Environmental Startups Finally Ready To Clean Up

With tougher laws and renewed investor confidence, opportunity blossoms for many scientific disciplines Imagine a machine that enables you to dump waste in one end and get products out of the other. No sorting required. No noxious gases or hazardous byproducts produced. Sound like science fiction? Well, it is science, but thanks to a new technology being developed at Cambridge, Mass.-based Molten Metal Technology, such a scenario is no longer fiction. Molten Metal is one of a handful of young companies attracting growing interest from venture capitalists and turning heads on the environmental scene. While those in the business are wary of terming the current upswing for environmental businesses a revolution, analysts and investors say legislative and social pressures are combining to create a good milieu for scientists to apply new--or sometimes old--technologies to remedying mounting environmental problems. "Just as the '70s was the decade for electronics and computers and the '80s was biotech, the '90s will be the era for technology-based environmental companies," predicts John Preston, director of the technology licensing office at the Massachusetts Institute of Technology. And it's about time, say environment industry participants and observers. For more than a decade, the environmental market has been a frustration for financiers, scientists, and managers alike. Ineffective legislation has allowed industry to circumvent cleanup and prevention requirements, and the result has been an uncertain market. Today, however, public pressure is producing new legislation that is establishing the framework for a greatly expanded market to meet these legislative obligations. This is resulting in greater incentive for investors and opportunities for scientists. New ventures that run the gamut from air pollution prevention to toxic waste cleanup are finding it easier to convince investors that they are serious, viable, market-oriented businesses. Likewise, this expanded interest is enabling scientists to develop new and more promising technologies--and to put them into practice. Environmental analysts tend to credit the groundswell of public pressure with the more stringent environmental protection laws that are being passed. Until recently, legislators weren't always anxious to require the large industries to invest in expensive prevention and cleanup technologies. The resulting uncertainty as to which laws would be passed and which ones delayed or voted down discouraged many investors. "Because the market is created by the government and regulations," says environmental entrepreneur Bill Haney, chairman of Molten Metal Technology, "people couldn't assess the risk of investing in the technologies." Haney recalls a $5 million investment he made in 1982 to develop a system for reducing air pollution from diesel engines: "The federal government had a law saying that by a certain date, diesel engines had to reduce nitrous oxide and unburnt hydrocarbon emissions. But they postponed the deadline several times.... So there goes your money." The Offenders Exacerbating this problem, those in environmental businesses say, has been the attitude of big business, the primary offenders being the manufacturers who create the largest pollution problems; in the past, they have found it relatively easy to circumvent what laws there were. "Until recently, big industry hasn't had to clean up hazardous waste sites; they've found a way around it," says John Flint, a partner in the investment firm of Burr, Egan, Deleage, & Co. of Boston. One entrepreneur who requested anonymity recalls that when he signed a deal about 10 years ago to acquire new pollution-reduction technology from a utility-industry consortium, he was forced to agree to a clause that prevented him from informing the government that the technology existed. "This piece of technology was a fantastic way to reduce acid rain," the entrepreneur recalls. "But the companies didn't want the regulators to know that there was cheap technology available, and make all of them buy it. Michael Momany, assistant director of the Hazardous Materials Management Program at the University of Findlay in Ohio, says that professionals with virtually any background can carve their own niche in the growing environmental field. But while lawyers, businesspeople, writers, and even, in one case Momany cites, a physical education major are lining up across the country to take both degree and certification courses in pollution management, those with the strongest science background, he says, are the ones who are going to get the jobs. And professionals from all of the scientific disciplines are needed. Chemists are needed to define and understand potential reactions between pollutants and the environment; biologists gauge their effect on plants and animals. Hydrologists and geologists can work on groundwater issues, life scientists may design and direct the remediation of wetlands, and physicists look at radiation and energy issues and their interaction with the environment. And engineers of all kinds--chemical, mechanical, civil, and metallurgical--are all playing a role in the effort to clean up and maintain the environment. "You pick a degree or an area of interest," says Momany, "and I'll tell you how it will fit back into the environmental field." "Moreover, you can't demonstrate a technology unless you can get someone in the industry to let you do a trial. They didn't want it to be demonstrated, and they certainly didn't want the government to be writing laws about it." But owing to new legislation like the Clean Air Act passed last year and a new version of the Resource Conservation and Recovery Act currently under consideration in Congress, that is beginning to change. The new laws not only establish more conservative guidelines as to what constitutes "polluting," but also prescribe harsher financial and criminal penalties for transgressors. Perhaps most important, all the new requirements are stated in language much less equivocal than that used in the past. "The regulations are starting to bite," says Dan Monticello, a microbiologist and director of R&D for Cambridge-Mass.