Background and Challenge
The client is a diversified industrial company with a division focused on developing and commercializing renewable feedstocks and hydrocarbon substitutes. The client identified hundreds of end-use applications for these technologies which appeared to have commercial merit, but needs help understanding the true commercial opportunity associated with these applications.
The situation is further complicated by the fact that the existing applications being developed require additional investment to achieve break-even cash flow.
L.E.K. Consulting was engaged to value each of the major applications in development, to assess the total value of the portfolio – including the optionality of yet-to-be-developed applications – and to identify and evaluate the relative attractiveness of various funding alternatives (e.g. out-license technologies, create a stand-alone company, minority equity sales, JV/partnership options, continue with consolidated ownership, etc.).
Approach and Recommendations
We assessed the market potential for each of the applications to understand customers’ perspectives on the likelihood of adopting an application, the volume potential, barriers to adoption, timing, risks, substitution economics, etc.
We developed estimates of the market size, growth and timing of each application, and reconciled the key assumptions with prior work performed by the client, taking into account the strengths and weaknesses of the client’s commercial partners. We devised a range of commercialization options for the client and assessed the economics of each one.
The value of each application and the portfolio in total was calculated using a risk-adjusted DCF methodology. Finally, we synthesized the findings and analysis and identified the optimal strategy for securing the additional funding.
As a result of the project, the client was armed with a better understanding of the value, the risks, the required investments and the timing of its opportunities.
The company has successfully transitioned from a start up to a commercial-scale leader in its field.