Print
Email
Print Edition Stories
Friday, June 12, 2009
Green Growth
It’s time for clean tech proposals to get some payback
MHT's Efrain Viscarolasaga: Tech companies may have to wait for stimulus funds
MHT's Efrain Viscarolasaga: Solar installation booms in New England
MHT reporter Efrain Viscarolasaga on NECN: Green tech brings jobs back to Mass.
One of the things that’s special about energy and water markets is that there often are many different ways to accomplish the intended goal. At the end of the day, even the wildest scientific innovations in these fields are directed at very basic commodities, like producing electricity, saving energy or purifying water. The fact that there are so many viable alternative solutions means that costs and payback periods are critical to understand.
Most clean tech entrepreneurs already understand how important it is to provide a compelling offering to their customers in terms of dollars and cents. The economic value proposition is the single most critical factor that will determine the eventual success or failure of a clean tech startup.
Unfortunately, as a venture investor I have also seen many clean tech entrepreneurs lose sight of this fact in their planning and in their pitches to venture capitalists. In part, that’s because it is never really as simple a question as it might seem at first blush. Some potential pitfalls include:
Picking the wrong comparison: Many entrepreneurs present their economic advantage versus an overly easy target. I met with a manufacturer of a fluorescent lighting fixture who took great pains to point out how economically advantaged their products were versus decades-old High Intensity Discharge (HID) systems. But were the fixtures advantaged versus other fluorescent fixtures? Or even versus newer-generation HID systems? This management team didn’t really understand their emerging competition, so they compared themselves versus the status quo. So yes, the status quo was poised to lose versus new technologies. But which new technologies would win?
Lifetime versus upfront versus operating costs: First of all, you have to know how your customers are used to making their purchasing decisions. Is it a total lifetime cost comparison? Will they balk at “sticker shock” on upfront costs? Or are they willing to suffer a longer payback period if it means a significant multi-year reduction in their operating costs? As an investor, I care about overall lifetime costs most of all, it’s the apples-to-apples picture. But I care about how it breaks down in terms of up-front and operating costs too. And for many industrial and commercial customers, the key thing they need to know in order to justify a purchase is payback period. Entrepreneurs need to understand and present the full cost picture. And they need to understand what economics their customers will really care about.
Today’s costs vs. future costs: No one expects that the first system manufactured will be cheap. Volume manufacturing, climbing the learning curve and other factors will hopefully drive costs down over time, it’s understood. However, many entrepreneurs don’t paint the complete picture when pitching potential investors. They may talk about their long-term cost level. But how long will it take to get there?
What specifically will drive the costs down over time? What critical assumptions are necessary in order to believe the cost target? Are you asking investors to have faith in the promise of as-yet undiscovered technological breakthroughs? And what really will the first unit cost, anyway? As much as anything else, being very clear and precise about these answers will not only address a critical business issue, it will also help the investors feel comfortable that the management team is realistic, expert and focused on costs.
Even for the earliest of startups, focusing on eventual customer economics is crucial. It will help with fundraising, but even more importantly it will help in building a business that the market will eagerly welcome. Especially in energy and water markets, where customers have so many different alternatives to choose from.
Fashions and trends come and go. But it’s always payback (period) time. Especially in clean tech.
Rob Day is president of the Renewable Energy Business Network. You can reach him at cleantechvc@gmail.com.
Comments
If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.
RSS Feeds