-based startup Environmental Bioscience Inc. "Ultimately, these decisions [whether to implement cleanup measures] get made on the basis of economics, and the costs of not dealing with them are skyrocketing." Politically Incorrect The increasing level of personal ramifications of being considered a polluter is an equal dissuader. "No chief executive wants to go home and tell his wife or six-year-old child who asks him about this that he is not pro-environment," Monticello says. The result of this legislative crackdown is a growing market that investors are increasingly anxious to cash in on, they say. Lyman Clark, president of the Environmental Economics Association in Traverse City, Mich., estimates that the Clean Air Act added $20 billion to the previous $100 billion cost of complying with environmental legislation, and that any new legislation will further increase the value of the environmental market. On the startup side, the numbers are up as well. According to a survey conducted by the Environmental Business Journal of San Diego, 30 venture capital firms that are active in the environmental area collectively planned to invest more than $200 million in 1991 and 1992. And the most active companies--those that had already invested a total of $3 million or more--planned to more than double their total investment in the field over the same two-year period. The same survey revealed that investors tend to focus on specific segments of the environmental industry, with resource recovery and recycling topping the list of favorites (see table on page 7). Within the environmental industry, according to the Environmental Business Journal, total annual revenue for 14 industry segments is projected to increase from $153 billion in 1991 to $275 billion in 1996 (see accompanying table). These numbers, along with announcements, such as the recent one from Ally Capital Inc. of Sausalito, Calif., that it plans to raise an additional $100 million for investment in environmental concerns--doubling its normal annual capitalization--are fueling optimism that the money is beginning to roll in for environmental entrepreneurs. Roger Wilson, executive director of the Venture Capital Network Inc. at MIT, says that the environment has been an area of interest and activity all along. Since VCN was founded in 1984 to help match entrepreneurs' needs and investors' interests, he estimates, a third of the 30 deals that have been consummated through the network could be classified as environmental. Recently, demands from entrepreneurs and investors alike forced VCN to add a formal environmental classification to its databank. Though the new category was just announced in June, Wilson says, the number of inquiries is already "swamping" his staff. "The investors recognize this as a promising market, and the entrepreneurs see the environmental hook as appealing to investors," he observes. Most important for scientists, this increase in interest from the investment community means that they will have a greater opportunity to transfer their ideas from the lab into practice. Though there has never been a lack of technology or ideas in the area of pollution prevention or remediation, investors say that in recent decades, developments have been more evolutionary than revolutionary. "People have found better ways to burn waste or better ways to transport it, but there haven't been a lot of technical breakthroughs, I think, because a lot of resources have not been put toward that goal until recently," says Flint. "But recently I have seen more commercially viable, interesting technologies coming out of the university and scientific communities." "In the past, there was no economic advantage to innovating. Now there is," concurs Preston at MIT, who says that the difficulty he has identified with most of the environmental startups over the past decade is that they have offered better methods of transferring waste problems, rather than solving them. That's why he says he was so excited to learn about--and invest in--Molten Metal Technologies. Just a year and a half old, this company claims that it can take in excess of 95 percent (by weight) of waste and turn it into materials that are of moderate-to-high value and can be sold to a wide range of markets. MMT feeds waste into a bath of molten metal, which acts as both a medium and a catalyst for the reaction. In the bath, the waste is reduced to its basic atomic components, supplemental materials are added to the reaction--oxygen or hydrogen, for example--and the result is high-value-added products. The aluminum industry, for example, spends $200 per ton to dispose of the material that lines the huge pots that process the aluminum. But at a cost of $50 per ton, MMT's technology can transform it into aluminum fluoride, aluminum oxide, and/or calcium chloride--compounds worth approxi- mately $600 per ton to the industry. Further enhancing the attractiveness of compelling economics and the small amount of true waste produced is the fact that MMT's system requires no presorting of the waste (they only need to know a rough estimation of the atomic composition of the waste). The system is also sufficiently small to be built at the manufacturing plants, thus eliminating the problem and expense of transporting the waste. But equally appealing to him, Preston says, was the company's chairman. Though only 27 at the time of MMT's inception, Bill Haney was working for the National Academy of Sciences, was on the board of the Environmental Protection Agency, and, most important, had just sold, for $200 million, an environmental technology company he had started from scratch in 1983. And solid, experienced management, investors say, is much harder to find in the environmental field than an exciting technology. In Boston, this is venture capitalist Flint's complaint. Though he has been actively seeking environmental companies to invest in, his firm has made only two such investments. "I've seen lots of potential investments," he says. "But we're very selective. "We invest in people as well as products, and we just haven't found a heck of a lot of really experienced people who have taken technology from an early stage and developed it into a bug-free, commercial-scale technology." At the same time, Flint acknowledges that the lack of experienced management is "a chicken-and-egg kind of thing," and that, as in all industries, investors will have to take a chance on the first generation of entrepreneurs before there can be a solid training ground for the next one. But the pollution on land, sea, and air is not going to disappear, and with the environmental condition worsening and public pressure for legislation mounting, there should be plenty of problems for the second and even the third generation of environmental startups to address. And it is only a matter of time, entrepreneurs like Haney say, before they cash in big on their investments. "We produce 7 billion tons of waste a year in this country," he says. "At $500 per ton you just can't afford to dispose of all that; so there are a lot of guys like me who are looking for new technologies." Over at MIT, Preston expresses confidence that those technologies will be forthcoming. "Science," he says, "is ready to respond to the economic need for environmental solutions." Susan L-J Dickinson is a freelance writer based in Philadelphia.

Environmental Startups Finally Ready To Clean Up

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