Swinging For The Fences

Assessing your asymmetric risk in product development

Source: It’s not that I’m a Red Sox fan, but this was the coolest photo on Unsplash that fit the theme.

Last time I wrote about product development in the polymers space I ended on the concept of graduate school being the best time to commercialize your own research. I wanted to expand on this concept.

Graduate school for most scientists and engineers is a time of extremes. There are undoubtedly not enough hours in a week to manage the expectations put upon you by your department, the granting agencies, and most of all yourself. For many, getting a PhD in any discipline is kind of a crazy endeavor, but in the physical sciences and engineering it's often a chance at a subsidized education that could unlock enormous earning potential. Just look at this graph from the American Chemical Society from 2019 on average salaries for chemists when adjusted for inflation. PhDs earn more than the other degrees. The “flat wages when accounting for inflation” is a real drag, but most professions are seeing this issue according to Pew Research back in 2018.

Source: Sorry ACS, I didn’t ask for permission, but I’m begging your forgiveness here.

My point is that near the end of graduate school, most people want to make money and mentally recover. Usually, mental recovery in a post-doc is not a real thing. The idea of wanting a stable 40 hour per week job with benefits and a big enough salary to go out to lunch every day and buy Starbucks lattes without going broke is a Rich Life to most graduate students. A bunch of students just want to make more money, it’s what I wanted, and while others might want to become professors and not care about anything else (good luck).

My advice to the graduate students out there is that if they want to explore doing a start-up and they have a supportive thesis adviser and department then you should go for it. There are a few things you can do to attract investors’ capital.

Let’s say for example you’ve developed a polymer that will enable replacement of indium tin oxide coatings in smartphones because it’s got similar conductivity, it’s colorless, but your material is much cheaper to produce. If we revisit my thoughts on risk adjusted home runs then this might already check some of those boxes.

When you pitch this material to financiers they might think:

“Oh, making smartphones cheaper and having an investment in the only company that can make the material. How much do you need?”

The Importance of Patents

There are a few things you need to consider before “pitching.” The first would be a patent, which can take some time, but in a biblical sense this is your slingshot to the Goliath that is your existing competition. If you’ve already published this research, you’ve got a year (last I checked anyway) to file a patent in the United States.

If all you did when it comes to trying to start a company while graduate school was file a patent based on your research and you help write it with a lawyer then this is a good experience. Many current patent attorneys I know started off like this, realized they enjoyed the patent prosecution process, and went to a law firm to become a technical adviser and eventually to law school to become a lawyer.

The patent is part of the foundation from which your company can be built. It gives you the right to exclude others from practicing your invention for twenty years. Patents are only one piece of the puzzle though and don’t necessarily hold as much power as you might think.

Understanding The Market

Usually in chemicals there is a high switching cost when it comes to a new technology. To continue with the indium tin oxide example, most electronics manufacturers that use this material will be doing chemical vapor deposition and have probably invested significantly into being able to do this process at scale. Let’s say it's 10 million dollars for one manufacturing operation, which they have most likely capitalized the expense over a decade and it becomes an asset, which can be depreciated.

This high capital expense does one main thing in that it is a hurdle for new entrants to the market. Indium tin oxide is also very prevalent, everyone uses it when it comes to clear electronic conducting coatings, so there are in theory are multiple suppliers that can provide the raw materials, which keeps cost relatively low. Competition amongst suppliers is not only good, but having a secondary source of raw materials is important to keep from shutting down during occasions of supply chain disruption.

If your polymer can replace indium tin oxide and all you need to do is spin coat it onto the substrate with some solvent then this is super simple compared to chemical vapor deposition that requires a plasma source and vacuum. In theory your polymer could enable a few things:

1. Lower cost of entry to the market for electronics manufacturers

2. Potentially enable new surfaces to be coated with a clear conducting coating

3. Constraining supply of the new raw material in the form of pricing power and excluding others from practicing the invention (see patent part). Alternatively, licensing the patent out could enable additional suppliers to get to market while also providing revenue to the existing company.

As long as the costs of your new polymer and process are lower than what is done for indium tin oxide then you might have a winning technology in your back pocket.

Prototype It. Collaborate. Achieve a Minimum Viable Product. Scale.

So you’ve got your patent, you understand the market where your new polymer might play, so now is the time to prototype an actual product or a “systems level approach.” For this you might need some help from the chemical engineers and/or electrical engineers.

Go coat some glass with your new polymer via spin coating.

Find the best solvents, rotation speeds, and ideal thickness you need to achieve.

There might be some formulation work the needs to happen.

Figure out how much it would cost to make your polymer at scale and some regulatory questions:

1. Cost at 1 gallon

2. Cost at 55 gallons

3. Cost at 400 gallons (still pilot scale for many places)

4. Cost of the coating after spin coating to correct thickness (e.g. $/cm^2)

5. Do you need to file any sort of pre manufacturing notice with the EPA for any specialized monomers?

6. Does your polymer meet the polymer exemption rule under the Lautenberg Chemical Safety Act?

7. Don’t forget to factor in labor, energy inputs, and any sort of permitting for emissions due to solvent or condensation products.

Is the performance better or worse than indium tin oxide and what are the costs in comparison to the potential customer after manufacturing. Since it’s a new to the world polymer you might have to make your own monomers too. How much will everything cost and how much will you save when you scale? Optimize as much as you can while getting a prototype finished.

Pitch Decks and Talk To Some MBA Students

If everything is looking good at this point I’d suggest you go talk to some MBA students at the business school provided your university has one. Most MBA students are looking to go into investment banking or consulting at the big 3 (McKinsey, Bain, and Boston Consulting Group). They need a high salary job to cover their graduate school loans, but there might be a few who are looking to help build a company.

Get some help putting together a pitch deck and perhaps you find a viable co-founder for a company. Based on all your work you should know the rough costs of scaling up, the cost of your product, the cost of the incumbent technology, and how you might enter into the market of thin film conducting coatings. The business school students can help you understand how much profit you should be aiming for and how to speak to VCs.

If you do get a co-founder at this point make sure that founder is good at the stuff you hate doing. Get your school’s lawyers involved too to understand confidentiality, draw up some contracts, perhaps do some paperwork to start a company. Also, don’t forget to defend your PhD thesis and graduate.

Then, start trying to get some meetings with investors. There are a few VCs that read this newsletter.

I would be happy to help get the word out. Let’s talk.

Tony