Starting a Chemical Business

Starting a chemical business seems so reasonable.  Get some space, build or buy a hood, get the basic stuff- glassware, a rotovap, a vacuum pump, some chemicals, and start to work.  We chemists are able to do the lab stuff.  Basic transformations, separations, purifications, etc.  We exist to do these things.  But transmuting matter is the easy part.

There are many other things to do beyond mere synthesis when you have a company. You have to manage a physical facility. Deal with the state health department to get a haz waste permit so someone will come get your waste.  Bring in the fire department to inspect the place, review your emergency plans and MSDS collection so they can arrive informed of what to expect in an emergency.  You need to find an insurance carrier to provide some basic insurance coverage for the site.  

Cash flow is life itself. You need to have cash in reserve to pay for raw materials well in advance of shipping your product out the door.  It’s called working capital.  Figure on carrying the cost of raw materials for several months before you actually get paid for your product.  Once you do get the product shipped, the payment terms clock begins. Most companies offer 30 days net.  This is called commercial credit and do not expect to get it easily from your suppliers.  Of course, your customer will expect 60 days net. 

To get commercial credit, you’ll have to get a Dunn & Bradstreet number. Then you’ll have to fill out applications and hope that you can get approximately decent terms. Chemical companies have a certain amount of due diligence to do when starting a new account. They will allow a modest credit initially (eg., $1000 for 30 days net) to protect their financial position. But they also have some responsibility to the safety of the public in regard to where they send hazardous shipments to.  Their nightmare is to send hazardous materials to some 14 year old puke in Cleveland who found a tattered copy of “The Anarchists Cookbook” in his Grandpa’s attic and decided that he wants to make a nitro ester to impress his friends. To avoid this, some locations may be barred for shipment of hazardous materials.  So make sure that your site is zoned properly.

Collecting payment from a customer can go smoothly or very poorly. Customers who do not manange their working capital very well may strapped for cash until they get paid for their product. Accountants in the receivables department refer to their “aging schedule” to keep track of how late various accounts are.  Getting timely payment can be a problem. Some companies will offer terms like a 1 or 2 % discount for payment in 10 days.

One of the most important hires you bring on is the receivables person.  It is best to hire the most savage accounting troll you can find for this position.  Their job is to watch the accounts aging and to call and threaten bodily harm to the slackers who are behind on their payments.  A long list of past due accounts can bring you down like a lead balloon. Take no prisoners. This is life and death.

For a startup, following a synthesis procedure is straightforward.  However, if you need an NMR spectrum, you are going to have to be clever.  You can pay through the nose to have a commercial lab get you one. But if you have to follow a purification by NMR, it can get to be problematic fast. This is where your grad school experience can let you down. By that I mean, an over-reliance on NMR. For a lean & mean startup, you can’t rely on expensive spectroscopic methods to get you to an endpoint. That is, unless you’re flush with money.

Which brings up a philosophical point.  Many people start a business on the assumption that they need venture capitalists to rain money on them to do the startup. If you can possibly avoid it, do so.  If you have to get venture capital, then consider bringing on a professional business manager to deal with it. Venture capitalists are not merely smart, they are cagey.  They exact a large toll on the shares of ownership of a startup they fund.  You can find yourself as the founder being a minority shareholder.  These people serve a valuable purpose in the startup world. But remember, there is a price to be paid for using their money.

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About gaussling

Gaussling is a senior scientist in the chemical business. He occasionally breaks glassware and has been known to generate new forms of hazmats. Gaussling also digs aerospace, geology, and community theatre. View all posts by gaussling

9 responses to “Starting a Chemical Business

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