Aspen Aerogels S-1 Analysis

tl;dr: Good company; tough road in the rear-view mirror.

Aspen Aerogels filed for an IPO last week, pitching itself as an energy efficiency company. Aspen makes insulation, but a particularly high-performing kind of insulation, being a nanoporous silica material that’s about 97% air by volume. I’ve been tracking this company since 2004 and think highly of its CEO Don Young (the only cleantech CEO I know with a baseball career, having played minor league ball for a Braves farm team).

To me, SEC filings are dry only like a fine wine – I devour these things because numbers reveal truth. Here are the big numbers for entrepreneurs from the S-1:

  • 10 years. Materials businesses take a long time, at least those with a substantial top line (i.e., not licensing plays). Aspen took its first VC money in May 2001, so it’s been north of a decade. And that’s with the unfair advantages of a big price/performance leap and a great management team; adoption and scale-up time frames are just really difficult to compress for physical goods. If you’re contemplating a start-up here, you and your partners need to be in it for the long haul.
  • $200 million. It’s not enumerated in the S-1, but adding up past financing announcements it looks like Aspen raised around $200 million in total capital, including north of $50 million in debt, over ten years and nine rounds. That’s not a crazy figure for a manufacturing company (A123Systems raised more than $300 million prior to its IPO), but it does underscore the capital intensity in many domains of cleantech.
  • 18-for-1. That’s the tough medicine that common stock holders – in particular, management and employees – had to swallow when the company recapitalized in 2008: Every 18 shares of common stock turned into one share. This was part of a complex transaction that appears to have been designed to give the investors a large enough level of ownership to justify continued funding. (In addition, a second recap in 2009 seems to have wiped out the preferred stock from the first few rounds of investment.) While I imagine the company re-upped the people it felt it had to retain, if you were a founder holding common stock (or worse yet a rank-and-file employee holding options), both of these events would have been really bad for you –unless you’d negotiated protection beforehand.
  • $1.65. Whenever my partners and I assess a manufacturing company, we always ask for the revenue-to-capex ratio: the annual revenue from a manufacturing facility divided by the capital expenditure required to build it. It’s a quick, simple benchmark for capital intensity. Aspen’s number is $1.65 ($50-54 million in projected annual revenue from a $31.5 million manufacturing investment). This is a positive: The quick rule of thumb is that under $1 is bad, $1-2 is good, and $2+ is great.
  • $38 million (in licensing fees). Venture investors like me often perceive extra risk in materials domains because they tend to have patent thickets, making it likely that someone will sue you for claimed infringement down the road. Such legal action can kibosh a start-up, but it’s hard to predict in advance because no one cares enough to sue until you’re finally making money.  The aerogel materials that Aspen makes have a particularly thorny IP landscape dominated by incumbent chemical company Cabot Corporation, and the S-1 recounts $38 million in fees that Aspen has signed up to pay Cabot as part of a cross-licensing agreement. If you’re pitching materials-savvy investors, you need to acknowledge these risks upfront.
  • III. Buried in the S-1 is the fact that Aspen received $16.8 million from the Department of Defense under Title III of the Defense Production Act, which authorizes the government to pay for private companies’ manufacturing facilities if they make materials deemed to be strategic. This is as close to “free money” as you can get – it’s treated as a reimbursement for accounting purposes – and it paid for a good share of Aspen’s Rhode Island manufacturing facility. The big string attached is that the government holds title to the equipment that it pays for and can theoretically ask for it back, but my understanding is that Aspen wrangled an exemption to this rule. Hats off to the team for creative non-dilutive financing.

Outside of biofuels and solar, nearly all venture-backed cleantech IPOs to date have been one-offs, so there aren’t many good comparables to look to in terms of how Aspen’s IPO will play out. I’ll watch with interest. A strong showing could open doors for other long-in-the-tooth materials start-ups that have patiently built top-line revenue, and a poor one means that the current cleantech IPO window may have closed.

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