Investing in the Future

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Knowde's webinar series episode on investing in the future, where Dow and Sequoia Capital share their perspectives on how the world is accelerating through a digital approach and what this means for the chemical industry

Dow and Sequoia Capital share their perspectives on how the world is accelerating through a digital approach and what this means for the chemical industry.

The chemical industry is one of the largest markets in the world. This industry however has not typically prioritized the customer experience – now with customer expectations evolving, chemical businesses are realizing their need for a digital approach. In this recent Knowde webinar, Dow’s Chief Commercial Officer (CCO) and partners from Sequoia Capital discuss the acceleration in digitalization in the chemical industry.

How Sequoia thinks about innovation in the chemical market

Sequoia typically thinks about innovation in one of three ways when making investment decisions: 

  1. Organic innovation: Fundamental discoveries and innovations, such as Dow’s everyday material and process ideas.
  2. Inorganic innovation: Acquiring an asset or business to drive innovation.
  3. Go-to-market innovation: Capturing customers of a market in a new way. 

Go-to-market innovation is where Sequoia believes that Knowde fits in perfectly. The chemical market is massive and organic and inorganic innovation happens frequently, but the industry is missing go-to-market disruption. With Knowde’s digital marketplace, suppliers and buyers can engage and transact online – the modern, digital experience they now expect.

Adoption of digital principles

In the early 2000s, it was difficult for marketplaces, especially for chemicals, to succeed. Dan Futter, Dow’s CCO, believes that this was due to an imbalance in supply and demand. The marketplaces never managed to be a place where suppliers were willing to provide transparency and access to materials, since they didn’t want to disrupt their existing channels that they had in place, and therefore customers couldn’t explore the full array of materials they wanted to buy. 

In contrast to the excellence around product and technology innovation, the chemical industry has not systematically focused on the customer experience. Now however, companies like Dow are learning lessons from the B2C world and are beginning to concentrate on understanding, and improving, what the experience of their customers is of doing business with them. Whichever role the customer comes from into Dow’s business, whether they’re a research chemist in the lab or a purchaser, they should have an experience that’s relevant and intuitive for them. 

Companies like Dow are increasing their willingness to take on new tools in order to better access customers and understand how they can help them be successful.

Lessons from the industry

The chemical industry has traditionally not been one to adopt new technology quickly. Certain companies however, like Dow, have recognized the importance of digitizing their business and are quickly accelerating. Below are a few insights that Dow and Sequoia Capital share on potential barriers to investing in technology, and how to overcome them:

Psychological caution

There is inherent conservatism in the chemical industry. If companies have gone through years and decades without change, and have not failed, it’s difficult to be convinced to take a digital leap of faith. This industry also does need to be more conservative in the aspects of science, production, and transportation – the cost of doing something wrong could be an explosion in a facility or harm people’s health. It’s possible that this conservative mindset has bled into all aspects of the business. There’s a huge opportunity to change the way sales and marketing’s is done that will lower the cost to serve customers – by equipping team members, from R&D to procurement to sales, with digital tools, they can meet customers where they are, engage with them at the right time, and accelerate the sales process. 

High data quality

Successful digital transformation in the chemical industry requires high data quality. There are potentially hundreds of years of history at these companies, and therefore hundreds of years of data that has evolved. Redesigning how this data works in order to create the outcomes businesses want is a difficult task, and one that takes large investments in time and resourcing to accomplish internally. Now, software companies like Knowde have built technology that is grounded in great data quality, which allows internal teams such as scientists and salespeople to use it as a core part of their job.

Learn more about how Knowde is organizing the world of chemistry.

Organizational culture

People are creatures of habit and it’s naturally a big challenge to convince them to change – especially in the chemical industry. However, customers have moved online to discover and access chemicals and expect a modern search, engagement, and buying experience. This shift towards digitalization wasn’t a matter of if, but a matter of when. Companies need to recognize that digital acceleration is happening, with or without them, and that meeting customers’ needs should be at the forefront of their minds.

