Plastics Poised to Pop

To most people, plastic is a mundane reality of everyday life: It’s what keeps your potato chips fresh, your tennis shoes bouncy and holds the guts of your computer together.

But to businesses, plastic is the basis of a several hundred billion-dollar industry growing at 3% per year, according to SPI, an industry association. And it’s an industry that’s ripe for innovation.

Enter venture capitalists, who are funding innovations to remold the business. Over the past five years, VCs have pumped more than $500 million into more than 65 startups working to make plastics more environmentally friendly or applying the unique qualities of plastics to new applications, according to Thomson Reuters (publisher of VCJ). Given the number of opportunities for continued innovation and the humungous market, it would not be surprising to see the amount of venture capital going into plastics startups grow over the next few years.

But working with plastic is not without its challenges. For investors, it means getting garlic, crucifixes and holy water to tread into the badlands of materials science, where companies are quietly killed in the crib when their science projects fail to yield real products. It means having to work Dow, Dupont and dozens of other major chemical companies, learning to license effectively and optimizing the OEM process. And it means pulling products out of laboratories, hand-holding scientists and engaging non-techie executives and entrepreneurs.

Talk to the investors who are putting their money into plastics and you’ll hear variations on the same theme: Tomorrow’s biggest successes are going to be driven by materials. “The big gains will come from manipulating molecules instead of manipulating bits,” says Martin Lagod, co-founder of Firelake Capital Management, which invests in both private and public companies focused on materials science and energy, water and information technologies. “This is going to be a major trend that’s going to play out over the next 10 to 40 years.”

At least one of the nice things is that much of the most promising innovation will be able to leverage the existing plastic production process, potentially saving investors from massive outlays of capital and years of development.

Greener Plastic

Plastic has two big impacts on the environment. The first is its reliance on fossil fuel inputs. About 3% of all the petroleum used in the United States goes directly into making plastics, according to industry statistics.

The transition from petroleum-based materials to bio-based materials is a major global trend.”

Weiming Jiang

It’s easy to see why an ecologically minded venture capitalist would be interested in Novomer, which makes one of the critical binding elements to make plastics. The Ithaca, N.Y.-based company has dropped petroleum out of its plastic input product in favor of carbon dioxide and carbon monoxide. It may sound the opposite of green tech, but that’s exactly what it is. “Not only are you getting these materials made without releasing these gasses, but you’re actually decreasing the supply of them, too,” says Carl Weissman, a managing director with OVP Venture Partners.

OVP led Novomer’s $14 million Series B last year, with additional dollars coming from DSM Venturing, Flagship Venture Partners and Physic Venture Partners. To date, Novomer has raised a total of $21 million.

Novomer has been awarded 10 patents and has filed for 45 more. That helps CEO Jim Mahoney sleep well at night without having to worry about DuPont or Dow stealing his business. “They’re more likely to be manufacturing partners rather than someone who beats us to the end game,” he says. “My last company [Surface Logix] was creating new drugs. When biotech companies first came out, people asked how we could compete with Pfizer. Now the same thing is happening here [in plastics].”

Some of the stiffest competition in the renewable inputs business is coming from other venture-backed companies vying to own a piece of the plastic production process. Last September, stealth startup Rennovia picked up the first infusion of a proposed $12.3 million Series A, documents show. The Menlo Park, Calif.-based startup is working to make specialty chemicals from renewable feedstock, but won’t talk about the specific chemicals it plans to make.

Company co-founder Tom Boussie is quick to point out that he didn’t found Rennovia to pursue a save-the-world, green-related agenda. “The company was not born of a political philosophy,” he says. “It was the product of opportunities in the chemical industry, and this is one opportunity of significant value, diversifying their feedstock base away solely from petroleum.”

Last spring, Okemos, Mich.-based Draths Corp. raised $21.7 million in a Series C round from CMEA Ventures, Khosla Ventures and TPG Ventures, records show. The startup has bioengineered bacteria to convert corn into various chemical intermediaries that are used in the production of any number of final products, including plastics, paints, nylons and resins.

Draths recently received a $5.2 million, 10-year tax credit from Michigan to build its production facilities within the state. The company’s chief technical officer, W. Henry Weinberg, formerly worked at chemical maker Symyx Technologies at the same time Rennovia’s founders were there.

Growing Plastic

The big gains will come from manipulating molecules instead of manipulating bits. This is going to be a major trend that’s going to play out over the next 10 to 40 years.”

Martin Lagod

Creating better inputs is an important part of improving and innovating on the existing plastic production process. But another type of company is trying to swap oil out of the plastics production equation in favor of renewable resources such as plants.

For example, Tianjin Green BioScience makes Polyhydroxyalkanoates (PHA), a specific type of polyester that can be used in a variety of applications. PHA is created by bacteria that ferment sugars.

Tianjin Green secured $20 million in March 2008 from Kleiner Perkins Caufield & Byers, Northern Light Venture Capital, Tsing Capital and DSM Venturing, the venture arm Royal DSM NV, a provider of life sciences and materials sciences products and services.

“The transition from petroleum-based materials to bio-based materials is a major global trend,” says Weiming Jiang, president of DSM China, a subsidiary of Royal DSM.

Of course, bioplastics don’t just come from corn or bacteria pumping through sugars. One of the most interesting and innovative startups in the bioplastics space is using a renewable resource easily overlooked—chicken feathers.

