Transcript Entrepreneurial (Chemical) Engineering

Entrepreneurial (Chemical)
Engineering
Terry A. Ring
University of Utah
&
NewCo
Possible or Profitable?
• C&ENews August 20, 2012
• Donald Sadoway Materials chemist at
MIT says his economical battery
technology could solve the grid-scale
energy storage problem.
1 1 0
3
Number of Patents w Profit Greater Than
$10-100M
Data from Scherer, F.,
Ann Econ. & Statistic, 1998
1 00
10
Barouch Lev, CCR Study-2001
1
0 .0 1
After Tax ROI=17%
0 .1
1
10
Pro fit (Millio n s $ )
Scientific
Publication(s)
Proposal
0
1yr
2yr
3yr
4yr
1 00
TIME  $
5yr
6yr
7yr
8yr
9yr
10yr
11yr 12yr 13 yr 14yr 15
~$15-$100k
Technology Transfer
~$300k
Basic Research
1) National Lab Research
2) University Research
($29.5B in 2000)
(87% Gov’t. Funded)
Data from 5 years, 1013 patent disclosures @ University of Utah, Innovation, vol.12
Exploitation
Delay
# Licenses >$1M=0.6%
Patent Life
Fluorescent
Lamp
Data from Birchall, J.D., Chemistry and Industry 7/18/1983.
Chances of Innovation Success
•
•
Innovation Activity
–
–
–
–
–
Proposal Grant
1 in 10
Research  Publ’cn,
1 in 2
1 in 1,000,000
1 in 6,680,000
Publ’cn  Invention Disc. 1 in 100
Invention Disc.  Patent 1 in 2
Patent  Profit
1 in 25 (Real $$ 1 in 167)
Within TTO
–
–
–
–
–
Success Probability
Invention  Patent App.
Patent App.  Patent
Patent  License
License  Royalty
License  Start-up (5 yr)
1 in 100,000 (R)
1 in 668,000 (R$$)
1 in 320,000 (SU)
1 in 3,200,000 (SU$$)
1 in 4
1 in 2
~1 in 2
~1 in 3 (Real $$, 1 in 167)
~1 in 10 (Real $$ 1 in 100)
Innovation Odds are worse than
Napoleon’s Russian Campaign
1 in 44
Entrepreneurial Questions
• Why do 80% of all new ventures fail within first 5 years?
• (50% fail in the 1st year)
– Money
– You can never have too much cash at start-up time.
– Starting before you have sufficient money
– Too Much Competition (or no viable product given market)
– Growing too fast
• Neither Money nor Management can keep up
• Poor hiring of key people
• Principle business partners (Owners and Investors) Disagree
• When do you know if you are ready to start a new
business?
– Business Plan written and vetted
– 6 to 8 months of operating costs in the bank
• Salaries, rent, utilities
– 1 year of Capital costs in the bank
Context
• November 30, 2011 – The University of Utah is
No. 1 in the nation at starting companies based
on university research for the second year in a
row, according to an annual survey recently (52011) released by the Association of University
Technology Managers (AUTM).
University
Companies
U of Utah
18
MIT
17
BYU
13
Cornell & Columbia
12
Johns Hopkins & Purdue
11
Cal Tech, Carnegie Mellon, U of Michigan
10
http://www.techventures.utah.edu/news/university-of-utah-startup-companies/
Introduction
– A personal view from a startup trench
• Subjects to look for in this talk
–
–
–
–
–
–
–
–
–
The Idea (At least, what I can talk about.)
What to do to get Ready for a Date with an Angel.
How to Tell an Angel from a Vulture
Wedding an Angel on the Cheap
The Need for Flawless Speed
MESs Engineering – Learned on the Job
Risk Analysis
GREED Engineering
CCM Engineering
The Idea
• Single Walled Carbon Nanotubes
–
–
–
–
Conductive
Semi-conductive
Stronger than Steel
Today’s Price =
• very, very expensive if you can find anyone
to sell you any
• Multi-walled Carbon Nanotubes
– Strong
– Conductive
– Today’s Price = ~$80,000/tonne
• Corporate Objective:
Make/Sell Tonnes of MWCNTs
For more details see USPTO.gov.
Dates with Angels
• Developing an entrepreneurial case
–
–
–
–
Who will use your product?
How big is your market?
What are your product’s advantages?
Who are your competitors?
• How will you beat your competitors?
– Price
– Quality
– Business Model
– Who is going to invest in this idea?
• How much?
• Concept of staging investments based upon performance
metrics.
– When do they want their money back?
• How much do they expect to make on their investment?
Sculpting a Business Plan
• Discuss the product, its market, how you intend to beat
the competition.
• Give sales, cost and profit projections
• Be sure to show profit at some point
• Show staffing requirements as they change with time
• Show the investors a clearly profitable Exit Strategy
• Show you can be trusted with investors money
– Provide Resumes of Key Personnel and their roles in
management team
– Discuss risk to the investor should things fail (required by SEC)
Sculpting a Business Plan
• GREED Engineering
•
•
•
•
Go for huge markets
Show fast market penetration
Define a path to huge market share
Show Competitor Crippling Maneuvers
(CCM Engineering)
• Show huge profits
How to Win
• Need for Flawless Speed
– Use just the first round of investment to generate a profitable business
• Pay off investors with profits ASAP
• Borrow from a bank for additional capital needs
• Get more funding with 2nd and 3rd rounds of investment
• Dilution of all ownership shares in company
– Start with 20% end up with 10%
• This makes owners and 1st round investors un-happy
• Go Public
– It helps to be profitable at this point
• Joint Venture
• Sell your company to a larger one
– You can do this when it has not yet made a profit
– Price =
(15 to 25) x (Sales – Encumbrances)
Need for Flawless Speed
• What does a Chemical Engineer do?
