You've taken a technology idea, developed it into a product or service, and convinced a few customers to buy it. Now it's off to the races, right?
That's been the prevailing theory behind a lot of expensive growth-round financings in cleantech venture capital over the past decade. But from what we've seen, quite often there's a next step in the growth curve that can be very difficult to predict and to pull off successfully -- transitioning from an initial consultative sales phase into a rapid-scaling standardized sales phase.
It can be hard to get customers for many types of cleantech products and services to try it, much less pay for it. Take energy efficiency, for example -- energy costs for building owners may be one of their top 3 or so expense line items, yet it's rarely top of mind and is often subsumed below other priorities like maintaining comfort and/or productivity. So if you have a new type of efficient HVAC system, no one wants to be the first to buy it and install it, even with white papers and data to show the system will work. The same applies to other cleantech areas like solar panels, smart grid, vehicles, water treatment, etc.
I've run across a few entrepreneurs in the cleantech world who are really good at navigating this early adopter phase to get initial products and services out into the marketplace. These entrepreneurs tend to have a well-honed consultative approach to sales, a very direct relationship-based approach to enlisting customers and convincing them to take a relatively bold step to purchase the startup's solution. They work through a long sales cycle to make the customer feel comfortable that the system will work and that the startup will stand behind it and not let that customer fail. They rapidly iterate their overall solution in response to potential customers' needs and wants. And they help the purchasing manager feel good about their decision professionally and personally.
All of this takes significant time and effort. So while these entrepreneurs can be pretty gifted at making these first few sales happen, these skills don't necessarily lend themselves to a next phase of rapid sales growth, which can't be so high-touch.
In fact, it is at precisely this point that we've seen a number of venture-backed cleantech startups get themselves in trouble -- often precipitated by raising large rounds of "expansion capital" and then attempting to scale up too quickly.
The startup may have overly high expectations of the effectiveness of recently enlisted channel partners, for example. If the initial direct sales required a very consultative approach, sales efforts by channel partners are likely to require a similar approach. And often, distributors and resellers aren't as effective at that, nor can they scale up rapidly themselves, either. I've seen several startups who used early sales to enlist big-name channel/sales partners and then were surprised at how ineffective that partnership turned out to be.
Similarly, the startup may have successfully sold a downstream OEM on including their solution in that OEM's products, only to see the OEM underperform on sales. This has happened in the lighting industry a couple of times, for example, with LED component sales to large incumbent fixture manufacturers. Winning a few SKUs with that OEM is a great first step -- but then no market pull materializes because the OEM isn't very effective at selling the new technology and therefore initial POs to the startup dwindle instead of ramping up.
Alternatively, the startup may simply expect the direct sales efforts to ramp up quickly once the market sees its solution in place and working well. But the really difficult thing about many cleantech solutions is that even early sales often don't unleash market pull. It's not as if many purchasers of energy-related products and services are simply waiting on the sidelines until they see something that works. They often see lots of things that work. And yet they also have higher priorities on a daily basis, and they don't have time to sort through all their choices. So simply having successful installations to point to isn't enough to pick up significant sales momentum, at least by itself.
Meanwhile, the startup's investors are pushing for revenue growth, so new sales team members push harder and harder to win any deals they can -- and margins suffer and mission creep leads to overpromising on what can be delivered. I've seen at least one startup in the energy intelligence sector get sucked into projects that significantly drifted away from the company's core technology and competencies, and led to underperformance versus customer expectations. That startup still didn't see rapid acceleration of revenues even with such drift.
And yet, along with the above three types of failure to "turn the corner" and see rapid acceleration of sales, the startup may have significantly ramped up their expenses, to manage channel partners, or to do further product development, or to build out a direct sales force. But if they overly invest in such capacity and sales remain tepid, cash burn remains high. Let's be clear -- in all of the above examples, revenues were growing! But they were growing at a lower rate than expenses were, and the startups got in trouble. In a couple of cases mentioned above, the startups effectively failed.
So what does it take to make this difficult transition? It requires standardizing the solution and being very hard-nosed about it. The initial "the Beta Customer is always right" phase needs to give way to a phase where -- as informed by those early customer interactions -- the solutions offered to customers come in a very finite set of options.
This next phase also requires a very different skill set and sales approach. Instead of winning early sales at any cost, now the sales team needs to feel free to walk away if the customer is asking for too much of a discount, so this now requires a different level and caliber of sales team management, including changing the way sales team members are compensated so that it's not just top-line oriented. Counterintuitively, walking away from tough sales may help accelerate overall sales, if sales team bandwidth is a limited resource and other easier sales opportunities are being missed. This next phase thus requires a very formulaic inside and outside sales process, which therefore requires experienced sales leaders who know how to establish and manage such processes. Sales teams themselves may need to change, to better reflect the skills required for this next phase.
And now is when significant "direct marketing" can be helpful, so that in a very targeted way the next potential wave of customers are repeatedly informed about the startup's solution before the sales team has ever visited. The goal is that by the time a channel partner or sales team member shows up at a customer site, the customer has already heard several times about the startup's solution, the value proposition, and examples of success. They're primed to say "yes," or at least to proffer a faster "no." No more evangelical sales efforts with long lead times.
Managing this shift also requires significant changes to product management, to logistics and operations, to customer service, and to many other aspects of the business, as well. In short, it's a very difficult transition to get right. Very few management teams, even the ones who managed the early market introduction with flying colors, can successfully navigate this transition without at least augmenting the senior management team to bring in these different experiences and skill sets.
Nevertheless, in many cases there will still be a need for a consultative sales skillset when expanding into new markets with new offerings, so I'm also not arguing that it's inevitable that the startup's leadership has to be changed to manage this transition. I haven't yet seen many examples of cleantech startups dividing the sales management role into two parts -- a leader of the inside and outside sales effort for the solutions that are already established in the marketplace, and a "New Business Development" leader. That model would be interesting to see tried out. But for now, I've only seen attempts to have the chief sales leader in the company manage both types of sales. And I think this is why many revenue-stage cleantech startups have struggled at this phase. Either they are so focused on the rapid scale-up that they lose the ability to identify and enter new market opportunities, and fail to escape out of their early-adopter niches, or they never add the kind of sales leadership more appropriate for rapid revenue scale-up within existing market opportunities.
And while this transition is probably pretty difficult in any sector, I believe it is often exceptionally difficult in energy- and water-related markets. And it likely will continue to be until the universe of potential corporate customers for new solutions start making energy and water costs their top priority.