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Business Model Innovation: Why Building a Better Mousetrap is Not Enough

Posted on September 8, 2014 6:19 pmModified on October 10, 2019 9:36 pmby Foresight Valuation Group

What do solar energy and personal communications have in common? While energy and communications seem unrelated industries, they have significant similarities if one considers the role of business model innovation as a precursor to success in bringing new intellectual property to market. Take, for example, two companies:

•SolarCity Corporation (Nasdaq: SCTY), a solar panel installation company, which is publicly traded with a market cap of over $7 billion; and
•WhatsApp, the text messaging company which was purchased in February 2014 by Facebook for $19 billion.

In a playing field littered with the corpses of failed ventures, these two companies point not necessarily to cutting-edge technology, but rather to filling the gap in a business model as the key enabler of their success. SolarCity had one of the only initial public offerings (IPOs) in the solar industry, an industry known for high failure rates, due primarily to its successful solar system financing program which allows it to distribute a product with a negative return on investment to millions of households. And the recent WhatsApp acquisition is largely attributed to the lack of revenue model agility on the part of incumbent carriers, which created an opportunity for WhatsApp to tap into its user base – and grow to 450 million subscribers worldwide.

SolarCity: making solar systems affordable

In late 2007 I was on the founding team of a residential energy efficiency start-up in Silicon Valley, engaged in developing a data-driven analytical platform for homeowners to understand their energy consumption and savings opportunities. The residential sector has always been a tough nut to crack when it comes to energy efficiency: homeowners are motivated by a complex set of incentives (saving energy, saving cost and reducing their carbon footprint) that often seem at odds with their actual energy consumption behavior. Utilities have been experimenting for years with all types of initiative, ranging from handing out free energy-efficient light bulbs to installing smart meters that would balance off the load during peak hours. Successful IPOs are the exception to the rule in an industry that has grown accustomed to a steady stream of bankruptcies, poor earnings reports and dwindling funding resources.

SolarCity was founded in 2006 and was originally backed by Elon Musk, the maverick Silicon Valley entrepreneur, who is also the founder of successful electric vehicle company Tesla Motors. The company designs, installs and maintains photovoltaic (PV) solar systems on residential rooftops. Solar panel installation is a lucrative business. Most of the money being made in the solar industry does not come from making and selling solar panels, where the market is flooded with cheap PV panels from Asia. A recent Massachusetts Institute of Technology study found that in residential systems, solar panels typically account for only 20% of the overall cost of the system. The rest includes the cost of electricians to install the panels and hardware to connect the systems to the grid. Most of that money goes to companies like SolarCity.

From an economic standpoint, residential solar systems are expensive to install and do not actually pay back in energy savings over the duration of typical home ownership, which creates a major hurdle to adoption. The key difference between SolarCity and many other solar companies is that its strategy is not based on innovative new PV panel technology; rather, its competitive edge lies in utilizing existing solar technology with an innovative approach to financing the panel installation. Instead of asking for a big upfront payment, the company created a financing program whereby it leases the systems to homeowners. The lease payments are offset by power savings from reduced electric bills and the surplus electricity that can be sold back to the local utility. By doing that, SolarCity has managed to convert a product with a negative return on investment to an affordable energy-efficiency solution.

WhatsApp: picking up the slack in messaging services

Telecom research company Ovum Ltd estimated that service providers worldwide lost about $32.5 billion in 2013 in text messaging revenues to free social messaging applications like WhatsApp, a loss that is projected to reach $54 billion by 2016. Internet-based messaging services have particularly increased outside the United States, where carriers charge high fees for texting on top of the regular voice and data plans. In order to protect their text-messaging subscribers, US carriers began to offer flat-rate, unlimited text messaging in many of their plans. However, carriers in other parts of the world are largely affected by the proliferation of free social messaging apps: in Mexico, for example, it is estimated that about 90% of all instant messaging goes through WhatsApp.

For much of the past three decades, voice has dominated the revenue streams for almost all telecoms operators. The changing face of the mobile industry affected the business models and revenue structure of service providers. In 2013 voice revenues were expected to fall below the 60% threshold globally for the first time. The drop in voice revenues has been compensated by the rise of messaging and data revenues, as service providers try to keep the overall average revenue per user (ARPU) at stable levels. A ‘perfect storm’ set of circumstances created the fertile ground for WhatsApp to take over the market: the ubiquitous broadband internet access, the proliferation of mobile devices and the gap in business model on the part of the service providers. These circumstances pushed subscribers to adopt free personal communication applications at increasing rates.

