One thing I've learned as an investor that is true beyond cleantech: offering a compelling value proposition to customers is important, but it's not sufficient for a startup to be able to grow revenues quickly.
Growing revenues rapidly as a startup (with limited marketing resources, brand recognition, etc.) requires essentially fishing in a barrel. You need a concentration of either customer mindshare, or of actual customers. The best situation, of course, is to have both: a bunch of easy-to-find customers who all put a priority on the problem you're solving. That way you can quickly and cheaply reach new customers, you get their attention, and you quickly convince them to open up their wallets.
But that's not always possible, and it's not fully necessary. Flipping that around to put it another way, you can get away with having either customers with fragmented mindshare, or highly fragmented customers, but not both.
The problem is that, for many opportunity areas in cleantech, such as building energy efficiency solutions, agriculture solutions, alternative vehicles, etc., the startup is indeed presented with both challenges simultaneously. These are highly fragmented markets, and while the customers would all agree that operating improvements are a priority, it's rarely their top priority on a day-to-day basis.
I believe this is one reason why building energy-efficiency solutions have typically found it hard to scale. The building owners and managers who place a high priority on energy improvements and happen to be in a position to carry them out (e.g., a budget is in place, perhaps a general retrofit is already scheduled) are out there -- but they're highly scattered. And the rest will nod their heads and often take a meeting, but always find a reason (or a distraction) not to say yes. So we've seen a lot of very interesting energy solutions for residential, commercial and industrial customers that have failed to grow revenues rapidly, because the cost of customer acquisition is high in terms of both dollars and time (both of which can be deadly to a startup).
The saving grace for cleatech entrepreneurs facing this challenge, however, is that these markets are just so darn big. Billions of dollars of potential markets are just waiting to be tapped. Even if only a small portion of those markets are truly receptive and eager at any given time, that small portion still adds up to a very attractive market -- if you can find it.
Unfortunately, I see too many startups in these markets reaching out to a smallish pipeline of potential customers (out of necessity, due to limited bandwidth and marketing resources), and then working really hard to close on a high proportion of those opportunities. Others take the opposite approach and just spend way too much on marketing, but without ever really engaging with potential customers until they're already 'sold.' Several of the earlier posts in this Lessons series have dealt with this indirectly, by talking about the right role of marketing and PR, or the missing channels for a lot of these solutions. There are some tactics there for addressing the problem a bit. But basically, when you're dealing with a fragmented and distracted customer base, identifying a very few opportunities and then wrestling them to the ground will just never scale. And you can waste a lot of venture capital on marketing without knowing for sure that the customers are receptive and ready. The hoped-for 'inflection point' where you get enough customer momentum that the ball starts rolling downhill by itself is a lot further along than the startups and their investors anticipate when you're dealing with the double fragmentation problem.
So how do you deal with fragmentation? Aggregation.
We've seen how this works in the solar sector. As today's announced research from GTM and SEIA illustrates, the market for solar installations in the U.S. has been growing by leaps and bounds, including within the very same set of residential, commercial and industrial building owners referred to above. And arguably, solar on the roof has a worse economic value proposition than efficiency improvements in the building. So how is this growing so quickly?
Different companies have taken different approaches, but they're all about aggregating and effectively engaging the scattered demand. Perhaps only 10% of homeowners want solar on their roof (and at this point, that looks to be a low guess), but if you can quickly reach and quickly assess and quickly convert those scattered homeowners, you can build a backlog very quickly. So in downstream solar, the metric of the day is 'cost of customer acquisition.' It should be the metric for all sorts of other cleantech sectors as well, especially energy efficiency.
How do you effectively aggregate fragmented demand, then, to lower that cost of customer acquisition?
1. Build a network of potential customers, even including those who may not be in the market to spend money right now. Figure out what will make them want to interact with you, and make it easy. Or find existing aggregation points and tap into those funnels.
2. Get their data. Get rich information about their patterns, their needs, their existing conversations and research.
3. Analyze the data so you can present them with even more valuable opportunities that they may or may not have known about but can trust. Do their homework for them, and help them succeed with what they acknowledge is something they want to do but have trouble prioritizing.
This may sound like motherhood and apple pie, but understand that for most of the past decade the theory most cleantech entrepreneurs and investors seemed to follow was that a great technical/product innovation would drive customers to rapidly purchase the solution. You still hear echoes of this when very smart guys like Vinod and Bill Gates talk about the need to find radical innovation with ten-fold performance improvements as the be-all-end-all of cleantech entrepreneurship. But even if you can find and develop such solutions, I would argue that we've learned that it's still tough to scale up revenues in the real marketplace, without also tackling these other challenges. The fact that such basic lessons about entrepreneurship are still relatively untapped in the cleantech sector are what give me hope that we're on the cusp of a powerful next surge in our market. Because we know it can be done, and how to do it.
You will likely read the above three points and think they sound very applicable to internet-based business opportunities. They do. But not necessarily so. One of the reasons our portfolio company Next Step Living has been growing so quickly recently is that the firm went through this exercise but started with a physical touchpoint with customers. The firm partnered with towns and utilities to be able to visit thousands of homes per year as a trusted energy advisor. Now that Next Step Living has that customer network in hand, the data-driven side of its business is yielding exciting results, but it didn't start with an internet-based business plan.
On the other hand, (and as proof that we're at least attempting to walk the talk), see our latest investment, Noesis Energy. It was our first "cleanweb" investment at Black Coral. And that firm is doing exactly what's being proposed above -- as this well-done write-up by Katie Tweed illustrates: they're giving away some really cool value to building owners and managers for free, and in easy-to-use ways. We got to see how, even in a quiet beta mode, it was a no-brainer for building owners and managers to sign up for a value proposition like that. And as you can tell from the above thesis, we have a lot of big plans for what can be done with that network. I'm fascinated by data-driven cleantech plays, by opportunities to reinvent channels in these markets, and by great teams. With Noesis, we think we've found all three.
I'm using these examples from our own portfolio as illustrations, because I like these companies and their teams, so if I'm going to brag about someone to prove my point, then hey, why not. But I think cleantech investors out there will find it a common refrain in many of the other fast-growing companies in the sector, especially among those going after distributed customers (i.e., not utilities or chemicals giants).
Whether you're a hardware innovator or a cleanweb entrepreneur, figure out how to aggregate fragmented potential customers, and figure out how to get in an ongoing conversation with them. The revenue growth opportunities will follow from that -- not the other way around.