Accelerating bio-based innovations in the chemical industry by developing business plans that deliver on the promise.
A strong pipeline of bio-based innovations is emerging, driven by increased consumer and corporate interest in sustainability, circular economy and carbon neutrality. Public and private sector investment in research and development for biobased products is bearing fruit with product launches across sectors, including home and personal care, food, buildings and apparel.
Advancement of industrial biotechnology and green catalysis have been one of the cornerstones for growth. Industrial biotechnology harnesses nature, employing biology for the production and processing of everyday chemicals, materials and energy. The use of microbes instead of chemical processes to produce ingredients for everyday consumer goods is an excellent example. It has benefitted from advances in computing power and machine learning and the decreasing cost of DNA sequencing. Industrial biotechnology is already used in the production of biofuels, but it may also be used to produce novel chemicals and materials that cannot be accessed by conventional chemical processes.
Leading brand owners are delivering an important message on the need for renewable carbon in a circular, carbon neutral economy, and sustainable, bio-based innovations are there to respond to this need. In light of this enthusiasm, it is important to remember that there have also been some high-profile failures on the market, and to consider the critical factors for success.
Know the market
Each product has a unique market and business environment. Some markets have overcapacity, others a strong demand, and in some markets large existing players leave very little room for new entrants. Identifying potential applications and understanding the market, business and regulatory environment for each application is essential. Specialty chemical value chains have limited transparency, which highlights the importance of first-hand experience of the industry. Thorough market analysis at an early stage steers research in the right direction and helps to turn an opportunity into a feasible business case.
Verify the value proposition
Some novel chemicals and materials are already cost competitive with the incumbent, mature technology, or commercially available products, while others are unlikely to ever reach parity. In either case, it is essential to understand what attributes add value to the end-user. This may include improved performance; new functionalities, such as biodegradation; and sustainability attributes, such as cruelty free and GHG emission savings.
It is critical to validate the value proposition with each stage of the supply chain and the end-user. This may take time, but ultimately builds a better sales plan. All communications should be transparent and supported with quantified claims.
Find the right technology and business model
Bio-based innovations can be realised via inhouse process development, technology licensing, open innovation, contract manufacturing and, in many cases, a combination of these business models. Different degrees of horizontal and vertical integration may be adopted. Some producers are focused on the supply, whereas others have built strong brands and/or are working closely with existing brand owners.
More and more companies are redefining their innovation strategies to accelerate stage-gate processes and to develop core, adjacent and transformational innovations in line with the overall targets, unique strengths and capabilities of the companies. It is crucial to benchmark not only the technology, but also the business model to ensure that the business plan has the greatest likelihood of success.
Build the right partnerships
Partners may share development costs, speed up market entry or provide bankable offtake agreements, but they can also be a major constraint, limiting business opportunities and restricting future revenue streams. In the end, many large brand owners have little risk in committing to conditional offtake agreements with carefully defined technical and commercial milestones. However, the length and complexity of commercial negotiations is often underestimated in project implementation plans. Developing a balanced partnership portfolio can go a long way in limiting exposure to market risks.
Secure cash flow
New process and application development takes time, and sufficient cash flow is key. Before implementing a 10-year strategy, the business must be able to survive the next few years. Well aligned growth stage funds and strategic investors can help to support scaleup, but it is also advisable to prepare for lower capacity utilisation rate in the first few years of operation. Quality control, and particularly side-stream utilisation, can only be fully validated once the first-of-a-kind commercial production is in operation. There are warning examples in the industry where the costs of rebuilds have far exceeded the initial capital investment.
We at AFRY Management Consulting are proud to have supported our industrial clients at all stages of the bio-based innovation process, from idea generation and screening to implementation and launch, to develop business cases that deliver on the promise. Our unique combination of management consulting and engineering capabilities have enabled us to carry out a wide range of transactions on first-of-a-kind technologies and biomaterial businesses with solid track record and appreciation from the finance community.