Technology startups are all about disruption. If your technology is not disruptive, then it is hard to get funded, and even harder to succeed. Why would someone buy your stuff when someone else has something rather similar, and with lots of experience (and scale) behind it?
But then…the clean-tech startup movement has provided a reason to more critically analyze this disruptive nature of innovation. While disruptive technologies typically arrive with a different S-curve which eventually aspires to surpass the S-curves of incumbent technologies, how should they enter the marketplace, especially in entrenched industries where change is hard to come by? i.e. Do you blow up value chains and do everything completely different (as was described in Blown to Bits by some BCG alums), or is there a way to introduce disruption while working with existing value chains so the adoption is easier and less risky? The former could be Incompatible Disruption, while the latter could be called Compatible Disruption.
There are examples of both right before us in the clean-tech sector. For example, electric cars are disruptive (needing all kinds of infrastructure changes to improve fuel economy), but diesels and hybrids are not (minor change from a user point of view). GEO2 itself is a probably going to be an interesting case study on this issue at some point – but I am not allowed to speak freely about it as yet. So I won’t. But some decisions we will make will tell our thoughts on this problem in our industry.
But I want to point to two very interesting articles on this topic. I am linking them here so read them on… Exciting stuff.
by Rob Day
Almost all VCs will say that they look to invest in “disruptive” technologies — new products or systems where the value proposition is so markedly better in comparison to the incumbent choices that the market will have little choice but to go with the new option. Venture capital, needing to see rapid growth potential, naturally needs to see such opportunities, so it’s easy for VCs to say that they’re looking for Disruptive Technologies.
But VCs mean different things when they say this. And in cleantech, the differences between what I’ll call Compatible Disruptive Technologies and Incompatible Disruptive Technologies are, perhaps, even more stark than in other sectors.
Compatible Disruptive Technologies (let’s create an acronym and use “CDTs”) are those that offer significant economic disruption, but without necessarily disrupting value chain relationships (at least at first). They are the solutions that dramatically reduce costs versus the status quo, but still go to market through the same channels, and could fit nicely into customers’ facilities/ habits/ lives without too much of a mental or behavioral shift. They offer such a cost or other economic advantage, however, that they are still “disruptive” versus incumbent approaches within their targeted portion of the value chain. And often, the hope is that once they get into the market in a traditional way, they will further disrupt the rest of the value chain in some fundamental way.
Incompatible Disruptive Technologies (okay, okay, “IDTs”…) are those that blow up value chains. To be successful, they must have compelling economic value propositions as well, or no one would go through all the trouble. But to be successful, they also require some pretty fundamental shifts in value chains.
Some examples might help break through all the ex-consultant lingo… The differences between these two kinds of disruptive technologies can be found in most cleantech sectors.
- Hybrid vehicles are CDTs — you’re still filling up at the gas station. Fuel cell powered vehicles are IDTs — you’re filling up with hydrogen from some as-yet unknown retailer or home option.
- LED-based lightbulbs with edison screws are CDTs — you can screw them into your existing sockets. Lighting fixtures designed around LEDs, with the diodes integrated into the fixture itself, and other LED-only features (like specialized lighting controls) built in, are IDTs — no more sockets, you’ll throw out the entire light fixture before the bulb ever burns out.
- Thin-film solar panels in traditional format are CDTs — still a roof or ground-mounted panel, even if it’s cheaper. Building-integrated PV could be IDTs — when roofers or general contractors can just slap products in place, who needs solar installers?
As with all jargon-y business concepts, readers are free to dismiss the distinction as non-existent, or to dismiss the specific examples above… But regular readers of this column will easily be able to point to recent cleantech VC deals that fall into one or the other category. Anyway, charging ahead:
The markets that cleantech is targeting are huge, and resistant to change. So in this investment sector perhaps more than any other, the investment choices between backing CDTs and IDTs are clearer. And so you get very divergent investment strategies, where two very smart VCs may take entirely different approaches to how they invest in this sector.
Those VCs backing CDTs argue that it’s tough enough to break into the market with new tech in energy, water, etc. markets even when you’re offering little disruption and a compelling value proposition. They point to the failure of previous “big idea” IDTs. For example: in the late 1990s, it was pretty much an accepted given by many observers and investors that by about 2008 or so we would be living in a “DG world”, where microturbines and other distributed generation technologies, in a deregulated electricity market, would have dramatically changed the way utilities ran their businesses and their wires. Well, that hasn’t really played out yet, and being early looks an awful lot like being wrong, as they say. So CDTs are seen as the way to go, because revolutionary changes in the market aren’t necessary in order to get initial market traction. There’s an installed base of OEMs and channel partners who can integrate the new tech in
easilyto their existing businesses, and/or an installed base of systems out in the field where the new products can simplypossibly be slotted in. And earlier market traction means an earlier track record, more opportunities to demonstrate low remaining technology risk, and thus a more rapid path to broad commercialization and exit. To grossly over-generalize, in comparison to IDTs, CDT plays can drive to earlier cashflow breakeven, they can therefore be more capital efficient, and still offer very big upside returns if the innovation catches on quickly.
