Polylabs — Sustainable Chemistry for Polyurethanes?
Polyurethanes are a ubiquitous material found in most aspects of modern life from insulation, to car seat cushions, and tennis racket grips. Traditionally the feed stock materials for polyurethanes have come from petrochemical derivatives and it has become a large commoditized market with a potential global market size of about 70 Billion USD by 2020. If the world could transition this market to sustainable feed stocks then it could be a significant boost in making carbon neutral polymers. Will Polylabs be successful in helping the world transition polyurethanes to become sustainable?
I am not an investor in Polylabs. I found them on Angel List because I’m interested in writing about startups. Maybe if I keep writing these Deal Memos some VC will notice me and bring me on board to look at companies like Polylabs full time — Aaron Batalion I’m looking at you.
I’ve since had a conversation with Kristians Grundstoks, the CEO of Polylabs. The story has been updated to reflect our conversation. If I have mis-represented our conversation then I encourage Kristians to post a reply to the story.
The mission of Polylabs
Polylabs is making renewable polyols that are a component of polyurethanes. These renewable polyols are sustainable and mostly carbon neutral and could increase the sustainability index of a polyurethane. A polyol is an essential part in making a polyurethane and it’s almost impossible to make a polyurethane without a polyol. Today most polyols are derived from an initiator feed stock like Sucrose, Fructose, triethanol amine, ethylene diamine and a alkoxylating feed stock like ethylene oxide or propylene oxide.
Polylabs is using renewable oils such as rapeseed oil (third largest volume biobased oil in the world) and derivatizing these oils into polyols. They are utilizing alkanol amines like diethanol amine to functionalize fatty acids from biobased oils to make their polyols, which are then used to crosslink polyurethanes in applications like flexible or rigid foams.
Polylabs is led by Kristians Grundstoks who graduated with a law degree in Latvia. He does not list any experience in running a chemical company on LinkedIn or any experience in leading a company to a successful exit. The co-founder is Mikelis Kirpluks who has a MS in chemical engineering and is currently working at the Latvian State Institute of Wood Chemistry. He may be the brains behind the company and as a chemical engineer may help them succeed in running pilot reactors and scaling up even further. Neither of the founders has experience in the chemical industry and their board member from Flycap also does not have any experience in the chemicals sector. This company may have the right team to get to an exit. I give them a 45% chance that they could gain an exit and return money to their investors. As of this writing these founders have raised 120,000 USD at a 300,000 USD valuation from Flycap and Stardust Ventures.
Polylabs has recently brought on a season industry veteran, Dr. Daniel Auriel who has over 15 years experience with Bayer, Stora Enso, and other chemical companies.
Size of the Market and Opportunity
The size of the polyurethane market is gigantic and is expected to be 70 Billion by 2020. Polyurethane insulation is a growing market and may consume larger portions of the fiberglass insulation market via spray foam insulation in North America and the flexible or rigid faced polyurethane foam insulation is a strong choice for insulation in Europe. The explosion of polyurethane mattresses from companies like Casper and Leesa are a big growth area for flexible polyurethane foam as well. Polyurethane coatings are a top choice for topcoats in automotive, wind turbines, and other outdoor applications due to good resistance from the sun and physical toughness.
The Challenges for Polylabs
This technology is not new and a quick Google Patents search yielded no hits for Polylabs as an assignee, which means for right now they have no patent protection for their technology in the US. There are existing patents in Europe according to Kristians Grundstoks.
Further, Polylabs has developed new chemistry, which means that they are not listed on TSCA or REACh and there is a long and expensive road ahead of them if they want to be able to make commercial sales of their polyols in either the EU or the United States. The are currently working on the registration process in select countries.
Polylabs could have filed an application that is not public yet, but as of right now they are completely at the mercy of the market. This means someone like a DowDupont (Just approved merger at the time of writing) or a Covestro could just copy the technology if they thought it was worthy and cut Polylabs out of the business. Polylabs is liscensing Intellectual Property from the Institute of Wood Chemistry of Latvia and are working on drafting new patents, but they would need these patents granted across the EU and US if they want a chance to compete with the big chemical companies.
Finally, Polylabs has a small pilot reactor capable of 3000 MT/yr and are looking to scale up to 10,000 MT/year by 2020. This may take addition capital for another reactor and the appropriate safe guards for that reactor. It also appears the University of Latvia has a 5 cubic meter reactor available for their use as well. Making a capital investment is big for such a small start-up, but no polyurethane formulator would spend too much time on validating a new polyol without being able to know when a commercial sale would occur and being able to purchase their desired volumes.
Polylabs may be able to contract other companies with excess reactor space under a contract or tolling agreement once they get customer validation.
If I was going to bet on any biobased polyol company it would be Elevance. They have a unique advantage over everyone else to make materials that are not possible through conventional techniques, they have the manufacturing capabilities, and they can scale to the size of the market right now. I don’t see polylabs being another early Elevance.
If I had the money would I invest?
No. If I was asked to put in money into this company I would pass. I’ve seen too many competitive technologies from other companies like Elevance (who actually has a full scale plant in Indonesia based on palm oil and metathesis). Further, from what I can see they don’t have any value proposition for their products besides being 80% green. I don’t see their materials helping with respect to fire, smoke, or toxicity, or with respect to rigidity. They might have an advantage of blowing agent compatibility and thus an advantage in insulation performance.
I don’t see any unfair advantage this company has over the current players in the market space and I don’t think they will be successful. The problem with these types of companies is that the market they want to operate in is capital intensive. They need pilot reactors, engineers, sourcing of raw materials, a site and permits to produce their product, and a way to get that product to their customer. Their market is commoditized and they are not doing anything particularly new or revolutionary.
Prediction for the Future of Polylabs
My prediction for the future of this company is that they may gain a small niche in the market in supplying their highly reactive polyol that is difficult to formulate due to its inherent catalytic nature. At best I think an Evonik or a BASF could just buy them up and an investor might see a 2x return on their investment. If they have no intellectual property tied to the company that demonstrates a new novel technology then they might just disappear and have their lab equipment sold to the University of Latvia.
In speaking with Kristians Grundstoks though I see that he and his team are learning the hard way…by doing it. Polylabs could get as big as a BioAmber with their technology, but the challenges are big and even the biggest companies in the world have difficulties doing it. The one advantage that Polylabs has is that they are small, nimble, and don’t have a lot of bureaucratic things to do in order to develop a viable product.