When Green is Not Enough: Lessons from a Cleantech CEO
Funding for clean technology startups has increased substantially in recent years, with 323 U.S. companies raising a total of $4.3 billion in 2011, according to the recently released MoneyTree Report. In the San Diego area, the same report shows that four cleantech startups raised $78 million last year, including $15 million that went to SG Biofuels in the fourth quarter.
But sometimes it’s not enough to be green. Many cleantech startups face a basic challenge in competing against existing products that might not be as environmentally friendly, but are nevertheless well-established—even commoditized—in their respective markets.
In San Diego, sustainable design architect (and Xconomist) Robert Noble has led the development of clean manufacturing methods and technologies for manufacturing a green replacement for medium density fiberboard (MDF) structural panels—a standard material used in building construction and other industries. Noble says the proprietary process makes panels from any kind of fibrous, cellulosic material, such as recycled paper, cardboard, wood chips, corn stalks, and even cow manure. The big difference is that the replacement product, which Noble calls 3-D Engineered Molded Fiber (3DEMF), requires no petroleum-based glues or addititves, or vapor-emitting chemicals.
Now Noble Environmental Technologies, a company he founded in 2005, is overseeing installation of a 3DEMF factory, showroom, and design lab in downtown San Diego to manufacture the company’s Ecor brand panels. “The tide has turned for sustainable materials,” says Jim Torti, the company’s chief operating officer.
After personally funding the company through 2009, Noble says he now has about 15 individual and institutional investors, and he’s in the process of raising another $4 million to help equip the 10,000-square foot factory and to provide some cash flow. Noble adds that he has no plans to seek venture capital. He says the time required to build large-scale manufacturing and their primary market—the building industry—“doesn’t easily fit the venture capital model for a quick exit,” which is an issue for many cleantech businesses.
Torti and Noble say they wanted to establish the company’s first production plant in an urban, mixed-use setting—an apartment building is across the street—to demonstrate the sustainability and non-polluting nature of the Ecor manufacturing process. With more than 31 tons of cardboard waste produced in the U.S. annually, Torti says the raw material will most likely be recycled paper and cardboard.
The technology uses water, heat, pressure, and environmentally friendly glue to form the panels into an array of shapes—flat, corrugated, elliptical, waffle, wavy, honeycomb, and sandwich.
The company spent years refining the process, which includes recycling and reusing the water, through a partnership with the U.S. Department of Agriculture Forest Products Laboratory in Madison, WI.
It sounds environmentally beneficial, but the construction industry is a treacherous market for green and sustainable products, says Murray McCutcheon, an industry analyst with Lux Research in Boston. “Unless there is a big differentiator in terms of performance or functionality, the main factor comes down to cost,” McCutcheon says. Green and sustainable products offered at or near the same price as existing products are typically limited to a relatively small slice of the market, where consumers make their purchasing decisions for reasons that are more philosophical than economic. That makes for a challenging market. “My sense is that the space is crowded with a number of aspiring players as well as the DuPonts and Dow Corning-type companies,” McCutcheon says.
Noble already is familiar with the hazards. He started a company here in 1992 called Gridcore Systems International that manufactured structural and decorative flat panels from shredded U.S. currency, among other recycled raw materials. But the business faltered, and Noble closed it after seven years.
“The lessons I learned from Gridcore were related to success and failure,” Noble says. “There’s enormous interest in using recycled materials that are non-toxic and environmentally responsible to make building materials with structural integrity, design versatility, and low cost.”
But Noble says there were “a thousand technology hurdles to overcome in order to advance a new manufacturing process.” The hazards of using petroleum-based resins and adhesives also were less apparent to the public—urea-formaldehyde was a common ingredient in many building products—and the low cost of petroleum-based chemicals made it harder to compete. “The business lessons I learned are related to building the right team and culture in the company, but I’d say the biggest lesson was that it was doable—even though we got a very conservative reception,” Noble says. “Architects, engineers, designers, and end customers are just very cautious about anything that is new.”
Twenty years later, gasoline no longer costs 95 cents a gallon, and the aftermath of Hurricane Katrina included a very public lesson in China’s liberal use of urea-formaldehyde to make the paneling in trailers used for emergency housing. So the economics have tilted somewhat in Noble’s favor, and he contends that public interest in green and sustainable building products is even higher today.
Still, he concedes that what the industry calls “high performance composite panels” remains a commodity market—some manufacturers can produce more than 300 million square feet of panels a year at a cost of 20 cents or 30 cents per square foot. In contrast, Noble estimates that Ecor panels will sell at $6 a square foot after production begins, which will probably be late this year.
But Noble adds, “We’re not a commodity product. We’re focused on high added-value applications and niche applications. We have a business that’s focused on low volumes and high value.” The primary market they are targeting consists of interior design firms, furniture makers, and other businesses that specialize in retail signage and displays, theatrical set design, and architectural décor. Custom orders from such businesses will enable the San Diego facility to “source locally, make [the product] locally, and use it locally,” Noble says.
As business expands, Noble says he expects to license the Ecor technology to other manufacturers, both small and large, to serve local markets in other regions of the country. Whether they manufacture panels under the Ecor brand, he adds, “We don’t care, as long as we can get good margins.”
Noble also says the soft housing construction market means that major forest-products companies are looking for new markets, and new partners to reach them. “What we’re doing is a direct line into markets that they want to get into,” he says. “Large producers know they also have to ‘build to spec,’ and they’re running to us.”