Principles for a Successful Water Startup
How fast a year goes. In the past eight months the 2017 Accelerator companies have secured over $17m in funding, created over 25 jobs, and completed over 900 investor and customer connections. It’s time to open the gates to another set of exceptional companies. As we prepare to open the intake for the 2018 Accelerator, we’ve tried to distill some of the key elements of successful water startups.
Beware the “Field of Dreams” trap
“If I build it, they will come” is a poor maxim in entrepreneurship generally and especially so in the water sector. Innovators must ensure that they’re solving a problem that has been validated in the market. The gravity of that problem is a key determinant of the success of the business, most importantly by shortening the sales cycle. Focusing on a true pain point allows you to build something that someone genuinely needs. Engaging customers, understanding their pain points, and designing to solve that pain is the best way to build a business with genuine commercial potential.
Customer segmentation is essential
Beachhead market selection is critical to any successful business. Entrepreneurs must do the legwork to understand where they should focus their scarce time and energy — two of the crucial limiting factors for startups. The water sector’s fragmented and conservative landscape makes it a challenge to identify markets that will (quickly) pay for and sustain solutions. The successful businesses in Imagine H2O’s portfolio identified these markets early, and that has been a huge advantage. Focus is your friend.
The “Serenity Prayer” rule
Remember that old favorites contain old wisdom. “Grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference” applies doubly for early stage companies in this industry. Competitive moats are wide, incumbents entrenched, customers slow. Entrepreneurs must treat the world as it is, not as they would like it to be, and know the structural constraints of the market they’re targeting (e.g. regulation, sales process, sales cycle, willingness to pay). Remember Keynes — the market can stay irrational longer than you can stay solvent.
Every water business is an impact business
This is something perpetually underleveraged by water companies. If a company is solving a water problem, it is an impact business. Market the company accordingly, and track your impact. Being a company that is having a positive influence in the world and making the water supply safer, more abundant, and more resilient has a lot of advantages, from talent attraction and retention to fundraising from more patient sources of capital (a big advantage). Don’t leave that value on the table.
Look after your unit economics from day one
As the VC market cools off a little from the “growth at all costs” approach, the benefits of having solid unit economics from the start is becoming more and more evident. As Buffett said, “when the tide goes out you can tell who has been swimming naked.” Build a resilient business model from the beginning. Understand and quantify the value being provided to the customer, understand the cost to provide that value (including customer acquisition costs) and share the difference between you and the customer through the medium of the price point. Be fair, even generous — and make sure the customer knows it. Build a relationship rather than complete a transaction.
It’s not enough to sell a product — entrepreneurs must sell a whole solution
At IH2O, we think how the company sells is often more important than what the company sells. VHS beat Betamax despite being the inferior technology. It’s not enough to build something better and stand back and wait to be squashed by demand (see “Field of Dreams Rule” above). Match your business model to the delivery of benefit to the customer. Make it easy for them to test and deploy your product. Make sure they can fix it if it breaks, that they have the support to maximize the benefit from their purchase decision. Wow the customer. Do things that don’t scale. If you create 20 users that love you, that’s the best sales force you can hire.
Marketing mustn’t be an afterthought
Water entrepreneurs can be notorious for their lack of attention on marketing. Get back to basics and establish a clear connection between marketing and sales goals. Websites, collateral, and communications matter — no matter how innovative the actual solution or product may be. Define a brand promise and then build an organization to deliver on that promise. This is an excellent example of an area in which water entrepreneurs can differentiate by looking outside the sector. Doing the marketing basics well is an underrated differentiator in the water sector.
Beware of the partnership trap
Entrepreneurs can easily spend too much time building partnerships that have more cosmetic value than commercial bite. If dedicating time to partnerships, ensure that incentives are formally aligned, and that value is shared. If it’s not going to have teeth and measurable outcomes, don’t bother.
Manage towards the Metrics that Matter
Most startups we work with can show strong growth in percentage terms, given that they’re starting off a low base. Don’t get into the habit of telling the best story to yourself — tell the true story to yourself. What’s your sales cycle? How is it changing over time? What’s your Net Promoter Score? What’s your customer lifetime value? Vanity metrics can lead you to optimize for what feels good, rather than fix what doesn’t feel good but is vital for the long-term health of the business.
Look after culture early
Because culture eats strategy for breakfast.