Investment insight from DSM

The blog previously posted about DSM Venturing‘s growing recent investments in renewable chemistry and clean technology projects. It is now our pleasure to share insights coming from Erik Rutten, DSM Venturing’s senior investment manager, on how green chemistry companies can attract strategic partners such as DSM.

Q: What are the challenges that DSM Venturing confronts when it comes to investing in green chemistry-based companies?

In general green chemistry based companies are of interest to DSM because of our company’s strategic focus on innovations in the area of climate and energy. DSM’s Global Strategy is fundamentally to leverage strengths in the areas of Life Sciences and Materials Sciences via Innovation driven by the global trends, amongst others, in this field. This implies, for instance, using its white biotechnology competences to develop new generation ‘green’ materials. To speed up developments in this field, DSM applies an open innovation model, a.o. through its venturing activities.

However this does not directly mean we would invest in every green company around. DSM Venturing only considers investing if we see a clear strategic fit between the start-up company and one of the business units of DSM. Sometimes that is not directly clear and it can take several discussions to finally define the strategic interest. Next to the strategic fit with our business, DSM Venturing thoroughly evaluates the potential investment with regards to their business plan, the expected financial return, the risks involved and if the company has good and experienced management through a normal due diligence process. If both the internal strategic fit and the due diligence are positive we could decide for the investment.

Furthermore in line with our Triple P policy (People, Planet, Profit), we look into the Life Cycle Assessment of the products our potential investment companies make. Their environmental impact should be as low as possible throughout their life, i.e. ‘from cradle to grave’.

Q: Do you see increasing investment activities in general targeting green chemistry companies? What potential benefits can an investor get in these type of companies?

We already saw quite some increase in activities the last couple of years and we expect that to be more and more. The amount of start ups in this space is booming, but last year it was more difficult for them to get financing. Several of these start-ups suffered and had to adjust their plans or disappeared. For investors it is a good time to step in: valuations are low and demand for green-based chemicals are expected to increase strongly. Driven by climate change and alternative energy initiatives, this is a field with a lot of growth and innovation potential which attracts lots of investors and entrepreneurs and creates room for new ways of generating value.

Q: What specific strategies or objectives should a green chemistry company emphasize to attract investors?

Most important will be to meet the right price/performance ratio for their ‘green’ products. Although “green” is attractive for a lot of customers the premium they are willing to pay is low. Sometimes the products/company are kept alive by subsidies, but in the long run that is not sustainable. The green chemistry start-up company is best focusing on better performance and/or lower price than incumbent products. Take “green” as a bonus.

Further it could be of benefit if the company can show early revenues. Perhaps not optimized and not in the main final target application, but it helps to reduce the finance need of the company and provides trust for future activities. For a start-up in chemistry (so also green chemistry) the CAPEX layout for manufacturing facilities is relatively high – there is the chicken/egg issue of what to achieve first: guaranteed high volume orders or manufacturing capacity (scale/price issue) and to have a solid tolling or partnering option for manufacturing in place is definitely attractive to investors.

Q: What is your number one advice for those who want to start-up their own green chemistry-based company when it comes to getting funding?

Next to a great product or technology and a realistic business plan they need to take care of establishing a decent patent portfolio to protect their future business and secure freedom to operate. Furthermore the whole life cycle analysis should be taken into account. Finally the premium that will be paid for ‘green’ nor the costs of ‘green’ should not be overestimated.

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Check out more about green chemistry investment insights on ICIS Chemical Business’ March 1 issue.

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