Investors backing IDTs, on the other hand, say things like “if you’re hunting elephants, you need to bring an elephant gun.” They argue that if you really want to end up backing the huge success stories in cleantech, you need to back the plays that will revolutionize entire markets. That’s the way to not only back big-growth market opportunities, but also importantly to CAPTURE the market opportunities. When you’re the one who organizes the coup d’etat, in other words, you’re usually the one who ends up in the president’s mansion. Sure, it’s riskier. Significant capital will need to be deployed not only to develop the technology, but also to educate and proselytize the market, and to build momentum even ahead of market entry (ie: PR, key market and policymaker relationships, etc.). But with greater risk comes greater rewards. And besides, if we’re going to move quickly enough to change the world in the timeframe necessary to adequately address climate change, etc., we’re going to need to move beyond what’s easy.
No one knows which strategy will produce higher returns. It might be possible to succeed wildly with either approach. It’s certainly possible to fail with either approach. Really smart investors are lining up behind both strategies, and some are trying to build portfolios with a balance of both. But it’s an important distinction to have in mind when reading about the latest deal — pay attention to who was involved, and how the deal was structured, and the patterns will emerge.
How green-tech start-ups can take on energy goliaths
Posted by Martin LaMonica
News.com Green Tech Blog
Type “green+tech+bubble” into Google search and you get 228,000 results–quite a bit considering the terms “green tech” and “clean tech” are relatively new.
Discussion of an over-investment in energy-related start-ups is hard to avoid when the amount of venture capital dollars–which financed the Internet bubble–going into the field just goes up and up.
All digital ink spilled over the bubble is justified, but for reasons that may seem counter-intuitive, according to Scott Anthony, the president of Innosight, a consulting firm founded by business guru Clayton Christensen.
Anthony contends that many business people jumping into green or clean tech aren’t heeding the lessons that Christensen, a Harvard Business School professor, laid out in his oft-cited book, The Innovator’s Dilemma.
Namely, green-tech companies appear to be overly optimistic with what their technology can do.
Instead of taking on the gigantic energy industries head-on with technology breakthroughs, small companies should try to commercialize simpler technology, perhaps selling it in developing countries. Or, they should try to disrupt the market with a completely new business model.
Make no mistake, Anthony sees huge economic opportunity to apply more innovation to energy and the environment. And the long-term trends–high energy costs, climate change, green consumerism–make it a sensible market to enter.
But he uses history as his guide and sees green-tech giddiness getting ahead of where it should be. I spoke with Anthony last week. Here is an edited transcript.
Q: In an article you wrote, you said that the very tech-centric approach that start-ups are taking to the energy industry may be flawed. Why?
Anthony: Because in our observation at least, most of the people who are framing a lot of the challenges related to green have framed things predominately in technological terms. Which is, “How can we take emerging technologies and make them performance competitive if not better with technologies that have been in existence for 50 or 100, 200 years?” So you want to get something that is simultaneously better, cheaper, and better for the environment. It’s an incredibly tough problem. If you look across the sweep of history in other developments like this, when entrepreneurs or an industry frame a problem purely in technological terms, oftentimes they miss the mark and end up creating over-engineered products or solutions that never connect with the market.
Give me some examples of where that’s happening. Are there industries where this has happened before?
Anthony: Absolutely. So you can see some examples in history. Go back about 50 years ago to when the transistor first came into the market. All the big electronics companies took licenses to the transistor and they all framed it as a technological problem: “How do we make the transistor performance competitive with vacuum tubes?” They invested hundreds of millions of dollars and got no commercial results. Sony said, “How do we take this limited technology–because the transistor wasn’t very good in its early days–and commercialize it in new ways?” They came up with transistor radios and other forms of simple innovation and created a big business. Apple’s first foray into the personal digital assistant market. Do you remember that, the Apple Newton, back in the 1990s? They, Sony, Motorola, and HP all said, “How do we replace the laptop computer?” invested a few billion dollars and all failed.
Why? They failed because they were trying to do too much?
Anthony: Almost anytime you try to stretch an unproven technology to the most demanding application, it’s an incredibly tough challenge and it’s very difficult to succeed. So the disruptive innovation lenses show us that the path to success is trying to figure out a way to simply commercialize the technology in a new market. We’re playing the game differently so that you can succeed–even with something that appears to be limited.
In IT we see lots of disruption–open source, mobile. The industry is just very dynamic that way. But I don’t necessarily think of energy companies–power generators and fuel suppliers–as tech-led, risk-taking companies. Do you think this market is one where new business models can be introduced, or is just too set in its ways?
