanzaTech. The directors must be appointed with proven
success in market growth of new technology. The appointment of a VP Business
Development North America will create a presence in a market with significant client
potential. People do business with people and placement of this role within the North
American subsidiary company is recommended. Robust financial reporting through to
the board must be examined within the business – any write downs or potential write
downs should be bought to the Board of Directors attention. Sean Simpson should
stand down from the board six months after the appointment of the independent
directors to allow him to concentrate on maximising the potential of the patented
technology.

Word Count: 3211

Integrative Strategic Case Study Page 11 of 18

References

AltProfits. (2009). Take Part in the Biofuel Revolution. Retrieved from

http://www.altprofits.com/ref/report/biofuels/biofuels.html

Companies Office. (2010). Lanzatech New Zealand Limited. Retrieved from

http://www.business.govt.nz/companies/app/ui/pages/1595696/documents

LanzaTech. (2010). Company website. Retrieved from http://www.lanzatech.co.nz

PBWiki. (2010). Business Analysis Models. Retrieved from

http://exld54410casestudy.pbworks.com/w/page/33355813/FrontPage

Pew Environment Group. (2010). Public Opinion Polling. Retrieved from

http://www.pewglobalwarming.org/poll/index.html

Integrative Strategic Case Study Page 12 of 18

Appendices
Appendix One

Source: Author

Integrative Strategic Case Study Page 13 of 18

 Appendix Two

Source; Author and PBWiki

Integrative Strategic Case Study Page 14 of 18

 Appendix Three

Source; Author, Companies Office and PBWiki

Integrative Strategic Case Study Page 15 of 18

 Appendix Four

Source; Author

Integrative Strategic Case Study Page 16 of 18

 Appendix Five

Source; Author and PBWiki

Integrative Strategic Case Study Page 17 of 18

 Appendix Six

Source: Author

Integrative Strategic Case Study Page 18 of 18