Chemistry underpinned the industrial revolution in the 19th century, but rather than become commoditised by the biological and information technology revolutions, the science has had a new lease of life and with it a rise in margins and sales.
The importance of the new technologies has resulted in a shift to a more strategic direction for Dow Chemical’s corporate venturing unit, Dow Venture Capital, one of the world’s oldest and most successful groups.
Dow Chemical posted a 26% jump in annual sales last year to $54bn, excluding divestures. Following its merger with Rohm and Hass, the company saw a significant rise in margins and profitability.
Last year, there was a two percentage point increase in earnings before interest, tax, depreciation and amortisation (ebitda) margins. A 14% increase in prices meant ebitda rose by 36% to $7.5bn on a pro forma basis.
Adam Caper, founder of Innovation Capital firm Synchrony Venture Management, said there was a broad push in the industry to move from a model based on chemicals as commodities ("pennies for pellets", in industry jargon) to one which puts more value-added products in the mix. He said: "Value-added can mean a couple of things in this context: engineered products, such as the formed materials used in automotive, electronic or consumer-products components, and novel materials with unique properties which are based on protected intellectual property, the most well-known examples of which are things like Teflon & GoreTex."
Given such results, Dow Venture Capital’s money invested in portfolio companies since launching in 1993 has barely affected the company’s balance sheet. Partly as a result, Dow is understood to have shifted the corporate venturing unit to looking solely at investments to accelerate its sponsor’s strategy and deliver economic value.
One consequence of this shift has been a move away from indirect investing as a limited partner, or investor, in third parties’ venture capital funds towards direct investing. Dow Venture Capital has at least 17 relationships with third-party fund managers – called general partners – including Emerald Technology Ventures in Switzerlandand US-based CMEA Ventures.
In a presentation seen by Global Corporate Venturing, Dow said: "Financial risk management through broad investment diversificationis not primary priority, and so we are less focused on pursuing investment in venture capital funds.
"We value all of our fund relationships, and look forward to continuing to connect on opportunities and deal flow of mutual interest."
Such mutual interests involve a formal programme for dealflow sharing, access for due diligence and being the first choice to co-lead investment opportunities, and having privileged access to technical and market knowledge.
With less interesd in indirect funds, Dow Venture’s "time and financial resources [are] now focused on sourcing, structuring and supporting direct investments".
The company lists 24 direct investments on its website as a representative sample. These deals include its seed-stage investment in Plastic Logic, which uses organic rather than silicon-based semiconductors, tubercolosis diagnostics developer Oxford Immunotec and ZBD Displays, an electronic paper provider.
Although the company prefers to keep its total investment in a portfolio company across a series of rounds to less than $25m, the strategic rationale behind corporate venturing allows the team, led by managing director Monty Bayer, flexibility to invest more.
In wake of the investment shift, Dow Venture Capital’s more recent deals are directly in line with its sponsor’s strategy to develop elements useful in clean-tech and sustainable sectors. Andrew Liveris, chief executive of Dow Chemical, was ICB’s top power player in the chemical industry last year and has been quoted as saying the clean-tech energy sector would be worth more than $2 trillion by 2020.
Dow wants 10% of its sales to come from sustainably chemistry-based products by 2015 compared with 3.4% in 2009. In its annual results published last month, Liveris said: "Dow is well positioned for the improving economic climate and will continue to benefit from growth in high-margin sectors, such as electronics and packaging, driven by innovative products and technologies, coupled with our expanding presence in emerging markets."
Recent examples of Dow’s corporate venturing deals include Blade Dynamics for wind turbines, Clean Filtration Technologies and WaterHealth for treating and supplying water, solar panel producer NuvoSun, and Xtreme Power, a battery company.
Investments such as Nuvo-Sun are understood to fit well with Dow’s Solar Solutions business unit, which already spends about $50m a year on research and development on integrating photovoltaic panels into building products such as roof tiles.
However, Dow’s business units range from those involved with advanced materials used in paints and coatings, glues and lubricants for engines, filters for water, crop sprays and food, to wire and building insulation.That Dow operates in 35 countries and across a spread of business lines means closer integration between its seven-strong corporate venturing unit based in the US and Switzerland is an extra challenge on top of dealing with existing portfolio companies and findingnew investments.
Fact box Started: 1993
Key people:
Managing director: Monty Bayer
Directors: Paul Morris, Chris Jones, Mike Rehberg,Kevin McElgunn, Richard Fuentes, Dennis Merens