What questions does he need to answer and how is he going to get the information?

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In January 2003, John Moses, founder and president of CF Technologies, Inc., was debating whether to transform his chemical engineering research company from one that developed prototypes and new processes for others into one that took products to market itself. John was excited by several of the technologies the company had developed, which could provide the opportunity for the company to grow large. For the last fourteen years, CF Tech had been an R&D services company and had provided a very good living for John. Now, however, he thought he might be able to turn his company from a small services business into a product-based growth venture. John commented:

I not only need to make a decision, I also need to determine how much money is required to move the company to the next level. Depending on the project or projects that I pursue would require $800,000 at a minimum and could range all the way up to $2 million over the next several years just for R&D. I really need to figure it out and get it on paper. Ideally, I need to write a business plan and I need to do it soon.

John Moses

John had spent the last 28 years working as an engineer in product and process development. He worked for four years for W.R. Grace before working at Arthur D. Little in Cambridge, Massachusetts, in the supercritical fluid technology area. Supercritical fluids are gasses at an elevated temperature and pressure, which puts them in a supercritical state of having both liquid and gas-like properties. After ten years at Arthur D. Little, John grew tired at the lack of interest others in the company had shown toward his ideas because none had gotten into commercial development. So in 1989, he left to start his own company to focus on developing and commercializing the technology he was familiar with - supercritical fluids.

John had no difficulty in thinking up new projects to work on. His philosophy of R&D was not moving technology ahead as much as moving technology into a new area and adjusting it to perform in that application. He had two approaches to picking projects to pursue: one was to monitor companies looking for technology to be developed for a particular application. If someone was willing to pay, and John thought the application was potentially good, CF Tech would do the work. The other way was to invest whatever internal funds the company had to pursue an opportunity John felt was worthwhile. In the last 14 years, however, the company had not been able to break out from doing anything more than developing prototypes in its prototype manufacturing facility.

John, however, had now identified three potential application areas that he was considering using to enter the market directly himself. These were polyvinyl butyral (PVB) recycling, aerogels, and cleaning agents. He felt that the market potential in each area was huge.

John had previous experience at Arthur D. Little where they failed to take advantage of an opportunity. Arthur D. Little had received the Environmental Protection Agency’s designation for having the best available technology for petroleum refinery cleanup. While the market was large and Arthur D. Little had already performed demonstrations at eight refineries, the company had not taken advantage of their technology lead. John recalled:

The refineries were very happy with the technology and were in the process of building the first commercial system at that time. There was no reason to expect that it was not going to perform and do everything it was supposed to do. At this point it was a matter of how fast we could build and get the system up and running for the refineries.

In retrospect, John recognized Arthur D. Little’s mistakes. They did not invest the necessary resources in order to get the system running and into the field in a timely manner. As a result, they lost enough credibility in less than a year that refiners started to believe that the technology did not work. One system developed for Texaco was running at only one-third capacity and was experiencing a slew of problems. John knew that if they had hit their targets and devoted the necessary resources to the system, the possibility for success would have been great.

John felt that it was time to make a decision on whether CF Tech was going to pass up the opportunities as ADL had and remain a research shop or whether to take advantage of the opportunities and develop into a product company. If CF Tech were to take the next step, John had to decide which applications to pursue and how to sell them. He wondered what strategies should be taken to maximize profit and growth but still give the company the greatest control over its products. John also wondered what were the strategic implications for PVB recycling, the current and future demand for aerogels, and the potential for developing supercritical fluids as cleaning agents.

The Company

CF Tech had two sources of revenue: contract development work for large companies and technology development work for the government. The government work was either for the Department of Defense or in response to Small Business Innovation Research (SBIR) grants. In this way, CF Tech had grown to 15 people on the payroll. In addition to John, CF Tech had 2 full-time employees, a machinist and a welder, and 12 employees working part-time. Five out of the 12 part-time employees were chemical engineers who worked for CF Tech as contractors. The company rented facilities in Hyde Park, Massachusetts with 10,000 square feet of space. CF Tech relied primarily on contracts to fund its R&D expenses, as John had managed CF Tech as a bootstrap operation. Therefore, the company could only grow to whatever the consulting contract funding could carry.

