For cleantech entrepreneurs who were out raising funds from VCs three years ago, it was easy: Just make the biggest claims possible. Talk about reinventing the entire planet, VCs wanted to think big. Bigger dreams just meant bigger rounds.
These days, market disruption is still a major goal of many VCs investing the sector. But pragmatism, capital efficiency, and execution are the watchwords of the day. This presents the cleantech entrepreneur with a dilemma -- do they talk in very focused terms about a couple of market sub-segments where they know they can do well, or do they talk about massive market disruption but risk coming across as not being serious enough?
For what it's worth, my advice is: Do both.
Just as in the consumer web, the 'long tail' concept applies well to cleantech market opportunities. In both cases, "niches" can be very lucrative. Focusing in on one or two niches, at least at first, allows the entrepreneur to really get to know their initial target customers; to get to know all the major players in that market segment's value chain; to understand exactly what customers are looking for beyond the basic "cost per kilowatt-hour" type metric; to assess what other specific alternatives these customers have in front of them, and design a value proposition that beats them all.
You can't be all things to all customers, so this sort of narrow focus enables superior execution. Plus, it allows for a tailoring of the value proposition to get out of the "commodity trap" and capture better margins and some level of defensibility. And also, by the way, it helps give investors comfort that the management team is deeply engaged and digging into all the details of their market in a really thorough way.
"Niche market" is still a dirty word in some VC circles because it sounds like a limited market opportunity. But in cleantech, even very niche-y markets can be huge. Your component is focused initially only on the personal scooter and motorcycle market? Well, that's going to be a 75M-unit annual market by 2015. Your lighting system is targeted initially at industrial buildings? Turns out industrial-segment lighting is a multibillion dollar annual market in the U.S. alone. You can home in on some very specific niches even within these subcategories and find markets running in the hundreds of millions of annual dollars or more, providing plenty of beach for an initial bridgehead.
And yet... VCs still want to go for huge-win opportunities. Not only because of the returns profiles, but also because that's how they make a name for themselves even aside from their returns. Therefore, if you're raising venture capital, you also want to have a Grand Vision for how you're going to eventually break out of your bridgehead niche, and take on reinventing much larger swaths of the market. How can you use your initial niche-focused market entry to create an unfair advantage for yourself when then expanding into other large, related markets? How is your core business model and/or technology well positioned beyond your initial market niche? How are you going to use success in selling into the personal scooter market, to better enable the electrification of drivetrains across the broader transportation sector? What is the reinventive potential for "embedded intelligence" in the lighting market even beyond industrial buildings? These are the kinds of exciting stories that entrepreneurs should also be ready to tell, so that their passion and the broader opportunity is clear to them, their teams, and potential investors and strategic partners.
The key is: Have the stories ready to tell. Keep them in mind as long-term strategic guideposts. But make sure that on a day-to-day basis you're absolutely killing it within your initial niche. Think big, but be focused.