Anthony: Along some dimensions existing companies today take incredible risks. Some of the things they do to try to find new sources of raw material and new production technology, they’re betting at times hundreds of millions if not billions of dollars. But there are particular types of risks that the existing industry at least, has not really shown itself willing to take. So, you do have a complicated situation when you’ve got a deeply entrenched incumbent, a very interdependent system with lots of players who have a lot to lose if the game changes, which makes it even harder to go squarely after the mainstream of the market.
But you are beginning to see at least a couple of people out there in the existing market look at the world in a different way. One of the examples that springs to mind is auto manufacturer Renault getting involved with Shai Agassi’s Project Better Place to try to come up with a different way to play the electric car game (where a network of service stations will allow drivers to get fresh batteries). I think it is a very forward-thinking move for an established company.
Open source really shook things up because software like Linux was “good enough” for many jobs and replaced more sophisticated software. Do you think there’s opportunity for that in the energy world?
Anthony: Yeah, absolutely. So, kind of parallel to the energy world; instead of trying to think of how you take an established electricity system and get people to change something that works pretty well, think about how you can bring a very simple solution to people who have no electricity at all.
Now an interesting example of this is a company called Magenn. The solution they have is a wind-power solution. What they essentially do is they float the turbine in the air. There are some limitations to the technology, but it’s really flexible and really easy to install. So, from what we see at least, they really seem to be trying to bring this to markets where they have no power at all, where they uniquely value the flexibility and the simplicity, and they don’t care if it is in a picture perfect solution.
On the other hand, investors often are putting lots of money into these ventures for some sort of pilot project to prove out the technology, which costs lots of money. But if you’re selling to the developing world where low-cost energy is a big factor, will it work out for investors?
Anthony: The challenge is if you look at it at first you say, “Well, this doesn’t make economic sense because, to make a large investment payoff, you’ve got to target the largest most lucrative market.” And then you get into a cycle where it’s almost impossible to succeed. The bigger the investment dollars, the more you push people toward demanding applications, the lower their chances of success actually are. So, in fact, the task that starts simply, we believe, has a greater chance of long-term payoff even though it appears kind of intuitive at first.
I think one of the traps that everybody falls into is they expect things to come out of the gate and be really big really fast. You look at almost any great growth business and they actually started pretty modestly. So take Google as just a simple example. Google, obviously a hugely phenomenal company, had first-year revenue of 220,000 bucks. What’s interesting is people just seem to forget this over and over again and they say, “Well, we’ve got to get big fast if we’re going to justify investments,” and this cycle of death makes it very hard to succeed.
Typically, a lot of the green-tech companies are going after the big markets with either biofuel refineries, solar power plants, and that sort of thing. Do you think some of this is being misdirected?
Anthony: I think, without a doubt, some of it is being misdirected. You can understand why smart, rational people are doing what they’re doing because you do the math and you say, “Here is a big existing market; if we can capture X percent of this market it justifies the investment, and our scientists tell us this is what we have to do with the technology, and all of the math seems to work.” But again, history shows that people are picking a harder path than they realize by borrowing this approach, and if they were able to take just a little bit of the brain power and the money they’re directing toward this to think, “What are the novel ways we can commercialize this? What are the different business models we might follow?” they could have multiple times the impact that they will have following the traditional path.
Are you concerned that there is a bubble being created in this area with all the money going into it?
Anthony: It’s hard not to be concerned with this, the bubble in this area. You just look at the dollars flowing in and it’s just a big number. Any time you see this, you just get worried, and again the thing that gets you scared is, as the dollars go up, you increase some of the tendencies we talked about. So people invest more and more and more. And to make the numbers work in the spreadsheet, they’ve got to target bigger markets sooner. It leads to them having more pressure to stretch the technology to where it can’t be stretched (any further), the technology disappoints, the bubble deflates.
What about the incumbents? Do you see them adopting technologies in intelligent ways?
Anthony: If history is any guide, the incumbents will not adopt technologies in a way that immediately deviates from the core business model, because again, in the short term, it doesn’t appear to make sense to do that. They’re making so much money now, it’s hard to argue from an economic standpoint they’re doing the wrong thing. But again, if history is a reasonable guide, the incumbents that don’t invest in doing things differently ultimately will meet their demise. It might take 20 years, 30 years, 40 years, but to think that they’re insulated because today’s business is good, they’re just kidding themselves.
Do you see a boom-and-bust kind of cycle or more sort of steady, rapid innovation in technology?
Anthony: I think the Internet bubble could pose a reasonable parallel where you did have something where everything got overheated and the bubble burst. But in that period, some real game-changing innovations were born. And if you look at who really emerged from that bubble, you had Google, you had eBay, you had Amazon, you had Salesforce.com, you had Netflix–all companies following disruptive approaches creating huge amounts of value. So I think it’s very possible (that) there will be a boom-burst period, but the seeds of industry transformation will certainly continue to flower.