March 28, 2012 – In recent years, the revolutionary opportunities in the energy sector have attracted billions of dollars from early stage venture investors. But the venture world has learned some hard lessons on the difficulty of building energy businesses: they face science risk, often take a long time to scale and can be capital intensive.
While the overall appetite for venture-backed energy suppliers has cooled, we believe there are abundant opportunities for entrepreneurs to innovate on the ‘demand-side’ of energy markets. We are seeing a wave of new energy companies developing technologies focused on energy efficiency. Alas, most of these companies fall short when it comes to bridging that crucial gap between technical innovation and customer adoption. Similar to the trend toward consumerization of IT, we believe the companies that are poised to explode and redefine the energy tech landscape are the ones that are putting the consumer in the driver’s seat. Their value goes beyond the promise of energy efficiency, to deliver products and services that delight users, make them accessible through innovative business models, and understand the mindset of the energy consumer.
The Prius Effect
One of the most successful and important models for understanding energy-efficient products is the Toyota Prius, which has sold over one million units since its U.S. launch in 2001. The hybrid-drive technology behind the Prius is too expensive for the gas savings to catch up with the up-front premium on the price tag. What makes the Prius so popular is that it is symbolic, delightful and affordable. All of it – the unmistakable body shape, the navigation/smart key system, the price – makes the Prius a symbolic and easy decision for a hybrid car consumer. Whether you’re a senior exec, a stay-at-home mom or a college student, ownership of the Prius confers status and green consciousness –and therefore adds value. Following the success of the Prius, other examples of products and services that exemplify the consumerization of energy tech are beginning to emerge.
Delight and Engage the User
A good product must surprise and delight, and more importantly must continue to engage the user. Nest Labs has recently introduced a new home thermostat that has captured the imagination of the residential homeowner. Borrowing from its founder’s Apple pedigree, the highly fashionable Nest not only provides the comfort and energy savings that one might expect from a smart thermostat, but the styling, the simplicity and the engagement of its interface truly delights users.
Innovative Business Models
In many cases innovation on the business model and delivery mechanism pushes a product or service mainstream. In a span of a few years, SolarCity (a Mayfield portfolio company) has established itself as the leading residential and commercial solar services provider in the U.S. by providing a finance/leasing structure that makes the purchase of solar power both easy to adopt and available to a broader customer base who would have balked at the upfront cost. Their winning formula stems from owning the customer relationship and taking the pain and complexity out of being green.
Understanding the energy consumer mindset
There are two kinds of energy consumers – those who work in operations-centric facilities such as warehouses, cell phone towers, datacenters or water treatment facilities; and occupant-centric spaces such as homes, corporate offices and small businesses. In the former, the occupants are only there to support and maintain the operations of the facility. In these cases, energy efficiency can be used as a tactical weapon to drive down the primary operating costs.
In the occupant-centric organization, the annual energy spend is typically 10x less than the rent/mortgage, which in turn is 10x less than salaries and support costs. On average, homeowners spend less than 2% of their total disposable income on energy. The interested reader can do the calculation for themselves, comparing the value of their time, against their mortgage, against their energy bill. Offering someone 10% savings on a 2% budget hardly moves the needle.
In these cases, energy efficiency needs to be bundled as part of a broader offering of value-added goods and services. In other words, emphasizing a value proposition of cost savings and efficiency does not resonate as much as offering consumers a delightful experience that also makes them feel good.
Advice to Entrepreneurs
The little known secret in the world of energy efficiency is that most consumers don’t actually care about the savings; they care about being delighted by a product or service that is accessible, easy to use and potentially symbolic. We believe companies that offer the consumer something more – an augmented lifestyle or a seamless foray into the new world of energy tech – are the ones that will dominate. In the era of the consumerization of energy tech, technologies and business models must deliver value and solve a pain point for the end customer, and not just fixate on ROI and savings. In some cases, they can even charge a premium for it. Imagine that.
We are close to the realization of the smart home and the smart office, when we will never again have to walk into a dark room or a cold building. The existing set of technology companies have taken us part of the way there, but bridging that gap will require energy tech companies that take these exciting new technologies from the lab to the living room. That means someone installing the smart wiring in the walls of buildings, the network firm providing the platform connecting the smart devices, the gadget-makers that provide an Apple-like user experience for every fixture, and the next-generation utility offering new forms or methods of energy delivery. From the foundation up to the power grid, that’s a lot of space for entrepreneurs who know how to make it easy – and cool – to be green.
This post originally appeared in Forbes online.