As a Venture Capitalist who focuses on Industry 4.0, I bump into a lot of solid entrepreneurs that heard the story of the fourth industrial revolution. They’re reading the map correctly and understand that there’s an incredible opportunity for them to build big, disruptive businesses and serve a trillion dollars market. They are trying to figure out how to embark on their journey, as well as to find and define the right problems to solve.
In the last few years I spent significant part of my time studying the domain and meeting many startups and entrepreneurs. A journey I am particularly proud to be a part of is the one of 3DSignals. The Acoustic-based analytics company which just announced the completion of a $12M Series A financing round. The experiences we’ve had in past years together were similar to a roller-coaster ride which I’m sure a lot of young companies are experiencing as well. In particular, it sharpened my thinking process of what steps are required as part of an Industry 4.0 journey to success.
Thus, in this blogpost, I would like to share with you a few insights from my own experience as an investor in the field researching successful use cases and many failures. First things first, I should immediately reveal that I am not a mechanical engineer (I always kept a safety distance from big scary machines). However, I spend most of my time talking with global corporates, customers, OEMs, integrators, partners and startups that are on the forefront of the industry 4.0 promise. As I never built a production line in my life, I ask you to take my advice with the necessary caution, but I am convinced that it will assist you in receiving a better understanding of the industry and ultimately jump-start your Industry 4.0 journey in a more successful manner.
1. Focus on One Sector:
Guess what? THERE IS MORE THAN A SINGLE INDUSTRIAL SECTOR! There are different multi-billion dollar niches including Petrochemicals, Food & Beverages, Oil & Gas, Automotive, Mining, and others– each with its own unique dynamics, needs and readiness for digital solutions adoption. For people who are working in the high-tech industry, it is obvious that a semiconductor company and a consumer app company have more alike than unalike. In a similar way, when you are taking your first steps in the world of industrial IoT — I’d recommend concentrating on solving one set of problems for one specific vertical.
2. Build a Company that is Prepared for Long Sales Cycles:
Industrial customers are usually not interested in purchasing merely a technology but are rather interested in buying a full end-to-end solution. In most cases, a significant part of the purchasing process is the integration and customization part. This may be coordinated and executed by an external provider, and in some cases — by the same company which is in charge of the primary project . For example, if an organization outsourced smart-scale monitoring, it would need to integrate outsourced IT assets as well. Therefore, if your business has a direct sales approach, bear in mind that you should be prepared for a lengthy and complex sales process. You should also get ready for a high Customer Acquisition Cost (CAC), especially in comparison with mainstream enterprise IT SAAS solutions.
Consequently, my advice for building a successful Industry 4.0 business is to start by identifying problems which have a high CLTV (Customer Lifetime Value). Then, solve the main issues and build a company that has a limited number of small and medium customers who pay high sums for your services. Structuring your company in such way will enable you to overcome the high CAC.
My additional advice stemming from the above analysis is to establish your business firstly through direct sales. This is obviously not relevant only for startups which offer their products to buyers in the industrial markets, but it has a unique significance when you are paving your business’ way in a market that is traditional and new at the same time: Experiencing your customer’s world first-hand through a direct sale process is a must. Getting your team to the potential customer’s production line, where they will see real world problems with their own eyes, will help you understand clients’ dynamics and taste. After you score a few big clients, it will be the right time to scale to other sale channels, such as agents and partners.
3. Tackle Problems that will Ensure a Quick ROI:
Though it may sound trivial, it should still be noted. Many entrepreneurs are drawn to solving their potential customers’ biggest problems. This approach may explain why they became entrepreneurs in the first place, however, proving ROI on your strategic plan may be very challenging. Based on our experience, large budgets in industrial markets are allocated towards solving ongoing operational and maintenance problems, and the ROI will be easier to achieve fast (even within 6–12 months). It may be easier to start your way by focusing on solving these problems.
4. Choose Your Partners Wisely:
Especially in the early days of your pre-chasm journey and especially in industrial verticals, you should carefully choose investors and partners that can open the right doors for your company, but also have the flexibility to pivot together with you in order to find the right problem to solve in the right vertical, for the right market and at the right time.
5. Fear Not from Charging Appropriately on Professional Services:
Some startup textbooks claim that new companies should aim to invest in products that do not necessitate a lot of modifications in order to be suited to additional customers. Attempting to create custom-made solutions per-client may turn out as not so profitable in the long run, and Startup win mostly in very “low-touch” sales models based on their cool-easy-to-implement technology. However, in industrial sectors, the situation is a little different. Buyers are used to having a customization layer when they make purchases. They know that they will pay for professional services as part of the process. As the new kid in the block, make sure that you charge appropriately and that you make profits on professional services you supply. This will allow you to present better unit economics while scaling your business, and not less important — it will allow you to join forces with a local integration partner that will generate enough revenues and be incentivized to become your representative in remote geographies.
Beyond these 5 tips, the devil is, of course, in the details. When you’re building your business, you need to create an amazing product, and the most critical factor while doing so is to answer to the right challenge and solve a real pain for the industry. I hope that the above guidelines will assist entrepreneurs in the beginning of their way who are trying to tackle problems in undisrupted industrial markets.
At Grove Ventures, we’re always happy to help brilliant entrepreneurs open the right doors on their journey to success.