April 5, 2021
Timing Vagaries Can be Unforgiving for a Newly Launched Venture
By: John K. Lane, CEO/Managing Director, Inglewood Associates LLC
Last year, in the midst of the pandemic, Inglewood became involved with a company whose prospects at the time of its original launch were quite bright. Unfortunately, our involvement was in the role of a court appointed receiver after the business had shut down and in which the company’s assets were sold for about 5 cents on the dollar. This is the story behind that collapse.
What if you could create products that were based on a sustainable, natural raw material that produced a high yield even in poor soil conditions? Further, this raw material is a plant that is non-invasive and drought resistant, reduces soil erosion, and uses significantly less fertilizer, herbicides, and pesticides than annual crops. The products that can be produced with this raw material are many, including:
1. A compostable foodservice packaging material that was designed to displace landfill unfriendly foam and plastic.
2. An economical solution for the spill management of hydrocarbons and automotive fluids.
3. A non-wood pulp that can be used in traditional and specialty paper applications, as well as in filters, packaging, and fluff pulp.
4. The plant has the highest Cellulose Nano Crystals (CNC) than any known plant (two to three times wood) and these CNC’s can be used to make certain products stronger, lighter, less permeable, more viscous, and more miscible.
This plant is called Miscanthus and is one that checks all of the boxes for “sustainable”, “environment friendly”, “clean”, “green”, etc. etc. Add to all of the above an impassioned, qualified management team, all of which could be best described as decent, well intended individuals.
So, what happened?
In a word, timing. This company was a pioneer in this industry, foreseeing the opportunity, but not noticing that they were miles ahead of the curve…and the demand. Being a pioneer in the market, a lot of the potential product consumers were unaware of this product. The management team had to spend a lot of time informing the market about their products before they had a chance to sell.
Also, their competing products were in fact less eco-friendly, but they were also a lot less expensive. The market had not yet come to a point where the eco-friendly benefits were deemed to be worth the extra costs.
So, selling took a lot more effort and even when they got close to a sale, the lower cost non-eco-friendly products usually won the day. As a result, this venture was like a grounded boat waiting for a high tide that just did not come in time.
And there were other issues that hindered this business, or at least from my vantage point:
- Built supply beyond demand – Being true believers in their product, management approached a large number of landowners to allow the planting of the Miscanthus. When the demand did not show up, the harvested Miscanthus stacked up in the warehouse or went unharvested in the field.
- Invested in infrastructure beyond demand – Also in anticipation of the expected demand, real estate was purchased, and the company invested in processing machinery to install in the real estate. Overhead and carrying costs ballooned.
- Start up’s have start up issues – Most startup operations have issues and most newly installed production lines hit snags. The problem is that if there are no steady income streams from other established business lines, the company is going to be burning cash. Being “half-pregnant”, the investor group poured increasing amounts of cash into the business.
- Pursued too many product lines too early – Yes, there were many applications for this product, but successful businesses know to prioritize their efforts. The corporate organization chart reflected a holding company and seven subsidiaries set up to pursue these opportunities. The business would have been much better off establishing a beachhead in one application, create initial revenues and then build from there.
- Grasping for straws when under distress – When things look quite dire, many management teams make risky decisions and/or reach out for help in all of the wrong places. Trying to overcome some of the mounting problems, the company’s management outsourced a portion of the business and, perhaps due to a misunderstanding or perhaps predatory, they quickly found themselves locked out of the facility.
Ultimately, the business came crashing down. The landowners became upset that the fields were not harvested. The banks would not lend anymore and began to pursue their collateral. The supporting private equity firm said “no mas” as well and stopped advancing funds. Management began to cut employees and costs until there was nothing left. Even the third-party outsourced portion of the business soon failed.
Inglewood was appointed by the court to oversee the sale of the businesses. Unfortunately, being so far ahead of the curve, there was little interest by potential buyers to pay money to only replicate the company’s past issues. The good news was though, even at a deeply discounted price, a buyer was found for the business and the operations are continuing, waiting for the curve to catch up.
Lest anyone misconstrue, this is not a story of why or how sustainable investment did/does not work. It is a story of how timing is critical to the launch of any venture and how the founders have to evaluate both the opportunities AND the risks.