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Why We Will Win: Enthusiasm

Rob Day: June 20, 2012, 11:17 AM

The headlines can be depressing right now, I know. Because so much journalist attention is being paid to venture capitalists and politicians, when VCs are running scared away from the cleantech sector, and politicians are treating our industry like a punching bag, it can feel like things aren't going well.

That ignores the fact that I see a lot of cleantech companies (outside of a couple of sectors like upstream solar) doing very well operationally right now, growing revenues, achieving profitability, etc. And just as important is seeing how many large corporations are also more and more engaged in the sector, as customers, partners, and acquirers. If the economy can just hold off from cratering in the second half of 2012, I think it's going to end up being a pretty good year for our sector, all things considered. It just wouldn't be reflected in investor and political rhetoric. Whatever.

Besides, VCs and politicians aren't the most important stakeholders for us. Entrepreneurs are, because they're the ones who actually make it all happen. And while I acknowledge the challenges the sector faces due to capital flight and political fights, the level of entrepreneurial enthusiasm and effectiveness right now in the sector is higher than I've ever seen it. And that, my friends, is the lifeblood of our industry.

A couple of recent examples helped highlight this for me.

I had the honor of being asked to be a finalist judge for the first-ever DOE National Clean Energy Business Plan Competition. While entry was restricted to student teams, and thus naturally even the finalists all had gaps that would need to be addressed for them to be successful, it was clear that engineering and business students remain really enthusiastic about this sector. The teams had clearly worked very hard not only to make a compelling pitch, but more importantly to advance their innovations toward commercialization in meaningful ways. Especially encouraging was seeing how many of them were in some level of substantive dialog with potential strategic partners. The winners, NuMat Technologies from Northwestern University, are developing an obscure but potentially really valuable approach to gas storage (discovery and activation of MOFs) that could make it a lot more feasible for natgas vehicles to get adopted by the average American consumer, for instance. They and all the finalists did a great job, and I came away feeling encouraged about the level of enthusiasm I saw by all the competitors.

And then just yesterday we announced the semifinalists for this year's Cleantech Open Northeast accelerator program. What was great to see was that the level of participation this year not only didn't fall off from last year, but in fact it was even higher. Across the entire seven-region program, there were a record 350 applicants. Here in the Northeast region, we ended up with 39 semifinalists, up from 30 last year. 

And remember, for this networking and training program (built around a fun competition, of course!), we only work with actual startups -- this isn't just a business plan competition. So this level of participation speaks to the fact that entrepreneurial activity in the cleantech sector isn't falling off -- it's continuing to grow.

You can find the full list of Northeast regional semifinalists here (PDF), but let me close by highlighting just a small handful that were new to me but struck me as highlighting the breadth of entrepreneurial activity we're seeing right now:

Power Ally is taking advantage of more readily available customer energy usage information in deregulated electricity retail markets to be a channel for customers to better identify energy providers.

Red Ox Systems is tackling the oil and gas industries' challenges with brine discharge -- and turning it into useable product.

CleanSoft LLC is developing software that will help utilities tackle on-bill financing for energy efficiency projects -- a hot area in energy efficiency finance chatter, but one where the utilities will face challenges in implementation.

Callida Energy is managing and analyzing smart building data to drive more savings and better comfort in commercial buildings.

I'm very much looking forward to learning more about these companies, and to working with all of the semifinalist teams over the next few months. Our "Academy" is next week, which will be my first real chance to meet many of these entrepreneurs. I expect a lot of enthusiasm. In fact, I'm already feeling it myself.

Lessons From the Past Ten Years, Part Three: Team

Rob Day: June 5, 2012, 1:01 PM

It doesn't matter what kind of business model your startup is pursuing: tech development, service models, financial models, operational projects, etc. Unless you just get really lucky (which does happen, but can't be planned upon), you will need a team that executes at a very high level in order to succeed.

And yet, high-execution management teams are, from what I've found, the single rarest resource for the cleantech entrepreneurial sector. Much more rare than good business ideas. Don't read this as me saying that there are a lot of sub-par individuals out there -- but a lot of folks whose past experiences haven't (yet) prepared them for the unique challenges of their current role, and a lot of teams with significant but unaddressed gaps. Some will learn along the way and be able to execute at a high level anyway, certainly. But if launching a startup is described as "building an airplane in mid-air," these teams are also simultaneously trying to learn how to be a Top Gun pilot. It's really, really hard. Thus, investors are increasingly keyed into the team as a key success factor they want to see in place before providing capital to a startup.

