Some Lessons From Early Successes of the Next Wave
As we see increasing evidence of a "next wave" of cleantech investing and entrepreneurship, we're starting to see some early wins emerge. What lessons can we learn from the experiences of recent demonstrated successes like Nest, SolarCity, rumored upcoming IPOs (we see you, Opower), and earlier examples like Tesla?
People will draw their own conclusions, but as I've been mulling it over during the past few weeks I've come up with the following (incomplete list of) success factors I'll be looking for going forward when reviewing investments. This list isn't very original or deep, admittedly, but it's an early attempt to start trying to piece together a blueprint for big wins in our sector.
1. Own the customer experience
A lot of cleantech innovations and entrepreneurial efforts over the past couple of decades have been upstream of the end consumer, either components (i.e., advanced electric motors), commodities production (i.e., biofuels), middleware (i.e., utility smart grid software), or infrastructure (i.e., advanced batteries). Those can certainly be successful efforts if tackled the right way.
But when you look at the really big success stories over the past couple of years in our sector, not only were they well executed (more on that below), but they also all had some kind of direct delivery of experience to the end consumer. Tesla and Nest as the most obvious examples, but SolarCity is also directly marketing to homeowners and sending crews to their houses. It's not a coincidence that those businesses, when they exited, were granted really high valuation multiples versus some of the more "industrial" (i.e., lower) multiples that upstream companies have been able to garner. The underlying business has to be attractive, that's a necessary condition, but the big rewards are granted to the big brands with big lists of already-engaged customers.
That's because the acquirer (whether it's a Wall Street trader or a big strategic company) sees the existing customers not only as proof of the economic value proposition, but also as big opportunities for further sales, and the brand and direct customer experience are seen as the point of leverage with which to make that happen.
I don't believe, however, that this suggests B2B models can't drive such big exits. I've had colleagues tell me that they believe B2C is the best way to tackle this sector, and there's probably some truth to that -- certainly it's a common feature of some of the best exits over the past few years. But B2B companies, if designed correctly, can also build that deep customer engagement that is so highly valued, and leverage well-built brands to project strong continued growth prospects via positive network effects.
But whether B2B or B2C, building direct relationships with the end customer is very strategically valuable, and capturing as much of the customer's attention by building a robust experience (not just having a one-off transaction) unlocks this value.
2. Execution trumps clever ideas
OK, yes, it's best to have both.
But there were plenty of smart thermostats on the market before Nest came along. There had been various EVs before the Model S. Putting benchmarking data on your utility bill isn't the most breakthrough concept. These aren't out-of-left-field concepts that the world hadn't heard of before.
These startups succeed not because of their breakthrough concepts, but because of their superior execution. They developed better tactics than those who had tried this before. They pushed through barriers to entry and barriers to adoption with technical innovations, business model innovations, design innovations, better access to capital resources, and brute force.
This is a bit obvious, right? "Winning startups have great execution, duh," replies the blog commentariat. But I continue to see lots of evidence of low-execution management teams getting venture dollars because they have a fascinating technical innovation. The theory there is that the execution can be bolstered over time by topgrading, etc. But what I'm arguing is that you start with identifying the great team (or at least the core of such), and they'll figure out the tactics they need to succeed with ideas others have failed with before them.
Sand Hill Road gets this. This is why (as it's now coming out) Tony Fadell was basically offered venture capital to start a smart thermostat company simply because he was Tony Fadell. It's an unsurprisingly successful investment strategy to back proven winners.
But there are lots of high-execution entrepreneurs out there who aren't already known commodities to the Sand Hill Road network. And that's especially true in cleantech, which continues to be more geographically diverse than some other venture capital sectors.
I believe (and am actively betting) that new methodologies for identifying high-execution entrepreneurial teams can unlock a lot of the promise of the next wave of cleantech venture investments, even outside of Sand Hill Road denizens.
3. The convergence of IT and cleantech is powerful
I've expounded upon this many times already in this column, but the convergence of IT and cleantech isn't just exciting because of the specific "intelligent energy" business opportunities it's enabling. The convergence is also making other cleantech business models more viable as well, when it's used correctly.
Nest is best thought of as an "intelligent energy" play, but Tesla? It's a car company. And yet the Model S is more like a computer with wheels. The advanced use of IT enables the advanced battery management, the superior driving experience, that wicked-cool display, etc. That's just one such example.
There's magic to the convergence of IT and energy, particularly when it's used to bolster the customer experience. It can be a powerful tool to enhance the adoption of solutions that on paper should have been attractive without it, but which needed an extra push. And it can enhance the strategic value of the company when it comes to a point of exit -- all that data, and all that interconnectedness with customers. Superior ability to execute on IT is increasingly a success factor for cleantech entrepreneurs even when they don't think of their core business model as being at the point of convergence of IT and energy. We're going to see this play out in non-energy sectors of cleantech as well (water, food, etc.).
4. Momentum matters
This is venture capital 101. Momentum, or at least the perception thereof, is what modern venture capital is all about. It drives venture capital fundraising, it drives customer interest and zero-cost PR, it drives corporate interest, and it drives Wall Street interest.
The good news is that, from my vantage point, I see an increasing number of cleantech startups with such momentum. Some don't call themselves "cleantech" because they don't want to even raise the question, but they're companies that I would broadly consider within my mandate as an investor in this sector. Some are just kick-butt cleantech startups proudly claiming the moniker. But the labeling really doesn't matter. What I'm seeing is a lot of really strong growth out there.
I do think, however, that many of those growing companies are starving themselves of perceived momentum because they're underinvesting in marketing and awareness campaigns. This is especially true when they don't have high-profile investors lending them a halo effect. I know several cleantech startups now generating tens of millions of dollars in revenue that don't get nearly the attention from business journalists that the latest pre-revenue social networking app gets. And that, unfortunately, does have business and valuation impacts.
I know many entrepreneurs in this sector are being prudently cautious about spending money on PR and marketing given the lingering fundraising challenges and the need to prioritize where constrained capital is spent. But for those who are indeed growing quickly already, it might be time to spend a bit more on making sure everyone knows about it. This continues to be an underreported sector, and the headlines won't come to those who don't ask for them.
5. Start small, think big
There continues to be a false dichotomy in the minds of many investors and entrepreneurs around the magnitude of an idea. Is reinventing the residential thermostat "big enough"? Is building an electric sports car for high net worths "big enough"?
It's not where you start, it's where you end up.
Starting small can be pragmatic, it can focus early efforts, it can reduce capital needs, it can enable early market penetration into "unsexy" or "unscalable" market niches that are otherwise relatively ignored. It can help establish that all-important early momentum. These big successes started with small immediate targets.
But if you think these entrepreneurs ever set their sights low, that's wrong too. Great outcomes require great aspirations. So I guess the lesson here is that these early wins show that in this sector, entrepreneurs with huge dreams should be open to starting small, as long as they have a plan for how to build very quickly upon those early pragmatic efforts. Starting small can be a springboard, if done correctly.
Anyways, those are some of the lessons I'm taking away from these early successes. Others will draw their own lessons as well. We're all still learning how to develop replicable models of success in this sector, but it feels like we're closer than ever to being able to show what they look like.
Photo Credit: Next Wave of Energy/shutterstock
Rob Day is a Partner with Black Coral Capital, based in Boston. He has been a cleantech private equity investor since 2004, and acts or has served as a Director, Observer and advisory board member to multiple companies in the energy tech and related sectors. Rob was a co-founder of the Renewable Energy Business Network (www.rebn.org), a non-profit organization which was acquired in 2009 by ...
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