“I think the world has accelerated through a digital approach on how to sell products into the market… There’s this old adage, if the world is changing outside your company faster than you are, death is near.”

– Carl Eschenbach, Partner at Seqouia Capital

To hear more of Dow and Sequoia Capital’s insights, watch the full recording or read the transcript below.

Ali Amin-Javaheri: Today, I’m going to facilitate a discussion between two iconic firms, Sequoia and Dow. Everyone is familiar with Dow, but many may not be as familiar with Sequoia. Sequoia is the king of the hill in venture capital, founded almost 50 years ago. They are the earliest investors in the most iconic tech companies, including Apple, Google, PayPal, Oracle, Cisco. And there are also super early investors in technologies that we use every day in our personal lives, including Airbnb, WhatsApp, Dropbox, LinkedIn, and Instacart. The list just continues to go on and on. An amazing fact is that Sequoia-backed companies account for more than 20% of NASDAQ’s total value.

There are two partners from Sequoia joining us today – Shaun and Carl. Shaun, before joining Sequoia founded two companies himself, one in space launch and another in cybersecurity. After that he was a partner at Google Ventures. I’ve gotten to know him quite well over the past year and I can say that he’s one of the most creative and flexible minds that I’ve ever been around. When he is not thinking about the next company to invest in, he’s probably obsessing about quantum theory, physics, and now chemicals. Carl is an iconic figure in the Valley. Before investing, he was busy building VMware into a multi-billion dollar company. Today, Carl sits on many boards including Workday, Palo Alto Networks, the platform that we’re using right now, Zoom, and on the board of Snowflake, which I believe recently had the largest software IPO ever. 

We’re also super excited to have Dan Futter from Dow with us today. He’s had an incredible and long career at Dow. He is the Chief Commercial Officer at Dow, and from my perspective, one of the thought leaders in our industry in all things e-commerce transformation and digital marketing. 

So there’s an obvious new player in the chemical industry and that is Sequoia. To the Sequoia team, here’s the question: Historically there hasn’t been a lot of venture investment in this space; what gets you excited about chemicals? And why now? 

Shaun Maguire: So first of all, before answering that question directly, I just want to point out that I learned recently that Sequoia has an incredible history with the chemicals industry in that Sequoia’s first fund in 1972 was $5 million. And it only had three limited partners, one of which was Teijin, the Japanese chemicals company. And so quite literally, Sequoia owes its past in many ways to the industry. 

My biggest passion is studying industries that are oftentimes overlooked by others or maybe not obvious to the average citizen. The chemicals industry had just always blown me away for a few reasons. One was just the sheer magnitude of it at 5 trillion plus a year. And then also how fragmented it is. If you look at the C&EN list of companies, top 50 companies by revenue, even number 50 is 7 billion plus per year in sales. I don’t know any other industry that’s that big and that fragmented. I also did a PhD at Caltech and Caltech has a very, very deep chemistry history and I got exposed to a lot of the science and just saw that this is where some of the most promising scientific innovation was happening. 

At Sequoia we study businesses. We were pitched five times plus a day and there’s a company that I had been tracking called Good Rx. It’s sitting at a 22 plus billion dollar market cap today, which there were a ton of similarities with how GoodRx went and started its business to Knowde. When you’re starting a marketplace, it’s really hard to get started. And what they had done is they had scraped the web for PDFs with drug information as the first step. That just really resonated with me in the context of Knowde.

Carl Eschenbach: When we think about investing, we think about big markets that are right for disruption in one portion of their business. In this case, the chemical business we thought was right for disruption on the go-to market side. And then the other thing we think about: Are they creating a new category or are they a category creation company? And we think Knowde is a category creating company in the midst of a very large fragmented market called chemicals.

