The Chemical Entrepreneur, Part 3.
In previous posts I have written about aspects of starting and running a chemical business. I do not pretend to cover all views on this matter. It has been my experience that entrepreneurs and inventors are a thick-headed lot who often see the world through colored and distorted optics. To such folk I can only offer this- Cash flow is life. Have something to sell right away if not sooner.
For everyone else, a chemical business can take many forms. Choose your business model carefully. Here are some examples of general business models-
- Distribution or catalog model. Buy in bulk or semi-bulk and repackage for resale. This ranges from specialties to commodities.
- Formulation. Buy raw materials and blend to produce your products. Sell your own brand. This is often the world of commodities.
- Tolling business. A toller is a processor for hire. A toller takes a customer’s raw materials and processes them in a specified manner to produce a product. In tolling, the operator agrees to produce to a specification and yield agreed to by contract.
- Commodity scale production. Process raw materials to produce a product that competes with other manufacturers of the product. Buying decisions are made on the basis of price and contractual terms. Commonly high volume, low unit margin operation. Products pricing typically very sensitive to raw material costs.
- Pharmaceutical manufacture. Highly specialized and capital intensive. Specialized skill sets are required. Cash needed for long dry spells during development. Expect to turn over control to VC’s sooner than later. This is the realm of VC/Esq/MD/PhD/MBA’s- an especially loathsome combination of buggering pencil-necks. I would rather roll naked in broken glass wetted down with Tabasco than try starting a pharmaceutical business, but that is just my own bias.
- Specialty/custom synthesis. Manufacture custom chemicals for customers who will use them in their own process. This is usually done under a secrecy agreement on a spot basis or under contract. Specialty products may be from the public domain or may be the result of proprietary processing. They are “specialty” because they are low demand, require specialized skills, have particular specs, or are below the radar screen of other manufacturers.
- Hybrid catalog/specialty/custom. Aldrich Chemical started in this category. They were a catalog operation that was highly opportunistic. The hoods and kilo labs that filled their catalog collection could also be used to do custom or specialty manufacture. Alfred Bader’s great strength as an entrepreneur was his total commitment to getting the customer what they wanted. Bader’s method was to find out what chemists wanted and make it available to them. The secret to the catalog business is variety. Grow the collection and raise prices 5 % every year.
- Analytical services. Analysis work doing water, soil, fly ash, mineral, elemental, concrete, feed, fuel samples etc. You need to have approved methods and certifications to sign off on many analyses. In this business, you must keep the instruments going night and day to the greatest extent possible. The good news is that advanced degrees are not often needed and fresh college grads often flock to this kind of work.
I have had numerous opportunities to speak with chemists, often chemistry professors or university tech transfer folks, about their interest in commercializing an invention or exploiting an opportunity. Many of the ideas have related to reagents and catalysts. Professor X has developed a catalyst that performs some transformation in a unique manner and the prof is naturally interested in the commercial possibilities. Prof X has filed a patent application through the university tech transfer office.
Let’s say that Prof X has a new late transition metal complex that, say, performs some transformation. The professor has a good patent attorney so the composition of matter of the catalyst is claimed bearing mono and bidentate pnictogen ligands with C1-C30 alkyl, aryl, alkylaryl, arylalkyl, fluorinated alkyl, fluorinated aryl, alkylsiloxanes, arylsiloxanes, and on and on. Multi-dimensional Markush ligand space is claimed as well as a whole universe of chiral variants. Prof X has also claimed methods of catalyst preparation as well.
Here is what Prof X controls. Nothing. If Prof X is the inventor but not the assignee, then Prof X has turned over control of the invention to the University. Maybe the good Prof gets royalties personally or for the Prof’s research. This depends entirely on what Prof X had negotiated with the university. Some universities make a lot of royalty money from the patent portfolio. A great many do not.
Starting a business based on a transformation using patented compositions or processes can be a tough sell. For established products, you have to convince a customer why they should take their lined-out process and change it. Even worse, and this is a common deal killer, you’re customer’s customer may require lengthy and expensive validation. And, you need a good answer to the question the end user will ask- What kind of price cut can we expect as a result of this change? Better to supply product or technology during the development stage when changes are not so problematic.
The other big negative to selling proprietary reagents or processes is negotiating the terms and pricing. From the customers perspective, adopting your composition or process means that smack in the middle of their process train they have to manage a licensed technology with extra paper work and auditing. This is a big problem with catalysts. Many of the newer catalysts you see in the Aldrich or Strem catalogs are proprietary and must be used under a license agreement. Nothing stirs the creative juices like the desire to avoid paying royalities by finding white space in a patent or inventing a new process.
Having been involved in such license negotiations, I can say that you need to have a lawyer looking over your shoulder while you consider the terms and conditions. These agreements often entail upfront fees and a sliding scale of pricing based on usage. Some IP owners want a piece of your gross product sales resulting from the use of their technology. An annual audits may be expected as well. It’s like having raccoons in your picnic basket.
Instead of trying to convince the world that your reagent, catalyst, or additive is worth adopting, why not find a product that your technology enables? When you manufacture and ship a product, you can earn profits on the mass produced. You can use your technology to produce a portfolio of fine or custom products. Better yet, why not just find out what customers want. You have 110 or more years of public domain chemistry available to you in Chemical Abstracts there for the taking. Maybe you can even sell some of your composition to customers for their development work.
If you have no interest or capital for starting a commodity production facility, then you have to consider the other end of the spectrum- low volume, high margin specialty or fine chemicals. But how do you find products? Well, that is a problem. For the rank outsider, getting a clue as to what the market is about can be difficult. Commerce specifics in specialties or custom chemicals is usually confidential information.
An important consideration for the entrepreneur is to focus on your strengths and knowledge of the markets in your area of specialty. Low volume, high value products require smaller equipment and accordingly, smaller entry costs. I would encourage someone who wants to start up a synthesis business to avoid the one-act pony scenario. There is strength in having a diverse collection of product offerings. Multiple products and multiple customers bring greater stability. Your synthesis business should be a 3-ring circus of multiple simultaneous performances to a diverse audience.
In regard to products to start with, phone or visit purchasing managers to make an introduction and talk about your capabilities. Walk a trade show like Informex or ChemSpec to get an idea of what the market is doing. Most purchasing managers at chemical companies have a list of troublesome compounds they are trying to source. Keep your processes as close to earth, air, fire, and water as possible and try to keep your vessels full, even if the margins are low. It is important to have some good history with customers.
There is more to life than pharmaceuticals. It is possible to have a productive life entirely outside of medicinal chemistry. Consider CVD or organic semiconductor chemicals. This field is famous for stringent purity specs. But often the users do their own polishing.
Read patents from 17 years ago to see what technology is coming into the public domain. Scan recent patents in the USPTO’s Patent Gazette to see what potential customers are doing. Often, reactions in the specification are not claimed in the patent. Who knows, the procedure may actually work.
Search the USPTO for key words relating to chemistry you want to do. You’ll find assignees who represent potential customers. Maybe they’re looking for someone to take over preparation of materials related to their technology. Just because a chemical company patents a composition or process doesn’t mean that they want to practice it. They just want to control it. Look around.
Rethinking Start-Up Opportunities
Ways to be an Entrepreneur
US Chemical Business Innovation
A Few Hints on Starting a Chemical Business
Andy Grove on Scale-Up
The Chemical Entrepreneur, Part 1.
The Chemical Entrepreneur, Part 2.
The Chemical Entrepreneur, Part 2.5