So entrepreneurs -- especially first-time entrepreneurs -- would be well served to do a skills inventory of their founding team early on, to do an honest assessment of gaps that will need to be filled in sooner rather than later.

It may be helpful to think of four key skill areas that all startups share:

1. CEO
2. Head of finance
3. Head of tech / solution design
4. Head of sales / partnerships

For some early-stage startups, some of these roles can be combined, and for many startups, there are other critical roles beyond those four, but those are the four roles to think about in a broken-out way that seem common to every startup. Feel free to add additional ones as necessary.

Then ask, “Over the next two years, what critical accomplishments must we see out of each of these roles?” Write these down, so it becomes a scorecard for each role, and link each to an actionable time period. Include tight deadlines. These accomplishments should be as specific, quantifiable, and narrowly defined as possible to make it a useful scorecard for looking at the full scope of the role, not just one or two key tasks. Look to break down the role into very concrete and discrete tasks that must be successfully tackled along the way to bigger, overarching goals for the organization. So it shouldn't be "form strategic partnerships," but rather, "form co-marketing relationships with two of the following five potential corporate partners to result in $10M in incremental revenues by year 2," for example.

At Black Coral Capital, we do deep-dive (multi-hour) interviews of many of the key managers at the startup, to see if in their professional history they have demonstrated a pattern of executing on these specific types of tasks. We look for other patterns as well (what patterns can we see of their interactions with coworkers, etc.), but from a skills assessment standpoint, it’s pretty straightforward. We do lots of reference checks to confirm what we've heard. Obviously, given the time commitment, this is something we do only so often, but it's always a necessary part of our diligence before pulling the trigger on a new investment opportunity.  

We don't ask questions like, “Does this manager seem to have the right general skill set or personality for this?” or "Are they a successful serial entrepreneur?" but instead, “Has this manager concretely demonstrated an ability to execute on something at least very analogous and transferable to the current scenario?” We focus on quantifiable results as much as possible, and focus on what the manager was individually responsible for, not just "part of a team that did X." (Note: This doesn't imply that the manager must have accomplished the specific scorecard tasks in an identical context before! Every entrepreneur has to be a first-time entrepreneur at some point. But we look for analogous examples from other roles they've held in the past, which is why breaking down the tasks as discretely as possible is helpful. For younger entrepreneurs, this can be pretty difficult, but it's still possible by taking into consideration the candidate's academic career, albeit with a grain of salt.)

But even without deep-dive interviews like those we perform, you can break down your career to date and run through this exercise. For each segment of your career, ask yourself: a) what were your specific performance targets; b) how did you do versus those targets; c) what did you do particularly well, and why; d) what did you struggle with or simply not do as well, and why; e) what your boss would say about you and your performance. Be brutally honest with yourself, but really by viewing yourself (as best as you can) through the lens of what colleagues and supervisors would say. Definitely look up what previous annual reviews or other actual delivered feedback said. No need to be unduly harsh on yourself -- you're looking for what skills tend to stand out and what gaps you tend to experience, and how those affect concrete results. It's not a substitute for a deep-dive interview by a trained professional who can help you discover things you wouldn't have realized for yourself. But it's a good place to start.

Do this for your key senior team, and use it to build a skills inventory independent of the scorecards. Then match up the scorecards to this skills inventory, and grade along the concrete tasks: "green" for tasks that the manager holding the role has clearly demonstrated before, "yellow" for tasks they have some strong indications for but haven't actually done before, and "red" for clear gaps that haven't been demonstrated at all (not that the manager couldn't develop these over time, just that it hasn't happened to date).

No one ever scores perfectly green down the whole list, but it’s very useful to see where the gaps are, especially across the team. Particularly for younger, smaller entrepreneurial teams where everyone is wearing multiple hats and often trying to learn new types of roles, it's important to recognize where the biggest gaps are and think about addressing those as high-priority early hires.

And the scorecard itself becomes a useful yardstick for assessing the performance of the team along the way.

The above-described method is just one way to go about it, there are other valid ways, go with whatever works best for you. A short-hand version is to simply ask yourself, "Given the idea we're trying to tackle, why is this team as it exists today uniquely positioned to out-execute any other team on this specific idea?" Still, a full skills inventory and scorecard exercise of some kind gives a fuller picture. And that's helpful.

