Value Based Product Development

It's not easy, but if you can succeed it's the most defensible path to success.

In January 2023 I wrote about how product development is deflationary in chemicals. There are two main routes that I covered in that prior article. The first is developing a drop-in replacement for chemicals and polymers that are an exact replica for something that is currently being sold and used. If you had a new technology that can make ammonia cheaper than the Haber-Bosch process or if you figured out a cheaper way to make phenol than the cumene process are two examples. Both are commodity chemicals and replacement with slightly lower cost or even the same cost will eventually lead to long term higher profits for you and your shareholders. This will also eventually lead to a new price floor for that particular chemical and the end consumer will eventually benefit.

The second route is developing something that brings “value” that is greater than what is currently being provided by the existing market. Previously, I used an example of Aramid versus ultra-high molecular weight polyethylene as an example. There are plenty of examples out there such as polyurethane wood coatings replacing drying oils (e.g., tung oil) and can enable faster drying times and more durable coatings. Emulsion polymerizations for paint and removal of solvents that caused people having to vacate their house if they were painting and reduced exposure to solvents. I personally worked on Resonance Polyols early on in my career where our value was enabling polyurethane foam formulators to reduce or even completely remove organophosphate ester fire retardants from their formulations. Organophosphate ester fire retardants (OPFRs) have become a growing concern recently that hasn’t gained as much attention as perfluoroalkyl substances (PFAS). Here is an article from the American Chemical Society and a key part of the abstract or phosphate flame retardants:

Exposure to OPFRs is ubiquitous in people and in outdoor and indoor environments, and OPFRs are now often found at higher levels compared to PBDE peak exposure levels. Furthermore, data from toxicity testing, epidemiological studies, and risk assessments all suggest that there are health concerns at current exposure levels for both halogenated and nonhalogenated OPFRs.

The irony of organophosphate ester fire retardants is that they were supposed to be better than polybrominated diphenyl ethers (PBDEs) and definitely better than polychlorinated biphenlys (PCBs) and if you don’t know what that stuff is I humbly point you to General Electric duping PCBs into the Hudson River and their efforts to clean it all up. The issue with something like phosphate ester fire retardants as a replacement to PCBs and PBDEs is that you don’t have a lot of data showing that it is better.

To someone like a polyurethane foam formulator who is trying to anticipate the EPA’s future actions on certain fire retardants it’s better to be proactive in finding a solution before you have to do it. That’s where our value proposition for the Resonance Polyols started, but in order to show we had something of actual value you need to bring data. More data the better. Actually, if you can formulate for your customer and give them a recipe they can follow and use with your material, that’d be great. Then, please wait for a few years while they test and tweak.

The problem with value-based product development? It’s slow.

Chew Gum, Walk, and Talk on the Phone

Throughout 2023 I spoke to a lot of founders in trying to commercialize new technologies in biology, chemical engineering processes, chemistry, or a mix of it all. Sometimes I found myself talking to new founders on a weekly basis. Some of them were early in their journey while others were further along. All of them were figuring out their early products, who their customers were, and how their products fit their customers. The key thing to think about is doing multiple things at once.

People in “tech” like to talk “product market fit” and I think it does well in software as a service (SaaS) business, but it’s a dangerous philosophy to adopt in chemicals. Product market fit makes it sound like a product will work for everyone if you can just figure it out (e.g., Salesforce, Uber, Facebook), get scale to take advantage of network effects, and then iterate on new products with near zero production costs. To some degree this might be true for commodity chemicals (see above), but the margins on commodities are often so narrow that your investors will be pissed off that you are trying to eke out a 30% gross margin business (how are you going to 10x that $5 million dollar check if you are getting such small profits? Scale? Tough sell I think).

In specialty chemicals you might have 1 product for 1 customer that cannot be sold to anyone else. This is why it’s “special.” Oh, you made 30,000 pounds of bad product for your customer that they sent back? Maybe you can work a bit of that bad stuff into your future products or maybe it’s just trash and you have to write down those losses (I should write something about off-spec materials someday). Your entire market for your product might only be 3-5 customers across the world. But if you can get those products commercialized it’s going to be hard to displace you.

The question is, do you have enough time to do value-based product development where it might take 5+ years from product launch (all technical and engineering work is finished) to make it a profitable business?

Chances are you probably do not have that kind of time and that much money to burn and this is why I often tell founders that they need to have a plan to get early cash flows to do the following:

1. Survive long enough to have enough time for the big bets to pay off

2. Entice new investors to fund your big bets

3. Gain more market share

4. Actually work on the big bet products that will really change markets/the world

This translates in practice to thinking about an area where you can drop in a replacement chemical, gain some early revenue and profits, to have enough time to work on that thing that’s going to revolutionize some market. Just going through the commercialization process and bringing something to market is valuable even if it only pays the rent on your lab space for 6 months.

This sounds like a good idea on paper, but in practice it’s really difficult. Big chemical companies struggle to balance this balancing act and doing it at a start-up is even harder because you don’t have a lot of the resources that are commonplace in a big company. Even just figuring out shipping, storage, and disposal of your raw materials and waste is a big challenge.

Here is a pro-tip: DO NOT DUMP YOUR WASTE DOWN THE DRAIN (see GE story above). Or just watch this Julia Roberts movie:

I don’t really have any solutions for you other than to think about the following:

1. Develop a culture where people write things down for others when they leave. No one likes to spend 6 weeks working on something that a former employe did a year ago and found out it didn’t work. The job of an R&D manager is to ensure that there is a system and culture in place that allows for speed. This often looks like a good quality system (e.g., ISO 9001). Some sort of SaaS solution might work, but you need the right culture too.

2. Know all your potential markets and figure out which ones are worth pursuing now versus in five years. Where are the biggest margins. What area takes the longest. Where is the regulatory burden highest. What are the current costs that customers pay for products.

3. Go meet your customers and suppliers at conferences and trade shows. Look for future employees at these conferences and trade shows. Make friends and network.

4. DO NOT base your company’s business plan on a nebulous lofty goal like, “ending plastic waste” or “reversing climate change.” Thinking you can “end plastic waste” indicates a limited understanding of the problem regarding plastic waste and who would be willing to pay you money for your product.

5. DO NOT sign an exclusive partnership and 2-way non-disclosure agreement to work with a company like Shell or ExxonMobil to work on a technology that they “intend to commercialize,” because chances are it’s not going to get commercialized, your company will have limited options after that project is shut down, and then you can’t talk about it.

6. Figure out who regulates your space and figure out the regulations that govern that space. Hire someone with this knowledge or learn it yourself.

7. Everything takes longer than you think it will.

If you’re a founder or an employee at a start-up where everyone seems delusional and want to chat I’m usually available.

Tony