EL paint
A friend sent me a prospectus for a UK based startup that a mate of his is thinking of investing in.
Get this, it’s an electroluminescent (EL) paint. That is something you paint onto a surface that is also wired up to a electrical current which, when switched on, causes the paint to glow.
It’s the complex and expensive version of that photoluminescent paint that glows in night clubs when you hit it with UV light.
Firstly it breaks one of my cardinal rules of investment – no materials or chemistry. More on that later.
Other than that, it’s a cool idea. The idea has been around forever but maybe they have cracked the practicalities of mixing EL materials with real world coatings and electrical systems. Who knows?
What I do know is that coatings companies and their suppliers have labs and labs full of technicians and scientists to support their products and ongoing development. I have worked in them when I was young.
These guys with the EL paint have two guys and a dog and neither of the three of them has ever worked for a coatings corporation in a tech role.
The usual story for guys like this is that they know none of this which is why they do it. That’s both a good and bad thing.
They tell stories to ignorant investors and get a little money.
They get surprised when none of the big guys in the industry show any interest in their technology.
Then they realise that they are facing channel resistance because paint is usually sold in tins through a multi-channel distribution. Whereas they are selling a ‘system’ with issues of electrical design and safety and installation to consider. By the time any prospects have trialled these contortions they start dreaming about buying simple tins of paint again.
Then the limitations of their coatings start to hit and they realise that their best market is your local travelling carnival fair who are a little lax about electrical safety and have an alcoholic former electrician amongst their shitkicker staff who can wire the the stall fronts straight from the mains.
But the carnival guys will hardly give them a margin or even cash and demand that the shit gets repainted every 3 months when it peels off.
The board of the startup then brings in an industry ‘veteran’ CEO when cash starts looking low. This drunk is supposed to fix the thing and he even puts in a little bit of money as a short of commitment but strangely extracts a lot more as salary and expenses. He says they have to focus on customers and spends all his times telling lies to prospects. The tech guys try to satisfy the customers but there are more of them than tech guys and the technology doesn’t work anyway.
Everyone is too scared to tell the investors the truth and at the board meetings all that is presented is an ever creeping J curve of revenues with a series of ‘just around the corner’ stories.
Eventually, despite winning the UK medal for innovation, they go into liquidation losing their angel investors 2.1m quid of dumb common stock in the process.
What they have a bought is a whole bunch of people that now refuse to talk to each other and some techies who have this vague suspicion that they maybe they don’t know what they don’t know.
But only vaguely – they will try and fuck up again.
Usually in venture capital the IRR improves thusly (assuming all the investors are equally skilled and knowledgeable):
1. An investor in single companies has a lower return than
2. A VC with a portfolio of ten companies (where risk is spread) but
3. As the VC funds get bigger the IRR gets bigger because they can make bigger plays and fund the things to a credible market position. Oh and they keep control of their investments all the way through.
However this set of rules has never worked in materials and chemistry, and people have tried over and over. Why?
Well because the corporates in this sector simply don’t like buying anything and when they do it’s only because:
1. It moves the ‘needle’ – whereby it must be $100m revenue at least
2. But they refuse to get competitive about these things – it’s a club, so
3. The typical acquisition is less than 1x revenue
4. Which is reflection of the low growth in this old sector with very low margins
5. They can’t be paying big bucks for stuff when they themselves are on small margins and low growth in a saturated commodities market
So how to grow a materials and chemical company from tech concept to $100m (assuming you don’t mind losing real losing value – EVA – in the process)?
Firstly you would need 10-15 years with the first 5 without revenues.
Secondly you need to accept that any new product of yours is an incoming new BOM for your customers and they have to fiddle with it for a few years before releasing their product based on your product.
Thirdly, realising this takes too long you will end up going direct to the end customers yourself by targeting one specific end use (system) of your material.
Fourthly, you then realise you have to be a mini-corporation to do this given all the people and dollars required to do it.
And then you realise it’s a fucking stupid idea.
PS I write this solely in the case that I have to reuse it.
offshore westerly 
Also tale of El Irrigation