Plastics Paranoia Poses VC Profit Potential

Forty-three years after Benjamin Braddock heard that “one word,” plastics is still the future.

The most promising part of the plastic future may be capitalizing on people’s fear of Bisphenol A, a binding and strengthening agent used in the manufacture of plastics. Studies have shown that the substance causes health problems, such as certain types of cancer, early-onset puberty and other health problems.

It’s difficult to say whether these studies should be believed, but doubt certainly opens up opportunities for competition. After all, BPA production is a $6 billion a year business — and both investors and entrepreneurs should see this as a big fat opportunity.

I ran into the first iteration of this several months ago, as I was working on a survey of opportunities in the space for the Venture Capital Journal: Lots of startups selling BPA-free products, such as drinking bottles, food containers and other one-offs. These didn’t strike me as particularly compelling or scalable businesses.

I did, however, find lots of startups working on new ways of making plastics, typically from renewable resources. In fact, 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 & PEHub).

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.

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.

Venture Capital Journal subscribers can read the rest of my analysis, along with the accompanying chart of over 20 recent plastic-related investments at VCJ’s website.

Alexander Haislip is a Sr. Writer for Thomson Reuters’ Venture Capital Journal and the author of “Essentials of Venture Capital,” out this November from John Wiley & Sons.