Over the past ten years of cleantech venture capital, there have been a lot of hard-earned lessons learned. I'm going to start a periodic series of recapping some of what I think we cleantech investors and entrepreneurs have learned, and discussing ways to address those lessons.
To start off, today's topic is the importance of building trust in these markets.
With a few exceptions, cleantech markets (energy, water, etc.) are very reticent to adopt new technologies. They are risk-averse customers by design (you don't want your lights going off, do you?) and by tradition, and also just because often the buyers of these technologies have a million other things going on and so they just don't have the bandwidth to discover and assess new options.
So what doesn't work is simply expecting that you can build a better mousetrap, and the world will beat a path to your door. If you are introducing yourself to the cleantech marketplace, to scale up revenues quickly, customers need to quickly trust you and your products. You've heard of the sales cycle? I think a precursor to success in cleantech markets is the Trust Cycle -- how long it takes customers to trust you as a reliable vendor who they aren't risking their career by turning to.
How do you work through the Trust Cycle as quickly as possible, and even shorten it? I've seen three different strategies:
1. Build trust by growing to significant scale, and then introducing innovation.
"No one gets fired for buying IBM" was the old saw in the enterprise IT world before that market learned to love the innovative startup. Well, the cleantech markets still haven't learned that. So in this strategy, the startups attempt to become a trusted brand BEFORE introducing innovation.
Not too many cleantech startups have taken this approach. EnerNOC, however, is in the middle of trying this. They got big by out-executing during what was essentially a "land-grab" period in demand response. They weren't the only DR aggregator, nor were they really deploying much innovation during their early days (they, like other DR aggregators, were mostly paging facility managers and getting them to manually curtail loads or even just turn on a backup power generator). But it was a hot, fast-growing market, and they outgrew their competitors. Now that they're acknowledged industry leaders in this market, they're able to use the "cash cow" of DR aggregation to fund a lot of innovative offerings to their large customer base, including energy monitoring, energy procurement, etc.
Our portfolio firm Next Step Living could end up being another example of this approach, if things continue to go well. A couple of years ago, the firm's team started out in the residential energy efficiency services business doing what I called "blocking and tackling" services like audits, air sealing and insulation. The firm purposefully went into the market with an offering that the market already recognized, and attempted to simply out-execute. So far, it's worked: it has now grown around 10X since we made our initial investment. And while growing that core, familiar-looking (to the market, at least) business, the firm was simultaneously quietly developing much more innovative offerings in areas like finance, data analysis, etc. Now that the firm's in thousands of homes per year as a trusted energy advisor, it ends up looking like an effective channel for innovation like that. Opower could be another related example, and I believe there are other examples to be found in solar financing as well.
Another advantage for this approach is that the vendor owns the customer interface. Rather than rely upon distributors or channel partners, having a large amount of "owned" customers is unique in the cleantech market. And it leads to margin capture, as well as better direct information on customer needs and patterns -- which allows faster iteration and other benefits.
The jury is still very much out on NSL, and even EnerNOC, in terms of how effectively they'll translate their scale into innovation. And there haven't been too many other venture-backed examples of this approach, at least in cleantech, to date. But if this approach works, it'll be a good example of how to build trust by growing via out-execution on traditional offerings in an attractive market, and THEN using your market leadership position to bring innovations to market under your umbrella.
The major challenge to this approach, of course, is getting capital at an early stage. If there's no "secret sauce," why will VCs put capital into the company at all? I admit to having passed on EnerNOC as an investment opportunity early on, because I didn't see its core offering in DR aggregation as being defensible. I was right, but in the meantime, the company created a lot of value for its investors, so I made the wrong decision. But generally speaking, if entrepreneurs are going to try this "scale to innovation" approach, they'd better be able to bootstrap, or have a really great team and be able to point investors to a no-brainer fast-growth market opportunity.
2. Build trust via high-profile channel or JV partners.
This is the approach most cleantech startups have taken recently (at least, among those who didn't take a 'build it and they will come' approach).
Corporate partnerships have been the name of the game over the past couple of years, both because corporate partners have been one of the last good sources of capital (ouch), but also because they bring with them validation. Ostensibly, if a big-name Fortune 500 company puts significant dollars at work into a startup, it's because the Fortune 500 company has assessed the startup's innovation and found it to be significant. In some other markets, the right channel partner also brings this level of validation.
The problem for cleantech entrepreneurs is that lining up such partners is much easier said than done. These strategics and influential channel partners are like the innovation-reticent customers you're trying to convince anyway, so it's a big chicken-and-egg problem. It can take a long time to achieve the partnership that was supposed to accelerate growth.
Furthermore, just getting the partnership doesn't immediately lead to success. Many cleantech startups have been excited to line up a key strategic partner, only to be underwhelmed later by the results. Large corporate partners often aren't organized to effectively work with startups. And the more startups announce "exciting corporate partnerships," the more the market views such announcements with a yawn, so there's diminishing returns to how effective such announcements can be to getting customers to trust the startup, without the corporate partner pulling a lot of weight operationally. And as we've seen clearly in the lighting industry, simply signing up distributors doesn't guarantee volume.
And of course, partners will take their share of margin.
Finally, in some cases these partnerships can be counter-productive to the eventual value and growth of the startup, if it ends up scaring off other large corporate partners -- or eventually, acquirers. I've seen some venture firms that trumpet their ability to bring in corporate partners to their portfolio companies very early. I've often wondered how they manage this issue of partner-block, since many large corporates won't touch any startup that one of their competitors has put money into. Taking corporate investments and making corporate partnerships is not a decision to be made blithely, in other words.
3. Build trust by creating a powerful brand.
It hasn't happened too many times in the cleantech market, but certainly there have been some attempts to build strong brands, even before really having an offering, or via working with some high-profile early customers. Tesla, Fisker, Bloom Energy, Project Better Place all come to mind as examples of this approach.
The strategy is simple: If the theory is that customers need to hear about you seven times before they attribute any legitimacy to your offerings, then make that happen as quickly as possible by grabbing attention early and continually getting more attention. Especially effective is when it's a high-profile customer who's taken an early unit, both for the attention it brings, and also because it can help launch some positive feedback loops with other key opinion-makers and politicians who can help arrange other sales and other benefits (like incentives), etc.
The execution is a lot tougher -- and also capital-intensive. It requires a real core competency in PR and marketing, and a story that can be sold easily to journalists (and more importantly, their editors).
But overall, with the right teams and for the right investors, this can be a powerful way to short-circuit the Trust Cycle.
I hear entrepreneurs talk all the time about their "go to market" strategy. That's good. But I'd also like to hear more about how they're going to build customer trust as quickly as possible, too.