We think about innovation in one of three ways when we’re thinking about investing. Number one, it’s organic innovation. If you look at what Dow is doing, organic innovation is happening every single day in the material and the process innovation that’s taking place. There’s inorganic innovation when someone says “I see a market opportunity and I can’t get to it quick enough, so I’m gonna go out and make an acquisition to drive innovation.” The third area of innovation that I actually think is probably the most missed is around what I would describe as go to market innovation. People don’t think about sales and go to market and how you capture customers and how you put content and materials in their hands. And that’s exactly where Knowde fits in – between this big market, the innovation that’s happening on the tech and chemical world and the process innovation, yet missing the go to market innovation. 

Ali Amin-Javaheri: I think we can all agree that this industry hasn’t been super aggressive in adopting new technologies, but certain companies, Dow included, we think are quickly accelerating. Carl and Shaun, a quick follow up for you. Is there another market that you guys have invested in in the past that’s somewhat similar to where chemicals is today and how did you see tech changing that market?

Carl Eschenbach: There’s a couple different ones that you can think about. Airbnb in the travel industry, they started out by going out and scraping things like Craigslist to figure out where there were opportunities to build a marketplace to help people find their dream destination or their vacation rental. It started out more as screen scraping, but now if you look at it today, it’s a two-sided marketplace, exactly what you’re doing. So they’ve evolved their business model to be able to not just look at the supply side, the people putting their properties up for rental, but the demand side and the users are now very interested in going to a website like Airbnb and not necessarily connecting directly through the traditional hotel industry where you would get your past rentals or your overnight stay location.

One other one that I think was similar is a company called Houzz who used to go out and scrape the internet to look for furniture and then put it on their website for people to buy. Now they are truly a marketplace, a two-sided marketplace, where designers can go in and actually design people’s homes for them and then purchase right on that platform because they have access to all the people building the furniture. So it’s also a lifecycle type of company where from design phase to purchasing to delivery to payment to processing – the whole life cycle takes place on that platform which I think is also something people don’t think about the value of a marketplace. They think about buying and selling, but it’s the whole supply chain ecosystem that actually becomes much more relevant for people as well.

Ali Amin-Javaheri: Dan, I know that Dow was one of the first to recognize how much customers wanted a more modern experience and you guys have been investing like crazy over the years. What’s getting you excited nowadays and where is Dow investing right now?

Dan Futter: I was thinking about what Shaun and Carl were just saying. Cause if you reflect back, even in the chemicals market to the early two thousands, there was a rash of marketplaces emerged. And I was really interested in what Shaun said about the fact that obviously it needs this two-sided balance between providing value to suppliers and also providing value to the customers as well. And it’s sort of interesting to ask yourself, why didn’t that work in the early 2000s? I think the answer is, it never got that balance. It never managed to provide a place where suppliers wanted to provide the transparency and access to materials mostly because of concern with disruption of existing important channels that they had in place, most notably distribution and their direct channels. And then from the customer side, because you couldn’t see the full array of materials you wanted to buy, the marketplace became less relevant and so they essentially evaporated over time. So there’s great lessons for this industry and all the other industries that Carl and Shaun spoke about. 

One of the fascinating things about this industry, in contrast to the excellence around product and technology innovation, has been that actually this is not an industry that is focused systematically on customer experience over time. And actually it’s starting to change now, right? We’re learning a lot of lessons from the B2C world and I can speak to Dow specifically. We’ve run a systematic program for the last three years concentrating on really understanding exactly what the experience of our customers is of doing business with us.

That’s starting to bring transformation in the traditional ways of doing business. The big questions right now are with the incredible acceleration in digitalization, how do we make sure that those human interactions that you still need for some things and those digital interactions actually work in a harmonized fashion? Whichever role the customer comes into our business, whether they’re a research chemist in the lab or they’re a purchaser or there’s somebody managing logistics and good receipt at their facility, they should have an experience that’s relevant and intuitive for them. Ali, that’s probably where the major emphasis is going right now is really learning a lot of the lessons from other industries that have already been on this journey and saying, how can we make ourselves a much more intuitive industry to do business with? And that has to lead to the questions that Carl was asking, which is, then what role has innovation got to play there and how is it that customers want to buy, whether it’s proprietary from a single company or that’s through aggregation and marketplaces or traditionally through changes that’ll obviously come in the distribution industry as well. It’s trying to get your head around: how do we make those experiences more compelling?

