Start Ups vs. Large OEMs

Before one can invest in a technology or firm, an investor must first believe in the relevant sector. If this prerequisite is satisfied to a high degree, the next logical step is to decide how to best capture the upside of the sector. In Clean Technology many start up firms hope to be bought out by larger, more established firms. Very few firms will be lucky enough to IPO and establish themselves as an independent player in the market, while many other start ups will unfortunately die a slow, financial bleeding death.

Several years ago I spoke to a Senior Executive for Exxon Corporation. The gentleman I spoke with, while agreeing with much of what I said about the need for Exxon to hedge its position in oil with at least a few of the upcoming alternatives told me that Exxon, in 2003 anyways, had absolutely no desire nor immediate plans to get involved with Clean Technology. After an awkward pause on the call he said, “Why should we risk money and waste time developing something when we have enough cash to just buy whatever we want once it becomes established?” Wow, how could I argue with that- he did have a valid point. Which brings us to 2010:

This blog often profiles technology developments from the investor’s perspective. Many of the VC firms we discuss invest in small start ups in sectors like biofuels, solar, wind and energy storage. But there’s another way to capture these sectors if you want to participate- investing in the large OEM. In fact, Exxon later on did invest $600MM in a biofuel firm called Synthetic Genomics and is “prepared to invest billions more to scale up the technology.”

While we won’t perform an individual investment analysis of each sector and firm here, we can highlight some key options as well as investment pros and risks.

Investing in the large, diversified OEM Pros:
Limited Downside, Economies of Scale/Faster route to mass market, more established vertical infrastructure and brand name recognition
Cons: Limited Upside/No IPO potential, less nimble & dynamic management team & the fact that you are also investing in many other sectors or technologies you may like/dislike.

Flip all of the above pros/cons when investing in the Start Up Firm. Now- a brief look at investment options:

The Start Up vs. the Large, Diversified OEMs!

Energy Storage
A123, Ener1, EEStor, PowerGenix Panasonic Sanyo, Bosch, Samsung, LG Chem

Wind

Vestas, FloDesign, Ramco GE Wind, Samsung, FPL

Water

Statkraft, Saltworks, Pentair, Israeli Start Ups Zenon (GE Water)

Biofuels

Joule, Cereplast Exxon, BP, Shell
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Cereplast

Strategy: To replace oil based plastics with bio-degradable replacements for global packaging needs by development and licensing of innovative products for packaging companies. Lessening dependence upon oil and capitalizing on consumer and government preferences for clean, organic packaging.

Product: At pricing that is 20-25% higher than comparable oil based products; Cereplast designs and manufactures proprietary bio-based, sustainable plastics used in all major converting processes – such as injection molding, thermoforming, blow molding and extrusions.

Market- On November 11, the company said it expects the U.S. bio-plastics market to reach $10 billion in sales by 2020.  The U.S. market accounted for approximately $1 billion in sales in 2007, with some estimates pointing to bio-plastics capturing 30% of the total plastics market by 2019. Cereplast has some products that are food based, with a focus on algae based products as well. Cereplast is an investment in their technology and the market.

Competition: Metabolix, Archer Daniels Midland, Alcoa, Synthetic Genomics, Martek

Funding: A private investor group led by a Swedish Bank has contributed funding in 2009, Cereplast has the right to sell $20MM of common stock to Cumorah Capital, and most significantly in 2007 the company announced it received $14.5 million in new capital through a private placement of common stock from a group of leading “green” institutional funds, including UBS Global Innovator Fund, Swisscanto Green Invest Fund, Fortis L Fund Equity Environmental Sustainability World, and Credit Suisse Future Energy Fund.

Stock Symbol (OTCBB:CERP)

In a related note, Exxon has invested $600 million in Synthetic Genomics and BP has a $10 million investment in Martek Biosciences that compete with Cereplast.

Management: Frederic Scheer, Founder, Chairman and CEO of Cereplast

Comment: This company is an investment in a growing sector, but is their technology superior to larger and better funded competitors? Will their food based products overcome the hurdles that corn based ethanol faced?

Sources:

http://www.cereplast.com/pressrealeasedetail_ir.php?newsid=118
http://cleantech.com/news/4597/cereplast-unveils-bio-based-compost

http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20091111005157&newsLang=en

http://www.tradingmarkets.com/.site/news/Stock%20News/2592242/
http://www.europeanplasticsnews.com/subscriber/headlines2.html?cat=1&id=1256200526