Nine times out of ten, when I see a management team with clear gaps in skills and experience, they don't seem to understand them. And therefore, they don't have a concrete plan for addressing them beyond "We know we need a CFO" or such. And therefore I can't invest.

It's also the toughest subject area for investors to give honest feedback on when they pass on an opportunity, because it's the most personal. So if you have a great idea and you're having trouble getting investors on board, maybe it's the idea itself that's the sticking point. But as likely as not, one way or another, it's about the team, even if the investors don't say so. Take a deep breath, and do what you can to figure it out. Believe in yourself, but be honest with yourself too, and adjust accordingly. It's not a failure to spot significant gaps in your team's skills inventory, it's a win, because now you can go about addressing those gaps.

Note: This is not a personality test exercise. Personality tests are fun, they provide instant gratification, and some of the better ones can help people better understand themselves. But the science around how to mesh different personality and work styles is slim at best; plus, some of the more simplified personality tests just ask people about what they want to be like and thus just reinforce existing perspectives. They don’t really challenge folks to home in on what they truly do well or poorly. Besides, personality isn’t really a direct determinant of success in entrepreneurship. Everyone wants to be a visionary breakthrough thinker but execution takes many forms.

One caveat to end with: While I noted that you can consider analogous prior tasks when building the skills inventory, there's one aspect of venture-backed entrepreneurship that I've found there's just no substitute for, and that's understanding how venture capital works. I (half) joke that venture capital is more of an art than a science. More specifically, VCs tend to do things and ask for things and expect things that make sense from their perspective, but that can be surprising or may even seem illogical to an entrepreneur who hasn't worked closely with them before. It can lead to some real disconnects between strong entrepreneurial teams and their investors, simply because of those different perspectives. Understandable, but still potentially deadly disconnects.

If you are seeking venture capital for the first time, definitely seek to add to your team (either as a full-fledged senior team member or as a heavily involved and accessible advisor) someone who's done a slow dance with venture capitalists in the past, preferably as an entrepreneur. If they weren't in the board meetings, it doesn't count, so ask them about that. Rely upon this perspective to not only understand why the VC is saying what they're saying, but also to give you a heads-up as to what's coming next -- and what the tradeoffs are. And how to get as much value as possible from your relationship with your investors.

Also, feel free to ask the VCs themselves about what lessons they've gained and what surprises they've had in learning their business. You want to know and find a good match with your financial partners, after all, so they should be happy to share.

VCs can be quite valuable partners for entrepreneurs, but only if the entrepreneur understands where they're coming from, how they're motivated, and what they can truly bring to the table.

Lessons From the Past Ten Years, Part Two: Urgency

Rob Day: June 3, 2012, 8:15 PM

I've seen it happen way too many times: cleantech startups that miss their revenue forecasts, but not because they're losing sales opportunities to other vendors. Instead, it's just because it takes longer to get opportunities in the pipeline to a "yes."

It's understandable how this happens. The cleantech startup will have an offering that's an economic no-brainer for the potential customer from a payback period standpoint, and the potential customer makes all the right noise about being interested. But day to day, energy spending simply isn't a priority for most of these potential customers, so their decision-making slips. And then it's compounded by the fact that the customer feels like, even if this offering has great economics, they still will need to research all the recent proliferation of other available such offerings to make sure they're not missing out on an even better opportunity. So sales expected to close this quarter slip into next quarter -- and quite often, the quarter after that.

What's missing is a sense of urgency, some compelling reason for the customer to say yes now. And I haven't seen enough cleantech startups that have sales teams that are good at creating that urgency. Because I haven't seen too many examples of cleantech startups able to create this sense of urgency and drive timely sales, I don't have a complete answer to this vital question. But here are some ideas I've seen used in our portfolio and elsewhere:


1. Instead of trying to create urgency among customers who don't have it, do a better job of finding the customers who do.

What does this mean? This means fill the top of your pipeline funnel a lot more than you are.

In many other sectors, this is the role of well-running channels. They go out there and identify and aggregate the 10% of potential customers who are already ready to say yes, and take their cut for doing so, because otherwise the vendor would need to reach out to 10X as many potential customers -- a costly proposition. But of course, for most cleantech markets, the channels are either ineffective or missing altogether. So you're just going to have to do it yourself.

