The advanced materials industrial value chain incorporates activities that range from securing input materials to transformation processes into output products with all the supporting functions. Not just intermediate products for additional conversion but all the way to the final product in the hands of the end user. Primary activities include raw materials management, production processes, intermediate products and end-user products. This in turn involves a large array of support tasks, such as supplier control, product design, engineering, research and development, testing and quality management, product qualification, marketing and sales, regulatory compliance, life cycle management, and customer satisfaction. It should be noted that the concept of value chain management received a lot of attention following Michael Porter’s seminal work on "Competitive Advantage: Creating and Sustaining superior Performance". For over a decade, Pangaea Ventures has been building advanced material startup companies and this experience has allowed us to establish some best practice approaches that include industrial value chain management.
By default, most materials startups occupy a weak position in the chain; that is, all the way upstream from the finished product. Typically, engineered materials are provided to converters further up the chain to fabricate integrated products that may also require more fabrication/integration cycles before reaching the end user. This process generates too much distance between the start up company and the finished product, precipitating major problems. Issues include lack of timely and quality information, delays in product qualification, lack of troubleshooting access, use of incorrect evaluation procedures, insufficient product integration know-how, inability to influence decision-making on final product selection, and limited knowledgebase of the industry infrastructure. But there are proven tactics to influence the chain and minimize the risks. I vividly recall my early learning lessons dealing with these challenges during my entrepreneurial years at Nanodyne, developing and commercializing nanostructured materials.
First, know thy space! Establish a credible awareness of the applicable industry value chain system surrounding the end product. Typically, materials, intermediate products, components, processes and key companies in each of the segments are mapped out. This reveals not only partnering possibilities but also highlights challenges in product integration and end user requirements. It can also uncover the weak links that could be very disruptive to business growth. This analysis has become a standard requirement in Pangaea’s due diligence process.
Second, partner for success! Secure strategic partnering with credible companies along the chain. While there are always concerns about a start-up being close with a large corporation, the benefits outweigh the dangers. Pangaea Ventures is supported by some of the world’s leading advanced materials companies with resources and capabilities that are very beneficial for advanced materials startup companies. These include supply chain management, scale-up and manufacturing, application engineering, product evaluation and capital. A startup company can develop several products in parallel with strategic partners without the need to deploy large amounts of capital. Our portfolio companies are adopting this model by establishing partnerships along the chain to influence supply, manufacturing, product integration and market penetration.
Third, get out of the pit! Make a tactical move up the value chain without treading into customer domains. Advantages include faster product qualification and being closer to the end user. However, consideration must be given to the need for additional capabilities, expertise, human resources and capital. Nevertheless, this can open new opportunities and partnerships to support business growth. Cnano Technologies, a portfolio company, successfully implemented this strategy in their energy storage business by moving from raw nanopowders into electrode paste formulations. This has made a significant impact on growth and revenue generation.
Fourth, there is a time for everything! Employ smart, timely product sampling. Startup companies tend to sample too early, without a good understanding of specifications, limited end user requirements and poor selection of clients. Just sending out samples and hoping for success is a recipe for disaster. Don’t be lulled into believing that a large number of potential clients evaluating samples is a good measure of success. Again, strategic partners can be helpful in charting the right direction.
Understanding and seeking to influence the industrial value makes good business sense. Failure to map and analyze the industrial value chain is too costly in terms of time and capital. Advanced materials startup companies can avoid the chain trap by adopting smart strategies for value creation in a capital efficient manner.