07 October 2008 00:00 [Source: ICB]
Chemical firms are using external investments to help keep pace with innovation in technology, services, products and competitive niche markets
CHEMICAL FIRMS remain active in external investments where they can capitalize on innovative start-up companies with solutions for niche and competitive markets.
Marc Schueler, managing partner at DSM Venturing, a division of Netherlands-headquartered Royal DSM, says: "Our survival has a lot to do with whether we can find the right niches - profitable niches - to position ourselves. Today, we are a clear specialty player with two big arms: material sciences and life sciences. We are also focusing on leveraging a crossover between these two fields."
DSM Venturing has €200m ($271m) at its disposal for minority investments in start-up and slightly bigger companies. It participates in early and expansion-stage companies or venture capital funds as a value-adding partner. It aims to take a 5-10% share in these companies and its investment in any one business typically ranges between €250,000 and €5m.
Schueler, who has been leading DSM's venture capital division for the past six years, says: "You have to orient your innovation outward, and we found that with a typical big corporate mentality, we were not oriented outward during the course of the company's existence. One of the ways we chose to get better was by installing this venture capital division."
DSM Venturing was created in 2001 and has since been investing in start-up companies and venture capital funds in the areas of nutrition, pharma and performance materials.
"We are making between five and six investments every year," says Schueler.
DSM Venturing targets actively growing markets. It is looking particularly to invest in material sciences for advanced materials, and some areas of clean technology, such as biorenewables and materials made from sugars, starches and cellulosics.
The group is also looking in the area of high-performance materials, especially new organic plastics and polymers. Besides that, it is investing in biomedical materials and pharma-oriented and food-oriented life science businesses.
"These are areas that are clearly aligned with the strategic direction of our mother company," explains Schueler.
In comparison, BASF Venture Capital, a subsidiary of BASF Future Business in Germany, is vested with €125m of capital.
BASF Venture Capital's chief technology officer (CTO) Josef Wuensch says: "BASF Venture Capital aspires to equity investments of between €1m and €5m, based on strategic objectives to open a window on technology for BASF Group and on strict financial decision-making criteria such as a risk-adequate return on investment."
The division invests preferentially in startups that promise innovations for existing BASF Group activities, work in project areas of BASF Future Business and are active in the five BASF Group growth clusters: plant biotechnology, white (industrial) biotechnology, raw material change, nanotechnology, and energy management.
"BASF Venture Capital continuously screens a range of between 400 and 500 start-ups per year for potential investments," says Wuensch.
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Both DSM Venturing and BASF Venture Capital follow strict criteria when they are choosing which start-ups to invest in.
DSM Venturing adheres to two sets of criteria. The first is that the start-up must be active in an area of strategic interest for DSM, either now or in the future.
"This strategic interest is not necessarily determined solely by us," says Schueler. "It is also determined by our business. If we find companies that we think have profitability but we don't have a strategic interest in them, then we don't invest in them. Our philosophy is that we invest in companies that we can help in some way. If we don't understand the market, then we cannot add value."
The second set of criteria is what Schueler calls "typical venture capital criteria. If we believe a company has the right risk and return potential, that it could become very successful and has a good management team, as well as a solid technology platform and the right products to market, then we would see this as an opportunity to invest."
BASF Venture Capital invests in start-ups that are working on innovative chemistry and system solutions in the field of new materials.
"The fund strategy aims to support access to segments in which we still have to acquire expertise or to technology enterprises in regions in which BASF, especially the venture activities, is underrepresented," says Wuensch.
"Fund investments are typically done either when we want to supplement in-house technology expertise by an area where the fund is active or when BASF Venture Capital approaches a region where the venture activities are not represented through an investment manager. Investments in seed funds provide access to young start-up companies that might become relevant for direct investment in the near future," he adds.
DSM Venturing's start-up success stories include Swiss biopharma firm Speedel, which grew and was listed on the Swiss stock exchange in September 2005. It was acquired by Swiss pharma giant Novartis in July 2008.
And DSM Venturing's investment in Lipid Technologies Provider (LTP), based in Sweden, was so successful that parent DSM bought it in November 2006.
"DSM bought LTP because the product it was developing got so interesting for the company that it wanted to buy LTP," says Schueler. "We're thinking of making future acquisitions like this in a couple of other cases."
LTP develops lipid delivery systems for functional foods - including dietary supplements - and pharmaceuticals. The business uses lipids extracted from natural resources such as oat oil. Its main product is a food ingredient marketed as Olibra, which has been shown to reduce calorie intake.
"The best outcome for us is if we invest in a company that develops so nicely that it becomes advanced enough for DSM to buy, giving us a product or technology addition that we can offer to the market," says Schueler.
As of September, DSM Venturing's portfolio includes 21 start-up companies.
Meanwhile, one of BASF Venture Capital's success stories involves a start-up called hte, based in Germany, in which BASF Venture Capital invested back in 2003.
The company was a contract research service provider in high-throughput screening for catalysts hte's customers were major chemical and petrochemical companies. It performed well and secured significant contracts with blue-chip firms.
"In addition, the topic became of even more strategic relevance after BASF's acquisition of Engelhard," says Wuensch. "As a consequence, BASF SE has increased its stake in hte from 11.7% to 75% plus one share, effective July 2008."
Since it was launched, BASF Venture Capital has undertaken 20 direct investments and five fund investments. The direct investments all fit the division's overall strategic objective, in particular supporting the technology segments of BASF's five growth clusters.
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