BUSINESS
CHEMICAL FIRMS SCORE IN VENTURE Companies tell what they want in—and want to get out of—an investment WILLIAM J. STORCK, C&EN NORTHEAST NEWS BUREAU
V
ENTURE CAPITAL IS BIG BUSINESS
in the U.S. Last year, total U.S. venture-capital investments addedupto $18.2 billion in 2,715 companies, according to the National Venture Capital Association (NVCA). Although this was off 15% from 2002, it seemed to mark the end ofthe downturn following the investment bubble of 1999 and 2000. In 1999, the value of 5,604 investments totaled $54.4 billion, while in 2000, the industry hit an all-time high with 8,068 investments totaling $105.9 billion. Through the first three quarters of this year, investments were up 2 0 % to $15.5 billion, on track to beat the 2003 total. The number of investments for the first nine months, however, totaled 2,102, up just 3.6% from the same period in 2003. It is not just traditional venture-capital firms that are reaping the benefits of investing in emerging companies. Corporate America also is taking part. In 2003, corporations invested $1.1 billion in 415 growth-oriented companies, according to NVCA. This represents 6% of all investment dollars and 15% of the number of companies. The list of corporations providing venture capital to young companies includes many in the chemical industry—Dow Chemical, BASF, DuPont, DSM, Eastman Chemical, Rohm and Haas, and others— all with differing philosophies and methods of investing. But they are all the same in one regard: Like the venture-capital industry as a whole, they like to put their money into information technologies and life sciences. In the chemical industry however, materials can be added to the mix. To get a sample of how chemical companies invest their money, what they want to get out of these investments, and their respective investing philosophies, C&EN interviewed investment managers at four U.S. chemical companies ofvastly different
sizes and with greatly differing interests— Dow, Eastman, Air Products & Chemicals, and H.B. Fuller. Dow is the old-timer in venture-capital investment, having begun in 1993, according to Jim Plonka, vice president of venture capital. "Basically, we started doing a little bit of fund investment to prove to management we could make investments without losing money "I think this is very important," Plonka says. "Ifyou are going to be in the venturecapital business as a corporation, you need
LIGHT Photovoltaic polymer for solar cells is made by Konarka, a company in Eastman Chemicals venture portfolio. to make a decision very early whether you are a cost center or a profit center. We elected that this would be a profit center in the sense that we would provide the program with some amount of money, but the program had to ultimately become self-sustaining. It would perpetuate itself on the ability to reinvest the proceeds of its earlier investments. ^We are now in that position." Other companies, Plonka says, decide to run their funds as a cost center. They view the program as providing a vehicle for the acquisition of skills, capabilities, and technologies. Essentially, the question asked by
investors ofthis kind, Plonka says, is, "Given my other cost scenarios for acquiring the same assets, is this less expensive?" Plonka believes that a strategy of investing to acquire technology is counterproductive for a company that wants to make a profit on investments. "If you are investing to encumber the assets of a company you're decreasing its value to others," he says. To put it bluntly, Dow, an early-stage investor with some 60 companies in its portfolio, is in the venture-capital business to make money for Dow. And it has an investment strategy to make that happen. "We work with a network of probably 2 0 some venture-capital funds around the world that cover all of the major markets," Plonka says. "We essentially invest on a direct basis side-by-side with these funds. We believe that ifwe can successfully cherry-pick investments out of the portfolios of these funds, we should be able to get a better return than they can." Eastman Chemical got into venturecapital investment in 1999, putting its money in software. Then, by the end of 2000, the company expanded the portfolio to include life sciences, advanced materials, and industrial technology The firm at first made direct strategic investments in companies, then expanded to investing in venture-capital funds. It now has 25 companies in its direct-investment portfolio. Fouad Azzam, business ventures manager, says: "We are primarily strategic investors in that the companies we invest in have to have some relevance to the corporation. They either have tofitwith the existing businesses we own or with growth areas we are interested in." Azzam says the companies Eastman invests in are in the expansion stage. It can deal with a company with a first or second customer or, in some cases, just a prototype. But, he says, "strictly speaking, we will not invest in a business plan with no management team and no product." Azzam says Eastman wants a company at the stage where it has made a product. "Then we can help with product definition—for instance, on the information side with beta testing." Eastman's level of investment has been steady over the past four or five years. However, Azzam says, "we will continue to stay active but not at the pace we have shown." He also notes that "sometimes it's cheaper to buy the company" Air Products' investments tend to be
We tend to target companies where we can create strategic value above and beyond just giving them money." 12
C&EN
/
DECEMBER
6,
2004
HTTP://WWW.CEN-ONLINE.ORG
materials oriented, according toJohn Marsland, vice president for corporate development. "Generally, we try to match the investment with one of our growth platforms within the company—hydrogen, electronics, medical, and performance materials," he explains.