Ali Amin-Javaheri:: I think what you guys saw back then is something that others didn’t and so why was it so compelling back then and how does that influence Dow’s thinking today?

Dan Futter: On LinkedIn I posted some articles about the early journey of digital in the chemical industry and the Xiameter story is best described through a beautiful visual metaphor. There were two visuals that we used. One was of a screwdriver and the other was of a hammer. And both of these really simple tools had diamond encrusted handles and that tells the whole story of the origination of Xiameter. Our customers at the time were saying to us, Hey, I just want a screwdriver or I just want a hammer. You don’t have to bundle that with all these other things that I don’t need. Please simplify the buying experience for me, simplify the price and the price transparency for that and make it as efficient as possible for me to buy that product. I already understand it, I’ve already been buying it historically, I know how to use it, you don’t have to help me with that. Just make it easy for me to buy and take the bundling away. And that’s where Xiameter I think hit the nail on the head in the early two thousands was really paring back the simple buying experience for products that are bought so that customers could obtain those with a minimum first and the maximum transparency possible. And it made a couple of really interesting innovations at that time as well. I think the most prominent was the whole idea of a full vertical integration between the website experience and what the ECC was saying.

So as a customer, when you came into Xiameter, and it’s still true today, you would see the product that was available in exactly the volume that was available at that moment in time. So when you placed the order against the calendar, that was an automated immediate order confirmation and it recognized order control and allocation if that was in place and it allowed the automated change of that order as well. Back in the two thousands that was extraordinary for our industry and it’s still not done systematically in our industry today. You still wait for an order confirmation. You still have to talk to somebody to make an order change. That was a massive change cause it made it easy for the buyer, it was super transparent and that’s what they were asking for. And of course at the best prices we could offer cause we weren’t adding in all these bundled expenses.

Ali Amin-Javaheri: One quick follow up question before I move on on this topic – why do you think this model has not been duplicated over and over and over again in the industry?

Dan Futter: I think maybe there’s this inherent conservatism that Carl was referring to, that people are sort of watching and sees maybe three years hasn’t failed yet. No, maybe four years still hasn’t failed. Well, we are missing the trick, something’s gonna fail here sooner or later. So I don’t know, I’d be speculating Ali, I think that maybe it sort of really finds its roots in this inherent conservativeness. The reality of what it takes though to do what I described, to have a vertical integration between what the website shows the customer and the reality of your material inventory at any moment in time when you’ve got thousands of products in thousands of geographies regulated by lots and lots of different regulatory authorities, it’s not as simple as it sounds. And so I think probably the biggest hidden hurdle beyond the psychological caution around something new is actually the data quality that it requires in an organization to be able to pull it off. So if you start up a company fresh and it’s just going straight to a clicks business, you can design the data intentionally with the outcome that you want. In our industry, you’re building on 50, 80, a hundred years of history and therefore a hundred years of evolution of data and its design had a different outcome in mind. It hadn’t got digital enablement to the business in mind. And so I see that’s where the biggest change comes and that’s where the biggest financial and time hurdle is. It’s actually in redesigning how data works and processes so the data quality stays high so that businesses can operate digitally. That is a big and relatively poorly understood hurdle I think for the industry.

Carl Eschenbach: Typically if you look at innovation, technology innovation or chemical innovation, while I won’t say it’s easy, I would say it’s not that hard when you compare or contrast it to a business model transformation or innovation, they are much harder. And typically what stops companies from making that transition or disrupting themselves are two things. Number one, Dan hit it spot on, it’s the innovator’s dilemma. Dow is a massive company and they have a huge business, they’re very successful yet they may have to disrupt themself in a business model transition. And that’s really hard to do, especially when you’re a publicly traded company. You have shareholders who expect certain outcomes. And the second biggest barrier in my experience going through business model transformation is culture. People don’t wanna change. People are creatures of habit. People have jobs, they like their livelihoods and to go and do something different is always a big challenge. So there’s always this cultural barrier you have to overcome no matter what industry you’re in, if you wanna change, especially as we move to a new digitized world. 

