Chemical M&A May Be on Hold, But VC Investing Is Thriving

As some M&A activity in the chemical industry takes a pause due to world events, venture capital investing remains a hive of activity thanks to sustainability.

For a while there, it looked like longstanding manufacturing processes would survive the test of time, with a bit of tweaking. But climate change is firmly on the agenda and chemical companies that have pledged to hit net zero by 2050 are scrambling to find new technology to get them there.

That’s put corporate venture capital teams centre stage in sustainability. At a time when M&A bankers are agonising over deals and blank-check companies are failing, investment pipelines over at VCs are full and deal flows are running at record levels. Whether its hydrogen technology or biotechnology, if you are a startup with a proven formula and an interesting technology, it’s still the right place and the right time.

“We do see an increasing number of opportunities related to sustainability,” Bernhard Mohr, managing director of Evonik Industries’ VC arm, told chemicalESG. Although Covid and the geopolitical situation have had an impact on VC activities, investments still reached a new record in 2021. “Crises are also a driver for innovation, we have seen this in the past. Startups play a key role in the development of new technologies and business models then,” he added.

Evonik last year closed a record 10 new VC deals and had the same number of follow-on investments. Mohr said he expects a similar pace in 2022 as Evonik scouts for new materials, biotechnology and explores renewable energy and hydrogen. More broadly, venture funding last year broke records across the board, with more than $600 billion in investments, according to Crunchbase data.

“We still have a very strong pipeline,” Mohr said. “We continue to see a large number of startups. You need to make sure you are on the forefront of innovation and having access to the relevant technology and innovation leaders globally. Sustainability is very important for us. The same is true in the digital space.”

A chemist by trade, Mohr got his first taste of the VC world at BASF. He spent 16 years in a variety of roles at the world’s largest chemical company, before Evonik came knocking in 2012. The Essen-based manufacturer was looking for someone to set up a small VC arm. Fast forward a decade, and Mohr is onto his second fund, with EU250 million under management, and 15 people globally looking at some 1,000 companies a year. And Evonik is in the midst of a portfolio upgrade to focus on specialty materials, additives and ingredients.

I asked Solvay CEO Ilham Kadri about her endeavours in this area. Solvay is targeting areas like batteries and biotechnology and there are a couple of interesting prospects in this field right now, she said. The key is having the discipline to avoid anything too risky or too removed from core activities.

In some cases, a shrewd VC investment can yield a return. Kadri recalled one past investment in a battery business that was a total stand out.

“We exited at a very high multiple. It was one of the best in-and-out stories we’ve done recently,” Kadri said.

BASF’s M&A department is one of the biggest in the industry yet it’s not considered one of the busiest when it comes to acquisitions right now.

At the VC arm, however, business is brisk, according to Markus Solibieda, managing director of BASF Venture Capital GmbH. The challenge for Solibieda and his team is marrying BASF’s big-scale strategic and operative interests with the early-stage objectives of a start-up. Solibieda’s playground spans new materials, Agtech, digitalisation as well as new and disruptive business models.

“The investment managers of BASF Venture Capital are busy with these topics, especially with the new focus on sustainability,” Solibieda told chemicalESG. “We take a close look at many interesting young companies from these areas.”

Adaptive Surface Technologies is an interesting case in point.

Spun out of Harvard in 2014, AST spent years developing non-biocidal ship coatings to protect hulls against molluscs and fouling and also came up with novel repellant liquid-coatings used in manufacturing and packaging. That’s attracted some of the biggest names in the industry: BASF, SABIC and Akzo Nobel.

Chemical companies are finding ESG is now more than just a check box for customers who increasingly want to make a feature out of being more recyclable or less carbon emitting. Discussions around sustainability are on par with the savings benefit an innovation can bring. Boat hulls clear of molluscs mean less drag and fewer emissions. For years, the go-to antifouling solution has been copper-based biocides added to marine paint. Recently, there are increasing concerns about the concentration of the metal in sea-bed sediments and the impact on some aquatic species.

So far, AST has raised $14 million in equity, on top of some $8 million in grants, including from the US Air Force which is keen to explore how its “wet” surface coating could be used in aircraft de-icing. It’s in the process of completing its second tranche of funding after raising $4 million in the first run. That BASF, SABIC, and AkzoNobel are co-investing in AST shouldn’t be a surprise. The less experienced VCs can demand exclusivity, veteran investors are happy to cohabit as long as there’s limited overlap.

AkzoNobel CEO Thierry Vanlancker says his firm generally takes a flexible approach. That can span signing product development or supply agreements in some cases, and making more direct investments where a technology company is struggling to get its innovation off the ground. The worst thing is to stifle the startup.

“It is a philosophy of ours, and a success factor in our collaborative innovation activities, to not give a bear hug to startups and have them link up with a multinational that frankly spoils them with processes and systems that slow them down,” Vanlancker said.

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