Fortunately, thanks to advancements in marketing, there are a whole lot of new ways to get in front of prospective customers. So it may well be worth investing in skills, either internally or externally, in the fields of direct and internet marketing -- and effective (not just paint-by-numbers) PR, as well as to explore other ways of getting a lot of market reach, very quickly. Because you probably should have 10 times the sales pipeline you currently have, if you want to meet your sales targets. Some cleantech startups clearly spend way too much money on PR and marketing. But most don't spend enough.


2. Inspire greed. Inspire fear.

Did you ever notice how every month seems to be Ford Truck Month? It's how they get the customer to feel a sense of urgency -- high sticker price but a time-limited "special deal" to spur customers to get in by the end of the month or supposedly lose out on a bargain.

One of the companies in our portfolio has gotten customers to pay attention to certain dates by (truthfully) saying they're holding certain inventory for the customer, but if they don't say yes by a deadline, then the inventory is released to other customers. This works in their case because their solution is in high demand, and if the inventory is released to other customers, there will be a delay before the next inventory comes in.

Whether it's a special discount, or a potential missed opportunity, the point is to set a deadline that inspires either greed or fear in the customer. I do see a lot of discounts offered in the cleantech space -- but they're often not tied to a timeframe. They're just a lower price offered to try to entice a customer. But unless there's a deadline and consequences for missing the deadline, next month is just as good as this month for many buyers.


3. Change the message.

All I hear out of entrepreneurs is "payback periods." That's the standard metric used. It's all about two-year payback periods or less for C&I customers, and perhaps longer than that for residential customers.

But from what I can tell, that's not compelling to these customers. With the high upfront capex requirements of many cleantech offerings, even a two-year payback period comes across as delayed gratification, and may not stack up well versus other corporate investment opportunities right now. And it also misses out on the additional value after the payback. 

I've started to see use of "pays for itself X times over." So if it's a two-year payback and a 20-year equipment life, it pays for itself 10 times over. This seems to be more effective messaging.

But perhaps the messaging can be improved further still. I'd love to see more cleantech startups get enough knowledge of their customers that they can phrase things in terms very directly related to that buyer's economics, such as, "This will boost your profits by X%" or however the buyer is compensated on their annual bonus. Get 'em in the annual bonus, and their attention will follow.


4. Develop a better understanding of the buyer's process.

Far too often, the missed expected sales dates happen not because the buyer was unduly delayed, but because the startup didn't understand all the hoops the buyer was going to have to go through to officially say "yes" and sign a purchase order.

This seems to be particularly true for utility-facing startups, where the sales cycle will be dramatically impacted by the timing of things like rate cases with the PUC. 

Know your customers' purchasing decision processes -- and their own potential delays. And then factor that into your decision as to which ones to prioritize, when.


5. Help them get comfortable

This one is more of a brainstorm than anything that I've got proof works in the real world. Tread carefully.

But I do see that one of the major reasons for delays in purchasing decisions is because the buyer realizes they need to do research to make sure they're really looking at the best available option. And because of lousy channels and lack of other general information, this can be a pain -- and time-consuming. They can't just easily piggyback off of research others have done because it's hard to find, and there aren't good buyers' guides or comparative shopping sites, etc.

What if cleantech startups provided that info for them?

"Wait a minute," you might rightfully object, "Did you just say I should tell prospective customers about my competitors?"

Well...yes. At the right time. And in the right way.

It's worth finding any authoritative research that has been done on the market and buyers' options (and if it doesn't exist, think about even creating it, perhaps via a third party) and having it readily at your disposal. Sure, it's not what you lead with in the first conversation, perhaps. But when a customer seems to need to do their research on all their options, help them discover and assess all of their other options, in as trustworthy a way as possible. 

Because the sooner the customer feels comfortable that they've assessed all their options and you're still the right choice, the sooner they'll be able to say yes.

Providing transparent information might not only help them get there sooner, it might also help you build a relationship with them. And if you don't stack up well against the competition in a transparent comparison, perhaps you're not supposed to be selling to that customer anyway.

Just a thought.


Whether it's these or in other ways, get more aggressive about creating a sense of urgency with your prospective customers. You can't assume your channel partners are going to be competent at finding and closing deals. You can't assume customers are going to recognize and act upon good value in a timely fashion. Force the action. Or move on to the next sale quickly.