sort of joint development arrangement." H.B. Fuller is the smallest company surveyed. It is also the smallest in terms of venture investments, with just three, but they don't mean any less to the firm. "We're not looking for late-stage companies," says Bob McGrath, managing di-
y d International Microwaves in Chemistry Conference March 3~6, 1005 Wyndham O r l a n ^ o Resort
VENTURE CAPITAL
Orlando, P o r i d a
Chemical companies invest in a wide variety of firms RECENT INVESTMENTS
PRODUCTS OR TECHNOLOGY
Air Products
Nanotech Inc. Apjet Sterilox
High-performance nanopartides Decontamination of biologic agents Point-of-use systems for environmentally safe disinfectants
Dow Chemical
Cymbet Plastic Logic Clear Pace Symyx
Thin-film battery systems Plastic electronic circuits Relational database software management Catalysts for olefinics
Eastman Chemical BioProcessors Konarka Athenix Cydex
High-throughput biologies Photovoltaics for polymer solar cells Gene traits for crop modification Cyclodextrin-based drug delivery
H.B. Fuller
Electrochromic glass Replacements for polymer-based adhesives, inks, and other products Nanotechnology systems
Sage Electrochromics EcoSynthetix Nanosys
Marsland says the company tends to be an earlier stage investor, except for one or two investments that are revenue generating. "Most of them are prerevenue," he says. "We don't have any requirements that they be prerevenue, but we think this tends to lead us toward earlier stage opportunities." BASICALLY, what Air Products is looking for, according to Marsland, is a company with solid technology "If I had to choose between a company with a business model and one with technology, I would take the technology investment." As to business plans, he says, "If the company has a solid technology with some level of commercial interest from potential customers, and a good quality management team, then the business model can morph over time and you can still make some value out of it." Marsland adds that Air Products, with 12 firms in its portfolio, will provide help for the companies in which it has invested, although "there is a fine line between giving them help and running the company Because of our technology focus," he explains, "we tend to target companies where we can create strategic value above and beyond just giving them money This could take the form of us supplying them with either products or materials or where they could potentially supply us with products or materials. Because of that, we generally end up with some
rector of H.B. Fuller Ventures. "We look for companies that are close to commercializing a product or have a proven concept. We're also looking for companies that have a strategic fit to what we do." Fuller, like Air Products, believes technology is more important than product when it comes to investing. There is an R&D aspect to this position for the St. Paulbased company, which has cut back on R&D. "We've restructured, and R&D is located within each one of our business units," McGrath says. "So we look at venture capital as a way to augment our internal R&D and find innovations and get visibility Venture activity is a way to get initial visibility with possibilities to license technology or, perhaps at some point, to acquire the company if we think it would be a good fit." McGrath points to one of Fuller's investments, the nanotechnology systems company Nanosys, as an example: "I think there's going to be a lot of opportunity to take nanotechnology and use it in existing businesses and product lines. We look at our investment in Nanosys as away to stimulate our R&D organization to think differently about how they go about either developing new products or augmenting existing products. That ability to collaborate with a company that is on the leading edge of that technology has been very valuable for Fuller." •
Join your colleagues and peers from around the world in sunny Orlando for the premier conference on microwave chemistry! Topics include: • Peptide synthesis • Scale up • Low-temperature chemistries $ Applications in Proteomics • Integrating microwave *JHP chemistry into your laboratory] • Fundamental microwave] theory workshop ...and mucIfmore9
In association with the 6thi Annual Florida Heterocyclic^ Conference '""* February 27 - March 2/2005 Gainesville, Fl
Sponsored by
CEM vnvw.cemsynthesis.com 800-726-3331 Reauest more at AdlnfoNow.ora
HTTP://WWW.CEN-ONLINE.ORG
C&EN
/ DECEMBER
6, 2 0 0 4
13