Shaun Maguire: When Dan mentioned the conservative nature of the industry, that really resonated with me and as kind of an outsider and someone that’s only been studying the industry for a few years, it’s one of these industries where of all the industries out there, people in this industry need to be more conservative on the science and production side and transportation side and storage than pretty much any other industry where the cost of doing something wrong quite literally can be an explosion in a facility or shipping a dangerous flavor molecule to someone that can harm their health. And so quite literally this is an industry where in those pieces needs to be one of the most conservative that there possibly is, rightfully so.

And it seems like that has historically bled into all aspects of the business, which is naturally what you’d expect cause you’re trying to optimize and reward people for being very conservative in the core production, transportation, storage pieces. But in terms of the business model, I’m a little frustrated for the whole industry that has 5 trillion year in sales, and I don’t know the total market cap, but it’s probably total say enterprise value if you include the private companies is probably about 5 trillion, probably trading at about 1x total sales. And I think a lot of that comes from just the conservative business model aspect. And a lot of companies operate in it, call it 5% EBITDA margins, where there’s a huge amount of fat in the sales and marketing division, which is kind of legacy of how things have been done in the past. I think that there’s a huge opportunity to change the way sales and marketing’s done, make it more efficient, more like a, I don’t wanna say technology business, but I think there are a lot of lessons in technology business, software business or kind of at the cutting edge of go to market and hopefully double the EBITDA of the entire industry and therefore opportunity to almost double the total market cap.

Ali Amin-Javaheri: I’m sure Sequoia you’ve seen other B2B markets that have started to adopt and implement B2C principles. From your perspective, thinking outside of chemicals, how quickly are you seeing this accelerate? 

Carl Eschenbach: So it’s interesting, with the pandemic that we’re faced with today, I think the world has accelerated by three to five years when you look at it purely through the go to market channels that people use today. If you think about it, the days when Dan and I grew up, flying around on airplanes, landing, getting a car service, going to meet a customer or prospect shaking their hand, going to dinner – you might get one call in a day. Now with the pandemic, everyone has realized that communication mediums like we’re on here today have only accelerated people’s ability to engage with their customers or prospects. And while you don’t have that in-person touch, you can still build a relationship with them and have more frequent interactions with them. So I think the world has accelerated through a digital approach on how to sell products into the market.

There’s this old adage, if the world is changing outside your company faster than you are, death is near. The other thing is, if you look at, for example, Dan’s customers, they’re demanding a digital interface, they wanna go in this direction. Sometimes it’s the actual supplier of the technology product or goods who’s slow to get it to them, but they’re demanding it. They wanna use this type of interface to get access to technologies and supply chain and materials. So I think the world has changed forever.

Content marketing is a critical thing these days. The more content you can put out there, the better off you are and drive a frictionless environment between your customers and yourself. So there’s no good defense for speed using a sports analogy – If you’re faster than me, you’re faster than me, I can’t catch you. So it’s all about speed and iteration and innovation through these digital marketplaces like you guys are talking about in your building that will drive a different level of engagement with customers. And although it’s not in person, I think it can still be as formidable.

Ali Amin-Javaheri: I think we all agree that the buying journey is changing, that customers want to be able to interact with content online, be able to ask questions really easily, be able to interact with their sales rep almost immediately rather than having to wait a couple days for them to get off the plane and come into their office. Dan, are you seeing that firsthand within Dow? 

Dan Futter: This is an industry that historically has done its promotion through having big shows, right? So you’d go to a show and you put on a stand and people come to the stand and you have lots of meetings around the stand, maybe you launch a new product. It has been changing for a while, but of course in March of this year it changed dramatically – suddenly they have no more shows this year. And so everything has gone virtual and I think if you look at the number of product promotions or general launches or market communications that we were doing last year, I guess that we would be up in the 150 to 200 related launches associated with shows. By contrast, our use of webinars has gone up by a thousand percent this last year. It is a complete switch around in the channels that we’re using.