– High throughput experimentation
– Statistical Design of Experiments (DoE)
• Significantly shrinks the number of experiments
needed
– Multiple Engineered Solutions
(MESs Engineering)
– Reliance on Modern Engineering Methods
• Process Modeling
• CFD
How do you tell an Angel from a
Vulture?
• Angel wants 25% for $10 million and will negotiate
• Angel wants a 10x return in 5 years = 200% ROI
• Vulture demands 51% (or more) for $1 million and will not
negotiate
• Vulture wants a 10x return in 6 months = 2,000% ROI
• Vulture wants collateral or guarantees for investment
• Vulture must add his people to your management team
– This will cost you money
• Context: Cost of Capital for Big Chemical Company is ~7%.
They need 14% ROI for Wall Street to be happy.
Wedding an Angel
• Pre-sell product for a very good price
• Use contract to wed an Angel cheaply
• Get big company interested in your
product/process and enter into a joint
experimental or joint development agreement
with right of first refusal to either buy small
company or to license the technology
• Use contract to wed an Angel Investor cheaply
• Engage with different big companies for different
sectors of the market
– Angel polygamy??
Big Company Brings Different
Rules
•
•
•
•
•
Demonstrated Experimental Reproducibility
Document Control
Quality Standards
In-depth Product Analysis
Environmental Impact analysis for Process
and Product in multiple uses
• In-depth Risk Analysis
Need for Speed and RISK
• Speed from funding to a workable solution
– Investors need to see action and results
• 1st of a kind processes require a different
approach in entrepreneurial setting
– Pilot scale
– Scale-up
– Money put away for Contingencies
• 15% of Capital Cost becomes 200% of Capital
Cost or more
• Multiple-Engineered Solutions
(MES Engineering)
Technical Risk Assessment
• New Process
– Failure to Function at all
– Failure to Function on Schedule
– Failure to meet Production Rate
– Failure to meet Product Quality Requirements
• Assess Risk of not working for each
component
SiCl4
Si
SiHCl3 + SiCl4
H2
Risk Probability Definitions
Probability Category
Probability
Description
Very High
0.90
Event expected to occur
High
0.70
Event more likely than not to occur
Probable
0.50
Event may or may not occur
Low
0.30
Event less likely than not to occur
Very Low
0.10
Event not expected to occur
Risk Impact Definitions
Project Objective
Very Low
0.05
Low
0.10
Moderate
0.20
High
0.40
Very High
0.80
Cost
Insignificant
cost impact
< 10% cost
impact
10-20% cost
impact
20-40% cost
impact
> 40% cost
impact
Schedule
Insignificant
schedule
impact
< 5% schedule
impact
5-10% schedule
impact
10-20%
schedule
impact
> 20% schedule
impact
Scope
Barely
noticeable
Minor areas
impacted
Major areas
impacted
Changes
unacceptable to
sponsor
Product
becomes
effectively
useless
Quality
Barely
noticeable
Only very
demanding
Sponsor must
approve
quality
reduction
Quality
reduction
Product
becomes
effectively
useless
applications
impacted
unacceptable
to sponsor
Risk = P * I
Probability↓
Risk Matrix
0.90
0.05
0.09
0.18
0.36
0.72
0.70
0.04
0.07
0.14
0.28
0.56
0.50
0.03
0.05
0.10
0.20
0.40
0.30
0.02
0.03
0.06
0.12
0.24
0.10
0.01
0.01
0.02
0.04
0.08
Impact 
0.05
0.10
0.20
0.40
0.80
Risk and Its Minimization
•
•
•
Total Risk = Σi Σj Pi * Ii,j
Risk Analysis allows Risk Aversion and Risk Minimization
Risk Analysis allows accurate estimation of contingencies for a 1st of its kind process
–
Much larger than typical expenses
•
•
•
Typical 15% of direct permanent investment (DPI)
DPI=CTBM+Csite+CutilityPlants+Cfactilities
Risk Minimization – Do Not Rely on One Engineering Solution
–
Multiple Engineering Solutions (MES) for each component
•
Reactor
–
–
–
•
Metallurgy for HXs
–
–
–
•
Packed Bed
Fluid Bed
» Slugging, Bubbling, Pneumatic Transport
Reactor Cyclone Combination
Accelerated Testing of Alloys for each service
Rapid prototyping
Engineer Several Solutions all at once
•
Purchase Several Good Solutions at the same time, be ready to change any unit out
•
This increases the total bare module cost and the % used for contingencies
Risk Aversion – Design it differently
–
Examples of less costly solutions with low risk
•
•
Compressor with speed control (extra $$) allows some turn-down
Purchase 2x size compressor with recirculation loop allowing all flows 0 to max. 2x flow
– Buy refurbished used equipment to keep operating costs down.
Entrepreneurial Rules of Thumb
• Start with family commitment
–
(your family time will disappear if you are not careful)
• Start with product(s) with the highest profit margin with no
competition
– Start with product(s) with little competition
– Gain market share, Gain product quality/performance, Then and only then
compete with larger companies
– Know what can go wrong
• Be realistic and have alternative plans
– Plan A and Plan B
• Start small with less risk
• Be flexible,
– Plan B may be the right business.
• Play close attention to your competition
• Nurture customers
Surprises for an Academic
attempting to be an Entrepreneur
• How important
– Sales pitching and good communications are
– Risk minimization is.
• How little work it is to create an MSDS for a product
• How much work is required to get the EPA to approve
the release of a new compound into the environment.
• How little work it is to get a patent, if you hire a good
patent attorney
– Trask-Britt in SLC
• How much work is required
– for document control
– to train operators
– to build an organization
Would I do it again?
• Certainly, yes, but only with people that
you trust.