Commercializing technology

In which we ponder the gulf between technology and product

I was having a conversation this morning with a friend who mentioned a startup he knew of. The company has developed a new technology that converts biomass into fuel (don't ask me how, I don't know the details yet). A similar company in Eastern Europe has been successful, so the investors believe that given the right GTM (go to market) strategy, this company could be a commercial success. The problem? The technology they have today needs economy of scale i.e., it needs to process a LOT of biomass to make fuel, and this means you get a BIG machine that costs a lot of money. The investors are interested in affordability i.e., make me a small machine that one family can buy and use. Result: a startup team that is focused on the cool new widget they invented, and potential investors who are (rightly) worried about commercial viability.

As a thought exercise, let's see how this might play out.

This is not an unusual situation. In fact, you see it in Silicon Valley about a dozen times a day. Startups are almost always about cool technology. They're not thinking about commercialization i.e., making money. At some point, the startup team realizes (or the investors help them realize) that money needs to be made. How? You can go both ways: you can take a product and build a business around it, or you can identify a market need and adapt your product to it. Which approach is better? That depends on your particular situation. A machine that converts biomass into fuel can be either (1) a small gizmo that you sell to every farmer in India for very little money or (2) a fairly large installation that is sold to large farms, co-operative societies or even joint families and villages. (I'm over-simplifying here. Obviously, there is a spectrum between these options and the final product can be anywhere on that spectrum).

In (1), you want a truly retail product that can be manufactured, shipped, marketed, sold and supported at pretty thin margins. In this case, your "big money" is going to have to come from scale. Assuming, of course, that you make that commitment to go out and sell the thing by the tens of millions. If you're trying to cover a country like India with a small retail product that will be sold to farmers, what should you worry about? You should worry about being able to find and reach that customer base. You should worry about the logistics of getting your product from manufacturing to customer. You should worry about how this product is going to be maintained and serviced. And how you're going to do all this at very low cost per device. Is the retail product going to be robust enough that you expect a very low failure rate? Is it simple enough to repair that every village cycle shop guy can repair it and you don't need to worry about building a service organization?

In (2), you have a little more wiggle room. Each installed product has to be profitable on its own: so you need fairly hefty margins (remember that you're factoring in the cost of getting it there, setting it up and probably servicing it too). Now you're less worried about finding new customers and more about scaling carefully and maintaining your customer base. What is the lifetime of this product? How long before you have to replace it? How often do you have to service it? Do you price lifetime service into the installation or do you take the product + service fee pricing route?

Neither case gives you easy problems to solve. These are fairly standard business principles. The trick is to remember these and apply them rigorously when you're looking at that shiny new gadget that's _just_ short of where you need it to be for the business model to work.