So, you could say why wasn’t the industry doing that more? And it’s true, that’s a fair question, but what I have loved is the agility that our people have shown to say, hey, it’s changing and we have to change drastically and quickly to do the job that a customer is looking for, which is make it easy for me to access your advice and insight about how to use your products, the ones that exist today. And make it easy for me to access your know-how to design the product I need next to help my business grow. And probably, that’s the least prosaic thing that we’re going to do on the digital side. We could copy all sorts of models and adjust them for our industry on what it’s like to transact, what it’s like to buy products that are bought. 

But it’s much harder to have a digitally enabled interaction around tech, service and innovation. And it gets harder and harder the closer you get to the innovation piece. And so that change of mindset, that agility that I’m talking about and that willingness to take on new tools and actually access the customers to talk about what can I do to help you grow? I understand everything that’s going on in the outside world and the challenges, but how can I still help you be successful? That is where the big, big innovation digitally is going on for us right now. So I’m encouraged about that willingness to change and I don’t think it’s going away.

Ali Amin-Javaheri: Everyone’s trying to accelerate their customer experience and all of that. What role has marketplaces played in these sorts of environments in the past and then Dan, how do you think marketplaces will play in our market?

Shaun Maguire: This is a hard question, because there’s not that many patterns that I see personally. I’ll use this as an opportunity to answer Brad Griffith’s question which I think has some overlap. His question is, how do you get a marketplace to significant scale where you can have a meaningful amount of transactions in this industry, especially the B2B transactions happening? I’ll go back to GoodRx, which I mentioned in the very beginning where the parallel there is that a lot of people have tried to create marketplaces in the pharmaceutical industry in the past and had never been able to get one that had enough value that they could go to the big whales and actually get them to work with them.

With GoodRx, basically what happened is pharma companies around 2007, 2008 started to put PDFs online with their product descriptions for their drugs and also Obamacare Affordable Care Act mandated the hospitals published pricing data of what people had paid for drugs. And so they were also able to scrape that. So they had pricing data combined with product data and were able to then do SEO and get a lot of just average consumers searching for things on the internet to end up on GoodRx. Once they had lots of eyeballs and basically the lead gen, they could then go to the biggest pharma producers or pharmacies to potentially fulfill orders and basically come with, call it 10,000 eyeballs and then get the biggest companies in the world to work with them. Once they had the biggest companies in the world working with them, they could then go back and do targeted marketing to acquire customers and go upmarket on the customer side.

The parallel here with Knowde is that this industry, from what I’ve seen over the last five years or so, started to open up and put a lot of public information. Historically, there’d been a lot of walled gardens and companies had protected their product information as their crown jewels and there’s been no ability to access that in the last five years or so. A lot of companies have started to open up and put a lot of product information on the internet, but it’s been very hard to find. Knowde then was able to consolidate a lot of that public information. The belief is that we’ll hopefully be able to follow a similar playbook as GoodRX and get a lot of lead gen going which is obviously valuable even to the biggest companies in the world. 

But it’ll probably start with connecting huge companies to smaller buyers. And then I’ve already seen this that, we’ve been told from a bunch of users of Knowde, especially in certain verticals, that Knowde has such great data quality that they have scientists and salespeople using it as a core part of their job, even just for search. Once you have people that are living in the product, then as long as there’s gonna be change happening, like change with prices or change with supplier, change with product, then even for the large B2B matchmaking, there can be a lot of value to do that through a marketplace. If someone already has a detailed historical relationship, as the marketplace, you can’t extract as much value as you can if you’re pairing them with some completely brand new customer. But if you can still make the whole process more efficient and cheaper and have EDI integration and everything with seamless discovery, then I think that’s how we get there.