Entrepreneurial Chemical Engineering Terry A Ring University of

Entrepreneurial (Chemical) Engineering Terry A. Ring University of Utah & New. Co

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.

$10 -100 M Data from Scherer, F. , Ann Econ. & Statistic, 1998 Barouch Lev, CCR Study-2001 After Tax ROI=17% 0 TIME $ Scientific Publication(s) Proposal 1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10 yr 11 yr 12 yr 13 yr 14 yr 15 ~$15 -$100 k Technology Transfer ~$300 k Basic Research 1) National Lab Research 2) University Research ($29. 5 B in 2000) (87% Gov’t. Funded) Data from 5 years, 1013 patent disclosures @ University of Utah, Innovation, vol. 12 Exploitation Delay # Licenses >$1 M=0. 6%

Patent Life Fluorescent Lamp Data from Birchall, J. D. , Chemistry and Industry 7/18/1983.

Chances of Innovation Success • Innovation Activity • Within TTO Success Probability – Proposal Grant 1 in 10 – Research Publ’cn, 1 in 2 1 in 1, 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 $$ 1 in 167) – Invention Patent App. – Patent App. Patent – Patent License – License Royalty – License Start-up (5 yr) 1 in 100, 000 (R) 1 in 668, 000 (R$$) 1 in 320, 000 (SU) 1 in 3, 200, 000 (SU$$) 1 in 4 1 in 2 ~1 in 3 (Real $$, 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 1 st 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 2 nd and 3 rd rounds of investment • Dilution of all ownership shares in company – Start with 20% end up with 10% • This makes owners and 1 st 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 (Do. E) • 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 10 x return in 5 years = 200% ROI • Vulture demands 51% (or more) for $1 million and will not negotiate • Vulture wants a 10 x 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 • 1 st 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

Si. Cl 4 Si Si. HCl 3 + Si. Cl 4 H 2

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. 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 1 st of its kind process – • Much larger than typical expenses • • Typical 15% of direct permanent investment (DPI) DPI=CTBM+Csite+Cutility. Plants+Cfactilities Risk Minimization – Do Not Rely on One Engineering Solution – Multiple Engineering Solutions (MES) for each component • Reactor – – – • Packed Bed Fluid Bed » Slugging, Bubbling, Pneumatic Transport Reactor Cyclone Combination Metallurgy for HXs – – 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 2 x size compressor with recirculation loop allowing all flows 0 to max. 2 x 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.