Salisbury, Md.-based Chesapeake Micro Products is using technology from the United States Department of Agriculture’s Research Service to convert chicken feathers into plastic pellets, which are used to make pots for house plants and other plastic consumer products. It’s a technology that could help industrial poultry farmers to improve their bottom lines, while offering consumers a biodegradable alternative to petroleum-based plastics. The company has yet to raise venture capital, but it won a $75,000 grant from Maryland Technology Development Corp. last year to help commercialize its product.

Other startups are trying to create a completely new material with some of the best properties of plastic, but without the potentially negative environmental effects. For example, Denmark-based Raimotech is making something it calls Cellulose Plast Compound (CPC), which is made from a combination of plant fibers and plastic. The benefit, according to Raimotech, is that it takes less energy to form a CPC than a traditional plastic, and the material is incinerator safe. The startup has raised nearly $500,000 from Seed Capital Denmark and Vaekstfonden, records show.

New Applications

When biotech companies first came out, people asked how we could compete with Pfizer. Now the same thing is happening here [in plastics].”

Jim Mahoney

Perhaps the most exciting new application for plastics is in electronics. The science behind electron-conducting polymers isn’t new, but its applications are starting to take hold.

The most well-known startup in this space is Plastic Logic, which is working with polymer-based semiconducting materials to build e-ink products. The company has raised more than $300 million from VCs, private equity investors and banks, according to Thomson Reuters. Investors include Amadeus Capital Partners, BASF Ventures, Dow Chemical, Intel Capital, Oak Investment Partners, Siemens Venture Capital and Tudor Ventures.

The Mountain View, Calif.-based company is going after Amazon’s Kindle with an eReader product of its own design.

“We have placed a big bet that plastic electronics is, indeed, a game-changing technology,” says Amadeus Capital’s Hermann Hauser. “Over time, the markets and possibilities for plastic electronics are endless.”

Of course Plastic Logic isn’t the only one trying to blend the world of plastics and electronics. Over in South Korea, NanoEnics is trying to develop electrically conductive polymers. The company has raised more than $2 million from South Korean VC firms Neoplux Co. Ltd. and STIC Investments Inc.

Back in the United States, State College, Penn.-based Strategic Polymer Sciences is working on a polymer-based dielectric film that coats the ends of capacitors to give them more powerful and consistent discharges. The startup has picked up $3.15 million from Ben Franklin Technology Partners, Chengwei Ventures, Life Sciences Greenhouse of Central Pennsylvania, and law firm Wilson, Sonsini, Goodrich & Rosati. Strategic Polymer is leveraging technology from Penn State and hopes the better capacitors it is building will go into defibrillators, hybrid electric vehicles and even direct-energy weapons.

Not too far down the road, Pittsburgh-based Plextronics (not to be confused with Flextronics) is working on semiconducting plastic technologies. It has raised $56.46 million from venture investors, including a $13 million investment round earlier this summer. Its backers include Birchmere Ventures, Draper Triangle Ventures, Firelake Capital and Innovation Works.

Plextronics makes printable polymers that can conduct electricity, a market that Ned Renzi, a partner at Birchmere Ventures, expects to grow to more than $50 billion by 2015.

We don’t need to reinvent the wheel to produce bioplastics.”

Frederic Scheer

Risk Factors

The biggest challenge for startups looking to revolutionize the plastics business is price. Even the most-advanced manufacturers are looking at $2.50 per pound for their bioplastics, as compared to prices that range from $1 to $1.25 per pound for petroleum-based plastics.

Justifying the premium for bioplastic means startups will have to connect with just the right applications for their technologies. A large mobile phone maker might get a bigger publicity bang for its buck by introducing an eco-friendly handset than, say, a garbage maker would get for adopting the same technology.

Bioplastics made from corn feedstock also have to be baked at a lower temperature than their petroleum-based counterparts. And those lower temperatures can mean longer production times and higher costs for product makers.

To be sure, there are boatloads to be saved by not having to build a specialized production facility. “It is as simple as making a few small changes,” says Frederic Scheer, the CEO of Cereplast and chairman of The Society of the Plastics Industry BioPlastics Council. “We don’t need to reinvent the wheel to produce bioplastics.”

But that has not deterred some companies from constructing their own facilities. Metabolix Inc. (Nasdaq: MBLX), for example, has invested more than $300 million in a joint venture with Archer Daniels Midland Co. (NYSE: ADM) to create a new production plant for its bioplastics. The construction suffered several delays last year.

Even when things go right, new production facilities take time to build. “Typical timeframes for design and construction of such facilities can be three years after a decision [to build] is made,” says Marc Verbruggen, CEO of NatureWorks, a Metabolix competitor that announced plans last year to build a second bioplastics production plant.

Even with bioplastics in production, it appears it will take a while for it catch on. Just ask Bob Crosby, VP of finance and operations at Trellis Earth, a startup that imports bioplastic-based cups, eating utensils and other products for resale on the U.S. market. His business, founded in 2006, has been quadrupling sales each year, but it’s still relatively small, he says.

Crosby does expect demand for bioplastics to grow faster than the 18% a year that analysts predict, but he notes: “It will still be the fly on the back of the rhino of the traditional plastics industry. It’s not that it ultimately won’t change, but it’s going to take time.”