My Energy Investment Thesis #4: The Advance of Software and Technology Adoption

by kirkcoburn
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Energy isn’t the only thing changing in the energy world — though the energy transition is certainly worth talking about. Keep reading to see how software and technology are taking center stage.

Thesis #4: Software Eating the World (Or, The Advance of Software)

(acknowledgment: Marc Andreessen has been an amazing force in the technology world. I remember being caught in the browser wars when I was at Dell during the ’90s when we decided to move away from his company, Netscape, to internet explorer. In 2011, Marc wrote an article that coined the phrase: “software eating the world” which I use frequently. Thank you, Marc!)

Then: 

VC investment has been fueling rapid innovation in digital technologies, leading to dramatic cost improvements and changes in business models across many industries. In the past, there was little disruption within the oil & gas and power industries, which often continued to operate with legacy techniques, software, and even hardware rather than upgrading along with the rest of the world.

Now:

From 2010-2015, there were many digital and IoT (hardware and software) startups emerging in oil and gas. At SURGE, we invested in quite a few “hoping” that many would cross the chasm and become the first unicorn. Most of the customers, however, lacked the proper infrastructure to engage and implement the solutions being offered effectively.

What changed?

There were two critical infrastructure implementations that moved into many of the energy industry’s largest customers which then enabled the new technologies the industry really need in order to succeed:

1. Cloud technology: Cloud technology is one of the most important investments in the oil and gas industry. Storage technology has been forced to evolve at a rapid pace in order to keep up with the increased needs of many industries, including energy. Thanks to cloud technology and cutting edge compression, it’s easier than ever to store and analyze substantial quantities of data, which has proven invaluable in many ways to the oil and gas industry as a whole. Consider:

  • Sensors in oil fields: which can identify problems and can (1) lead to the dispatch of technicians before they become more serious (this is an example of an open-loop system) or even reallocate systems to avoid potential issues (this is an example of a closed-loop system)
  • Decreased cost for cloud storage: which makes it a reasonable investment for oil giants
  • Increased cybersecurity: as more systems become “smart” and “online”, it increases the risk of external influences and problems. This field is becoming more advanced daily; however, the risks of failure are very high and cannot be taken lightly.  It will be interesting to monitor how budgets will move away and/or increase from dumb devices (pumps, compressors, etc.) to the software that controls these devices. Question: do you think costs will actually go down or will they be redistributed?

2. Mobility: These days, there’s an app for almost everything — including apps used by energy giants. In the oil and gas industry, in particular, there has been a recent rise in mobile technology that has the potential to revolutionize the industry. Apps can:

  • Break down data from sensors in the field, providing vital information to a wide range of sources
  • Provide immediate information about the locations of team members and equipment
  • Offer easier, more streamlined collaboration across diverse team members and locations
  • Provide increased data access which can aid in the making of critical decisions for energy giants

This shift in technology is rapidly transforming many industries — and the energy industry is no exception. As companies enable cloud and mobile infrastructure, they have the ability to connect to large quantities of data from any location. The company then has the capacity to globally expand a new software platform and/or application quickly and empower employees to work immediately, regardless of where they are or what they need to accomplish.

There is, of course, still a gap in change management. The technical infrastructure, however, is ready and open for business at most of the large and medium-sized providers. As a result, I have seen numerous digital startups move from idea to market acceptance, with promises of a global roll-out, in less than two years. I’ll save the details of that for my own investing, so stay tuned and read the news!

Technology Adoption in Energy

Then:

McKinsey did a study that showed that oil and gas was the slowest industry to introduce new innovations from idea to 50% market penetration. In fact, it took 31 years, on average, for a new idea to flood its way into the oil and gas industry. Full market adoption could take even longer. Unfortunately, that created slow growth and made it difficult for investors to find a platform to invest in the industry, especially since those investments could take so long to see returns.

Now: 

Anecdotally, we are seeing new technologies move from idea to potential market adoption within just a few years. I have already invested in a few. In most cases, those technologies are digital. For a standard fund that is intended to last for ten years with a few annual extensions, this is awesome news! In fact, I plan to include more details about these technological advances and how they have the potential to impact the industry in future posts. Stay tuned!

The Challenge: 

While the industry has enabled itself technologically, there is still a huge gap in change management. One of the largest challenges when selling to the enterprise as a software startup is its ability to IMPLEMENT & SERVICE. There are 4 critical skills that every startup must master when selling to the enterprise: (1) sales, (2) implementation, (3) product performance and experience, and (4) customer service.

  1. Sales: I am going to write a novel on this. As someone that has spent a career studying marketing and sales, built a successful company around it and continues to study it, the industrial world’s entrepreneurs are not prepared nor understand that this is a science, not art.
  2. Implementation: once you have successfully closed a customer, what is your process of implementing your technology within your customer? Unlike B2C, you must hold your customer’s hand to ensure success. I have spoken to many CEOs that unfortunately assume that rolling out software to a large customer should be like rolling out software to consumers. I believe the success of the best future software companies in energy will have a strong consulting/client service capability.
  3. Product performance and experience: This is the one skill that excites the entrepreneur and must be flawless and 50% better than the current solution to get the sale. When your customer starts to use the technology, the IMPLEMENTATION many times is as important as the product itself. I can painfully tell you this truth as someone representing a large customer as well as being a board member and painfully watching an amazing product get poor results due to #2 above.
  4. Customer Service: This is not only when something goes wrong with the product but rather an important discipline and company alignment. Do you have a client services business model? Do you have someone(s) on your team that “owns the customer”? I am a firm believer in the client services business model to manage enterprise customers. At a high level, the sales team is broken down into 2 buckets (Marketing is a separate team/discipline and will write in the future on this), (1) hunters and (2) farmers. Hunters get paid and want to get paid on “commission” for taking marketing qualified leads and converting them into sales. You need these people on the team who thrive in closing deals. Farmers are paid on 4 key metrics: (1) revenue and/or margin from existing customers, (2) new leads/opportunities generated from within your current customer divisions (these get flipped back to the hunter to close), (3) new leads/opportunities generated from outside existing customer groups and referrals to new customers, and  (4) NPS (Net Promoter Score) from the customer (as observed throughout my career, the service of the customer is more important than the product itself and where most product improvements come from). Are you holding quarterly business reviews with your customers and bringing this feedback to your company?

Substantial changes throughout the energy industry have created transformation both in the energy industry itself and in investments across the industry. Has my investment thesis changed in the intervening years? Certainly.

Due to these complex changes, however, there are incredible new investment opportunities throughout the industry. If you have one of those incredible opportunities, let me know about it and we’ll see how we can change energy over the next ten years. Or let me know after you need the next installment on my thesis in two weeks.

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