Texas, Forever: Advice for Startups Focused on the Energy Sector

October 29, 2019

By Scott Coleman, Ignition Partners, and Patrick Lewis, BBL Ventures

The energy industrial sector represents 15% of the S&P 500 (it’s big!), operations range from research to exploration to refining to distribution (it’s complex!), and global companies are dealing with environmental compliance, carbon capture/sequestration, pressured commodity prices and “new energy” (it’s in transition!). Typically, this combination of big + complex + changing would make a sector ripe for engaging with startups, such as we’ve seen in fintech, IT, insurance, healthcare, and other sectors. As investors in early stage startups, however, this sector has been a follower in engaging with agile, innovative startups relative to what we’ve seen in other sectors. In fact, feedback from startups has been that the energy sector is as hard to penetrate as the big banks – not a compliment by the way – in terms of how slow they move and how hard they are to sell to. There are many reasons for this, but chief among them, in our view is: massive scale of the companies; high regulation; capital intensity; and the complex supply chain.

Being the optimists that we are, we see the energy sector as a massive opportunity for startups and set out to demystify the industry and find pathways to introduce startups to the right people at the right time across. With this goal in mind, Ignition Partners and BBL Ventures recently hosted an event in Houston that brought together 16 large corporations – ranging from conglomerates like ExxonMobil, Shell and Conoco to oil field services companies like Schlumberger, and platform companies Intel, Microsoft and Dell  – and a dozen handpicked startups either focused on this vertical or with applicable horizontal solutions geared towards the challenges this industry faces.

As a way to stimulate startup engagement with the industry and raise probability of success, we thought we’d share our top takeaways from the session, and if you have questions or comments, please do not hesitate to reach out.

Margins matter: Cost Reduction Drives Decision Making

One of our tenets is that no one (but us nerds) buys software because they want to; they buy it because they have to solve a business challenge. And we tend to break the “why customers buy”, at a high level, into one of three buckets: increase revenue, reduce cost, and/or reduce risk.

It is our experience that large organizations tend to purchase more on the latter two drivers, and what we heard from the corporates at this event reinforced this belief.  What we heard from attendees is that technology that can reduce the cost per barrel or cubic foot matters greatly.  One quote that stuck with us was when one of the corporate attendees said “any solution the ekes a few pennies out of the cost per barrel goes to the top of the list to evaluate.” With crude and LNP near 20 years lows in price, producers need to keep costs as low as possible.   Advice for startups pitching this sector:  focus on the cost reduction elements of your solution.  Examples of startups that can help drive costs down for energy companies:

  • AI Driller whose automated directional drilling platform drives dramatic efficiencies in drilling time and optimizes outcomes.
  • CrowdAI helps operators make better decisions by forecasting changes in the physical world leveraging imagery (live video feeds, drone, hand-held cameras, satellite, aerial,) using proprietary computer vision deep learning technology.
  • DataGumbo’s blockchain as a service streamlines performance contracts and shortens cash cycles.
  • Jupiter Intelligence has built a platform specifically designed for climate impact analysis that helps businesses predict and manage the risks of climate change to their assets.

OT Value is Higher than IT Value

One of the fascinating discussion points was how the corporates that participated described how their relevant business units were trying to solve operational challenges.  For example, one of the high priority focus areas was cyber for operations, and securing the control systems and exposed end points. Interestingly, this was different than a typical “information security” discussion with someone from IT and more of an “in the field” element.  Startup examples:

  • Acalvio provides Advanced Threat Defense solutions to detect, engage and respond to malicious activity inside the perimeter, however an enterprise defines it.
  • Auxon enables integrators and systems engineers to build resilient, fault-tolerant systems.
  • Tempered Networks unifies network connectivity and security, resulting in reduced complexity, enhanced protection and accelerated deployments in complex, distributed operating environments.

What Are They Looking For?

Customer empathy (or lack thereof) can be the difference maker for a startup in getting that second meeting, third meeting, and so on.  This perspective was echoed by the folks from several of the majors that attended.  When asked for advice for startups, they explicitly said there are four things we need from you to be able to move forward:

  1. Do you speak our language and understand our problems?
  2. Do you understand what success means to us, which means: can you help us make money (less interested in whiz-bang tech than outcomes)?
  3. Can you scale and bring the resources needed to be successful at our scale?
  4. Are you best in class and how can you prove it?

How to Engage with the Energy Sector

Over 50% of the reasons that startups fail is they make a product no one wants to buy – no market need.  This supports BBLV’s reverse engineered innovation model.  Start with industry pain points and problem statements, then bring in teams and technologies to solve them.

We were fortunate to have John Gibson, current Chair of the Energy Practice at TPH and former President of Haliburton share his scar tissue with us.  One of the points John made was to advise startups not to do additional pilots after a proof of concept (POC) was performed.  He said that energy companies will “pilot you do death” and urged the startups to say no to future (especially unpaid) work.  Easier said than done, of course, but good advice, nonetheless.  Additionally, John shared a very lively perspective on startup boards.  “Be very careful about putting customers and tech experts on boards.”