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5 Business Models for Cleantech Companies

Today, a big number of cleantech companies are not working well. In the past few years a lot of green startups filed for bankruptcy, because they couldn’t find a way to capitalize their technological innovations. One of the major causes of these failures is that many cleantech companies still behave as traditional equipment manufacturers, randomly selling their products to customers. This traditional business model doesn’t bring big and recurring revenues and companies often lose customers after the sale. That’s why it is crucial for cleantech companies to find new unique ways to unlock commercial potential of their technologies. In this context, I would like to present five alternative business models that could enable companies to commercialize their innovations and scale them up to widespread market adoption.

Function-oriented business model

In function-oriented business model (or functional sales) a company offers its customers an opportunity to pay for the functionality or performance of the product, instead of buying the product itself. This type of business model creates close customer relationships, since it requires long-term partnerships and contracts. Because the payment is done per output unit of the product, there is an incentive for the consumer to purchase such service, as the producer will be constantly improving the product’s life span, quality and efficiency. Furthermore, offering functional sales, companies change the cost structures and risk schemes for their customers, due to lower investment costs and operational risks.

Function-oriented business model has been already tested and used with different industrial products. For example, Rolls Royce offers its customers the option of purchasing engine power (power by the hour) rather than airplane engines. Toyota Material Handling proposes its customers to buy load capacity rather than investing in a particular type of truck. Philips has introduced pay-per-lux model for selling its lighting equipment, whereby customers pay for a promised level of illuminance in a building.

Savings-based business model

In savings-based business model a cleantech company optimizes its customer’s use of energy, water, materials, or any other resources, and in return gets paid by part of the achieved savings. The business offer could take a form of designs and implementation of resource savings projects, retrofitting, energy efficiency solutions, or supply chain and logistics optimization. Customers in this case are incentivized, because they don’t have to make initial investments and pay only pre-set monthly fees. They could be also compensated if savings are less than guaranteed. This model also allows customers to get projects with a transparent and clear financial profile for the full projects period. As in the case of functional sales, saving-based model contribute to long-term relationship between the service provider and the customer.

For example, using savings-based business model, the Danish company Danfoss Solutions reviews customer’s buildings, production facilities or industrial processes, identifies potential energy savings and implements energy-efficient initiatives. Schneider Electrics, Honeywell and Johnson Controls offer saving performance contracts in a wide range of areas and industries, including building, manufacturing, utilities, retail and healthcare.

Leasing

Equipment leasing has been used for much of the last century by airlines, railroads, utilities, oil and gas developers and other industries as a way to finance expensive equipment. Leasing enables a company to use equipment without having to buy it. The company pays a periodic lease payment to the equipment seller, which usually also provides operational and maintenance services for this equipment.

Compared to companies in mature markets, a lot of cleantech startups still don’t integrate lease option in their business models. At the same time, in today’s slowing economic environment, businesses as well as municipal and federal agencies are faced with increasingly tight operating budgets and limited access to capital. A lot of companies prefer to conserve capital instead of investing it into green or resource saving technologies. So, offering a leasing program to customers could allow cleantech companies to capture those sales that would otherwise not happen due to lack of funding.

For example in 2008, SolarCity introduced a new solar lease option for homeowners that significantly reduces or eliminates the upfront cost of installing solar power. SolarCity’s solar lease can allow some homeowners to pay less each month, by adopting solar power, than they previously paid for electricity from the utility company. Another example is Tesla Motors that offers a leasing option to future Model S customers. Tesla is working with Wells Fargo and US Bank to provide financing for 10 percent of the cost of a Model S, and following monthly payments, after 3 years customers who choose this option can sell the car back to Tesla at a predetermined price.

Strategic Partnership

Big companies with their capital, access to markets, technological know-how, and expertise could help cleantech startups to overcome two of their biggest barriers to success: technology adoption and scale. Partnerships can offer funding, credibility, channel advantages and supply chain simplifications that dramatically reduce the cost and risk of bringing new innovations to the market. This is especially relevant for the cleantech areas, where many innovators have technological starting points, but often lack capital as well as business resources to manufacture and sell their products globally. Partnerships can take any number of forms, including distribution agreements, joint ventures, R&D relationships, and simple customer arrangements in which the corporation buys the startups’ goods and services.

Over the past several years an increasing number of cleantech companies have established strategic partnerships with corporations in respective industries. For example, the algae-based chemical and renewable oils producer Solazyme signed numerous partnerships with different corporations. Chevron has invested money into the company and provided non-dilutive research funding. Unilever signed with Solazyme a research development agreement back in 2009 and then became an equity investor in 2010. Furthermore, today Unilever is using Solazyme’s products for their algae-based soaps in an attempt to phase out the use of palm oil. Similarly, Tesla Motors signed deals to supply electric power trains to Daimler and Toyota, both of which invested in Tesla.

Local Joint Ventures

Perhaps the major issue of many cleantech companies in developed countries is that their products are made to displace the existing ones on the market. Therefore, customers who recently invested in an item are not willing to replace it. How many real estate owners would invest in new heating, cooling or water treatment systems in a building that was built a decade ago? At the same time, in emerging countries, especially in China totally new cities and industries are now raising up. Moreover, facing major environmental problems, these countries are more and more interested in sustainable and cleantech solutions. That’s why, instead of focusing on the existing markets, cleantech companies could create new markets for their technologies in emerging countries. One of the best ways for a small or medium cleantech company to enter an emerging market is a joint venture with a local partner. Working in emerging markets often requires playing according to local rules. From the business point of view it means, for example, that trusting relations could be worth more than a contract or the local legal system will not provide the same protection as the one in developed countries. From the technological perspective, the product in its original form could be inappropriate for this market. For example, it could be too expensive, or doesn’t correspond to the local standards and requirements. So, establishing a presence on the emerging market on one’s own could take a long time and require huge resources. At the same time collaboration with the right foreign partner could give a cleantech company an opportunity to rapidly gain access to wider markets, increase sales and also enhance its technological and operational capabilities.

For example, LanzaTech a New Zealand biotech company involved in low-carbon chemicals and fuels production have signed a joint venture agreement with one of China’s oldest enterprises Shougang Group to construct a demonstration plant at one of Shougang’s steel mills in China. Another example is San Diego-based company PowerGenix that is developing high performance rechargeable and recycling batteries. PowerGenix has formed a three-part joint venture with China City Construction Corp. and Huainan City to create the world’s first commercial-scale Nickel-Zinc (NiZn) battery manufacturing center.

Over the next decade the revolutionary changes in the cleantech sector will not stem only from technological advances, but equally from new business models. Innovative products at competitive prices are already a reality in numerous cleantech markets. Today, cleantech innovators need to find new ways to turn their technologies into working businesses. There are many possible business models to approach the marketplace and gain the profit. Even within the same industry companies may rely on business models that are very different from one another, or use a combination of several different models. Those companies that could find an appropriate business model for their technologies and markets would become the main drivers of transition towards a green economy.

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