Most high-profile cleantech VCs will tell you they’re looking for breakthrough technology. The “black swan”. The “grid parity”. The “unicorns”. (Okay, I made that last one up, but it wouldn’t surprise you to see some VCs talking like that, would it.)
But there’s an alternative model — that the winners in cleantech will be the integrators, those combining proprietary and non-proprietary technologies into systems, rather than those innovating breakthroughs at the component level.
Absolutely, there’s value to further innovation at what I’m describing in this column as the “component level” but which can be pretty important. Cheaper solar cells, better battery chemistries, more efficient LED chips — all these have value that I don’t mean to discount.
But at the end of the day, all such innovations will need to be integrated into products, if not systems, intended to cannibalize existing markets and applications.
I would argue that the “economic rent”, or the real economic value, is going to be captured by the system integrators, not the component innovators, however valuable those component innovations are.
Why?
First of all, the existing markets don’t know how to use such component innovations. Adoption is slow. Lighting fixture OEMs have shown themselves to not be able to incorporate solid state lighting into their product portfolios either rapidly or effectively. Solar installers have little interest in the latest hot but unproven solar cell technology. Utilities don’t want to risk reliability in the pursuit of efficiency improvements. The markets aren’t automatically incorporating innovations into actual products in a timely fashion.
Secondly and relatedly, component manufacturers don’t have the point of contact with the customer. By having to work through channel partners or other influencers, the component manufacturers lose sight of what the customers really care about. When it comes to lighting, does the customer really care about how the fixture puts out light, and how much total light is sprayed out from the fixture in all directions? No, they care about the amount of light that is delivered to where they need it — on the manufacturing floor, or workers’ desks. All of a sudden, directionality matters. If you’re just selling LED chips, do you get that message from customers? No, but the integrators do. And designing a system to meet a customer’s specific needs becomes do-able to them.
Thirdly, the component manufacturers are delivering, for the most part, a commodity. In solar or other generation technology? Kilowatt-hours. In water? Gallons. In batteries it gets a bit more complex, but essentially it comes down to the amount of power that can be stored, and how quickly it can be released. There are lots of ways to accomplish this. But from the customer’s perspective, they want a comprehensive solution, not just the commodity or process itself. All these components are best used when managed intelligently. That’s what the integrators do. That’s not what a solar cell manufacturer, an LED chip manufacturer, or a battery manufacturer necessarily do. The integrators will be able to cherry-pick each such innovation as it comes along. Plus, customers will have specific needs for their products beyond just the basic commodity being delivered. And the integrators will be developing products that not just accomplish the main mission, but do it with the right mix of other attributes. And the smart integrator will also be future-proofed — offering customers the promise that the components may be evolving rapidly, but the core system being bought will be stable for several years to come.
Finally, integrators are at the point of contact between products and services. And I believe that is where the money is going to be made in cleantech. Component innovation by itself is just building a better mousetrap and expecting the world to beat a path to your door. Maybe one such innovation catches on, but many such pure tech bets will end up disappointing, even if the tech makes sense on paper. Meanwhile, services without technology innovation are from the VCs’ perspective low-margin and slower-scaling. But at the intersection between those you find the integrators, who can latch onto access to new technology to drive installation and implementation services that can create a sticky customer relationship with good win-win margins for both vendor and customer.
So what kind of system integrator is best positioned to take advantage of these factors? An attractive system integrator will combine some proprietary technology with off-the-shelf components. Ideally, the main tech engine (LED chips, solar cells, battery cells, etc.) are treated by the company as a flexible input. And the proprietary technology comes in the form of controls or other “ancillary” features that actually make a significant difference to customer value. This gives the company an edge versus competing integrators, but allows them to take advantage of the rapid innovation cycle at the component level.
Such thinking may not go over well in a venture community that values component-type ARPA-E fund-able intellectual property more than it values systems-level IP and know-how. But it’s what I’ve found so far to hold true in the cleantech sector.
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