Friday, August 8, 2008

Startup Scene

Second-mover advantage in green design

New technologies that have the capacity to cause “disruptive change” are always the darlings of investors. The appeal arises from the ability of such innovations to displace existing products with higher-margin new ones that customers are eager to purchase. The result can be rapid growth and huge profits, at least until the competition catches up and the new products become commoditized.

Fundamentally disruptive changes (such as the Internet) are far more rare than narrow ones (such as the iPhone). But when fundamental changes do sweep across industries, they can offer opportunities to huge numbers of less innovative entrepreneurs, because so many old ways of doing things can be done better.

It would be natural to assume that in the Internet explosion we have already witnessed the biggest disruptive change of our lifetimes. And it’s true that the bubble years offered just about anyone the chance to try to do online what had never been done that way before. But while the opportunity was certainly broad, the economic impact proved to be brief for most. Today, much of the online marketplace has become highly consolidated, and most of the Internet-related jobs that were initially created in New England are gone.

Now, of course, there is a new revolution in process — sparked by skyrocketing gas prices and greater environmental awareness. This transition promises to be just as broad and disruptive as the Internet revolution, but more sustaining. Why? Because just about everything that we produce or do can be made or done better from an energy and environmental perspective. Moreover, it will often be feasible to retool an existing product using cash flow and bank loans, rather than hard to find and dilutive equity financing.

Think of it this way: If you have a product, can you make it lighter? If it uses power, can it use less? Are the materials you use obtained from sustainable, or from endangered or finite sources? When your product’s useful life is over, can it be easily recycled? If you want to start a new company, you’ll have even more freedom in choosing a place to start when it comes to these questions.

The key to the green opportunity is that virtually everything in use today — from building materials to high-technology items to food production and delivery — should be redesigned to make better sense in a world where energy costs more and the production of greenhouse gases must be reduced. That means that there will be just as much opportunity, and often substantially less risk, for someone doing a clever redesign of an old product than for a startup raising multiple rounds of venture capital to create something entirely new.

Those that take this to heart first will reap the greatest advantages as government and private procurement rules tighten and prices for green products can be highest, offering the fastest payback for investments in redesign. As emerging market wages and costs of transportation continue to rise, much of this new business may even be retained locally, rather than simply lost once again to outsourcing.

Unfortunately, the window to participate in this opportunity to maximum advantage will not be open forever. Local entrepreneurs that seize the initiative now, taking advantage of local academic and industry expertise in areas such as systems controls, network design, materials science and environmental engineering, will reap the greatest advantages — and create the most new jobs — for many years to come.


 

Andrew Updegrove is a partner at Boston law firm Gesmer Updegrove LLP, and has been representing startups since 1979. He be reached at andrew.updegrove@gesmer.com.