If CF Tech developed a product as a consultant, the client owned the product for that particular application, but CF Tech owned the technology and process for all other applications. John explained:

That is really the only way we can work. If we started to say okay you own this process technology or you own this piece of technology - I mean pretty soon, two or three years from now when somebody comes in and says he wants to do something, we have to say we know how to do it but we sold it and there is no way we can work with you. For example, if we sell something to Gillette for anti-perspirants and the same technology to Proctor and Gamble for detergents, we can still work with Lever Brothers on shaving cream.

Moving a technology into a new application was often as difficult as developing a new technology from scratch, not only for the developers but also for customers. Approximately 70% of industrial R&D is spent in developing new applications for technologies rather than developing the technology, so development work is still expensive and risky. Likewise, moving technology into a new area can cause the customers to change the way they do business. John commented:

A company we work with has been getting 5-20% improvements in product performance but were seeking more so they came to us. The raw materials we used gave them 100% improvements! The problem became that the material we made has very different physical characteristics so it doesn't mix into their standard product formula very easily. Our solution requires them to think and do things differently from the way they normally do, especially with their manufacturing equipment. This created a barrier they've never jumped before and I don't believe they ever will. I don't think they are ever going to go commercial with this product.

Through SBIR funding, John had continued to develop applications for supercritical fluid technology. SBIR was a federal program where governmental agencies contracted with small businesses to develop technology applications that had the potential for being developed for commercial use. Each government agency announced technical areas that they wanted small businesses to develop. In the first phase, individual companies submitted proposals to develop the technology. Winners were awarded $50,000 to $100,000 for proof of concept. For those who were looking to finance a lucrative idea, the program was a rare opportunity. In the second phase, awards could reach up to $750,000 for technology development. If the larger federal agencies, such as the Army, Airforce, and Department of Energy, were interested in further pursuing the technical ideas, a third phase followed, in which investments could be made in the form of multi-million dollar contracts.

Through SBIR funding, John had advanced technology in the areas of aerogels and chemical-cleaning technology to eventually put together his own prototype manufacturing facility. This manufacturing facility could build high-pressure systems that would be used to further develop the supercritical fluid “cleaning” technology. CF Technology was also in the beginning stages of development of the PVB recycling technology. John commented:

SBIR contracts are something that we have continued to pursue over the years. Government contracting has its own set of headaches for small business owners. At times, I ask my self am I nuts? It is a drain on time and energy dealing with the auditors and yet other times it has kept the company going and developing products that hopefully one day will become commercial products.

The Opportunities

Polyvinyl Butyral Resin (PVB)

Polyvinyl Butyral resins were already employed in a wide array of industrial and commercial applications. Most commonly, PVB resins were put on glass so that, if broken, glass particles adhere to the resin rather than causing potential injury. PVB resined glass provided durability, high-performance and multi-functional benefits, while remaining thin enough to maintain the appearance of the glass. These unique resins offered impressive performance, as well as outstanding versatility. Films, or thin coating layers, cast from the resin were tough and light transparent and adhered well to many surfaces. Resistance to heat, sunlight and water made the resins desirable for textile finishes, wallpaper coatings, protective coatings for glass, metal, wood and other materials. For many years, PVB resin had been a key component in vehicle windshields. A layer of the resin was applied to windshields to prevent against injuries from breaking glass, associated with collisions or flying objects and debris. By binding to the glass, the resin prevented individual glass pieces from breaking off and injuring passengers. PVB resins could also filter out 99% of harmful UV radiation produced by the sun.

For more than 50 years, Dupont’s automotive products division had been using PVB resin in its windshields. Dupont’s windshields offered superior protection from flying glass caused by the impact of an airborne object or an automobile collision, as well as providing a viable deterrent to theft and vandalism. Due to its high penetration resistance, Dupont’s windshields made it difficult for burglars to gain entry into a vehicle by breaking the glass. John wondered if there would be a market for recycled PVB resin from windshields. John had developed a process based on supercritical fluid technology that would extract the PVB from the discarded windshield. Besides the environmental benefit of recycling the material, it might be cost effective for companies to recycle the resin instead of producing more of it.

