Product vs. Process #3: High and High

At an Innegrity board meeting in the summer of 2008 we were discussing whether or not to put in a  production machine here in the US.  We had a pilot machine that needed upgrading badly, and there was a production machine running in Germany that we could access and purchase yarn from.  We had just closed a $3.7 million investment and most of it was still in the bank.  Wall Street had not fallen, unemployment had not skyrocketed, and the world seemed to be a pretty sane place.  Our biggest worry was meeting the demand for our fiber that was growing every quarter.

We had the money to pay for the new machine.  We intended to finance $2.5 million with debt financing which was not yet in place.

I've thought about this board meeting many times in the last two years.  My recollection is fuzzy, but there are a few distinct pieces.  One board member, asked a question.  "Have you thought about placing an order from Europe to satisfy your immediate demand while you upgrade the pilot machine?" 

Of course I had.  The question plagued me.

I was worried that our German partners would quickly know more about our technology than we did.  My VP Sales and VP Business Development were worried that we wouldn't be able to hit all the orders that were "flooding in," and that our customers would get frustrated with the shipping times from Germany.  My VP Manufacturing was tired of fighting the pilot machine that we had put together from rubber bands, duct tape and coat hangers.  All of the customers wanted the upgraded material that would come from the new machine.

The board member pressed his point, and my management team pushed back.  I watched them go back and forth, but grew frustrated with the board member. 

I can remember some late nights sitting at the very desk where I am now, wondering--do we conserve cash?  Do we push to keep our technology internal?  Do we add people in sales and application development, in manufacturing or in technology development?  How long can we wait before we will need an improved version?  Do we build capacity now when the customers are clamoring for it, or do we sell out the capacity we have and then leave them with too little material to build their markets?

In the end, we found debt financing and purchased the equipment.  This happened in August, 2008, four years ago.  In September, the world changed.  It would be twelve months before I understood the depth of the change, and by then it was way, way too late.

The board member is too fine a gentleman to ever say, "I told you so."  But he certainly has the right to.  As a result of our discussion and a general deterioration of our relationship, I asked him to resign from the board, which he did.  It was not one of my best moments.  To be fair, there were times when I listened to him that I wish I hadn't.  But in this instance, I didn't and wish I had.

Innegra is an example of the most difficult of the four quadrants to launch as a start up.  If you can pull it off, though, you will likely build another DuPont or 3M or BASF, because the durability and the profitability are unmatched in the other quadrants.  There are no base hits here, though.  Just home runs, outs, or in my case, a sacrifice.

These innovations have a high degree of innovation in both the process of manufacture, and in the product itself.  The R&D goes in two different dimensions--developing the product, as well as developing the process.  We've discussed the difficulties of a high process innovation--R&D is slow and costly, but can be protected with a battery of trade secrets and patents. 

They require capital investments to install pilot and then production capacity.  Often once a machine is installed and running, improvements come quickly from the technical team bringing new generations of the process, each requiring a new capital investment.

There are complexities of having an innovative new product.  Materials industries are slow to adapt an unknown material, and require lots of testing which may send the product back for a redefine at each stage.  Most companies consider the risk of a public failure more costly than the risk of being second.  They would rather let the competition lead and try to be the "first follower."

The sales team needs to be highly technical, capable of leading a customer through their own technical development.  The more innovative the product...the more value it delivers...the more different it is--the slower this is going to happen.  A drop-in may go quickly.  But the more advanced, the more redesign will be required, and the more time evaluating, understanding and finding the value and testing before launching their own product.  

All these have to happen at once--the product needs to go through successive generations at the same time that the application development is going on, and the changes from each somehow need to be managed so that the customers believe it is not just a long-winded R&D project that is going to sap resources from more immediate needs.

With all of these headwinds, why would someone take this on?  Simply put, because in this category are some of the most durable, profitable products ever invented.  Gore-tex.  Styrofoam, Kevlar, Post It, Nylon, Teflon.  These products build generational wealth and companies that can be passed on to one's children and grandchildren.  Tens of billions of dollars a year, with a durability that can last for decades without requiring much change.  Today's Kevlar is only a touch better than what was launched in the 1970s, and they celebrated their 40th anniversary by building a $500 million plant, the largest single capital investment in DuPont's history. 

Can they be successful as an entrepreneurial company?
Most of the successful entrepreneurs in this area do not build the whole thing, but rather take a bite of the elephant and then pass it on.  Here are a few successful strategies:
1. Sell equipment:  Many of the leading nanofiber companies are doing this.  They develop a new way to make nanofibers--faster, cheaper and smaller.  They have no idea what to do with them and skip the product innovation side and sell equipment first to universities and large company R&D departments, staying alive while waiting for others to develop the killer applications.
2. Build Pilot Production, Then Sell:  Another way is to build a pilot line and make your material in reasonable scale, so your customers can make hundreds or thousands of full scale products.  Balance the R&D on both of process and technology development as well as application development, look for the killer app and the killer customer, and then when the frenzy is at it's highest and the execution risk has not raised it's smelly head, sell the company and let the new owners handle the details of scaling from a few thousand to a few dozen million.
3. Joint Venture:  Find someone who either has the market access to make the application development an easy task, or who can handle the process and technology development, or at least scale it quickly.  Cut the R&D cost and the risk in half and find financial support along the way.
4.  Build the Company:  Building the company and managing all of the costs and risks of building the technology, developing the killer application and scaling production to full scale should only be done if you are confident that you will have the runway and talent to get to the finish line. 

I proved at Innegrity that it is possible to build a great technology, scale it to millions of pounds of annual capability, develop dozens of applications and keep the company alive for seven years, and still end up with a big financial mess at the end of it.  It was a lot of fun and I learned a lot, but that and $4.50 will buy you a cup of coffee.  And that is why, for my next start ups, I chose a High Product, Low Process innovation, where base hits are easier to find, as I'll describe two blogs hence.