The difficulty was to demonstrate that recycled PVB resin could produce a large enough cost advantage to outweigh the cost of developing the technology, as well as the capital equipment that would be needed to make it operational. John felt that most companies would want to see an improvement of about 100% over traditional methods before they would consider further developing the technology and change their current operations. John had yet to approach Dupont or further develop the technology on his own to make it more viable.

John estimated CF Tech’s capital needs to be $100,000 for proof that the concept would work. Once this was proven, an additional $1 million would be needed to build a pilot plant. The verification of the technology in a pilot plant would mark the completion of the product development stage, increasing the overall probability of technical success to an estimated 95%.

Aerogels

Aerogels were an extremely porous and light form of glass. Because of their low conductivity, high porosity, and large surface area, they could be used in many applications. Aerogels in their purest form were foam-like and fragile. In addition, they traditionally had costly production methods, which made them difficult to use in many commercial applications. The first aerogels prepared in the 1930s were discovered to have low thermal conductivity properties. However, at that time, improved insulation technology was not viewed as a pressing concern and further research into the applications of aerogels was dropped. In response to concerns about energy efficiency and environmental effects of cholorflorocarbons (CFCs), aerogel application research reappeared in the early 1980s. Aerogels were an attractive alternative to traditional insulating materials, such as fiber glass and polyurethane foam, because of their insulation properties and environment-friendly production methods.

The aerogel market was still in its infancy stages, leaving many potential market segments open for the few who dared to enter. Due to the high cost of technology development, however, aerogels were not anticipated to be competitively priced over the competition. As with PVB technology, if the price was not right, the added benefit of the aerogel over the traditional solution would not outweigh the cost of developing the technology. The R&D was expected to take 2 to 3 years and cost $1 million for each potential application.

Cleaning Agents

Supercritical fluids were effective cleaning agents for small and delicate parts, and are important in processes such as organic synthesis, extractions, and separations. They were extremely beneficial due to the lack of solvent residue from hazardous solvents, their moderate processing temperatures, and the maintenance of sterility. Overall, supercritical fluids were also generally inexpensive. They had both liquid and gas-like properties, which allowed them to penetrate very small gaps and complex assemblies. The majority of supercritical fluid cleaning agents used carbon dioxide (CO2), which had excellent solvent properties. Parts to be cleaned were placed into a pressure vessel with CO2 gas. The temperature and pressure were then elevated until the supercritical state was reached. The process worked extremely well for complex shapes and assemblies, however, parts that could not be subjected to elevated atmospheric pressures and temperatures could not be cleaned with supercritical fluids. This supercritical cleaning process had been developed specifically for the precision cleaning industry already, but with further development it could become more broadly applicable.

John had identified three different market places that could potentially use the supercritical cleaning process: cleaning continuous feed devices, cleaning in the metal and fabricated pot industry, and cleaning of industrial rags. Due to the different needs and constraints of each market, current supercritical technology would need to be developed individually. It was estimated that it would cost between $800,000 and $900,000 to build the system which would include all of the design and development work for each application.

Forming an Organization to Market the Technology:

The main reason John had formed the company in the first place was in order to commercialize his ideas, which had not happened in the prior company. If he really wanted his ideas to get commercialized, then he knew he had to do it directly by raising money and building an organization to do so. John estimated that $3.1 million was needed to bring to market any of the technologies once they had gone through R&D. CF Tech's current revenue stream provided a nice life-style business for John but had not thrown off enough cash for him to build a real organization that could commercialize products. Before he could even think about raising money from outside investors, he would have to get his ideas down on paper and write a business plan. He would also have to figure out what his role would be in the new company: if he was not presidential material, could he work for someone else?

John knew he had a lot to think about. He had more opportunities to pursue than he had resources, so somehow he had to pick the right market to go after. He also had to decide if he was going to build the company up to more than the nice micro business that it currently was. If he decided to build up the company, then he would have to convince investors that they should take the risk of letting him finally get one of his ideas commercialized.