One might argue with the price paid by Facebook for WhatsApp’s massive user base, but this acquisition was definitely triggered by the global accelerated growth of WhatsApp, which would not have been possible but for the gap in revenue model that caused telecoms companies to lose users that they already own, due to the wrong billing model. It remains to be seen how WhatsApp’s 450 million users will be monetized by Facebook, but this represents a missed opportunity for the service providers whose focus on maintaining their ARPU metrics and existing billing structure is causing them to lose sight of some of the new revenue opportunities in telecoms services today.
In some industries it is not enough to build a better mousetrap. Often, the key to product or service success in the marketplace hinges on coupling intellectual property with the right business and revenue model

Living in a Bubble? Demystifying Startup Valuations

Posted on July 17, 2014 5:15 pmModified on October 10, 2019 9:31 pmby Efrat Kasznik

Just when it seemed as though start-up valuations had peaked in 2013, the year 2014 has started with an opening shot in the form of the reported $3.2 billion acquisition of Nest Labs by Google, followed with Facebook’s $19 billion acquisition of WhatsApp. It now looks as if this year continues the perfect-storm conditions, which will sustain the trend of high valuations for exits (M&A and IPOs) and transactions in coveted markets such as the Internet of Things, where Nest has a strong foothold.

From my vantage point in Silicon Valley, I am frequently asked whether we are in the midst of a ‘valuation bubble’. The answer to that goes back to the definition of a ‘bubble‘, which inherently involves some irrational behavior driving otherwise rational participants in the marketplace to stray from reasonable prices that could have been anticipated under similar circumstances. Understanding the factors driving business valuations hinges on understanding the valuation framework, access to capital, liquidity conditions and the overall technology landscape. With that in mind, let’s look at some of the major trends that are shaping startup valuations in order to establish whether current valuation levels actually represent irrational, bubble-like conditions.

1. Demise of Financial Fundamentals: Rise of KPI-Driven Valuations

Valuations in certain high-growth industries are undergoing a paradigm shift, with financial fundamentals making room for valuations based on key performance indicators (KPIs) such as user stickiness, churn and conversion rates. A common pitfall involves trying to benchmark valuations of pre-revenue companies against traditional financial valuation fundamentals, such as revenues and profit multiples. This might give people a false sense of irrationality when they try to justify the valuation. This may sound like a radical idea, but it is the only way to explain the price parity between Instagram and Ducati, two companies purchased on the same week in April 2012 for around $1 billon. Instagram, a high-flying social media start-up with no revenues and 50 million users, commanded the same price as Ducati, a century-old Italian motorcycle manufacturer with €500 million in revenues. Last year saw a proliferation of KPI-driven valuations, with pre-revenue start-ups such as SnapChat and Pinterest valued at billions of dollars.

2. JOBS Act and Crowdfunding: New Platforms for Funding Innovation

Reward-based and equity-based crowdfunding platforms are emerging as prominent means for funding innovation, with over $2.7 billion raised in more than 1 million campaigns across all types of crowdfunding platform in 2012. Equity-based crowdfunding was made possible by the Jumpstart Our Business Startups (JOBS) Act, which lifted the 80-year ban on public solicitation in the United States. The long-awaited equity crowdfunding Title III Securities and Exchange Commission regulations are expected to be released later this year, marking the full launch of equity crowdfunding in the United States (which is currently limited to accredited investors only). At the same time, reward-based crowdfunding is becoming increasingly popular, with major platforms such as Indiegogo and Kickstarter helping start-ups to raise millions of dollars and bring new products to market.

3. Supply and Demand: Cash is Abundant

The consensus in US investment circles is that there is a lot of cash on the sidelines waiting to be deployed. Several factors are at play here: corporate cash levels are at an all-time high, creating shareholder pressure; high liquidity is fueling private equity investors, which are moving into growth equity; and venture capital investors are increasing their funds, resulting in higher investment rounds. The abundance of cash for investment is pushing up valuations to higher levels across the board – a trend that is expected to continue in the near future.

4. Multiple Paths to Liquidity: Intense M&A and IPO activity

In 2013 the NYSE reported a total of 230 IPOs with a combined value of over US$55 billion across all major US stock exchanges. Companies going public in the United States are generally more mature and are staying private longer. Subsequently, pre-IPO liquidity in secondary markets is very important, especially to early shareholders and investors. M&A activity saw some decline in 2013, with slightly over 10,000 deals reported overall, including about 2,200 technology deals with a combined value in excess of $100 billion. IPOs and M&A deals represent alternative paths to liquidity, which drive valuations up as companies have several options. These pricing pressures are expected to continue through 2014.

5. Hot Technology Sectors: Major Disruption Ahead

Some technology sectors represent particularly high-growth opportunities, and are expected to rise above the tide and generate M&A activity and higher valuations in 2014. One such sector is the Internet of Things (IoT). The IoT represents the vision of a connected universe where objects, devices and people will all share a common network of communication. IDC estimates that the number of connected devices will grow to 212 billion by 2020, with about 30 billion devices smart enough to operate without human control. A study by GE concluded that the IoT market over the next 20 years could add as much as $15 trillion to global gross domestic product, which is roughly the size of the current US economy. The Internet of Things is gaining momentum with industry leaders such as GE and Cisco, which adopted it as a key element of their corporate vision in 2014 and beyond.

So, are we living in a valuation bubble? The answer is probably somewhere in the middle, and perhaps we could characterize current valuation levels as “somewhat inflated, but mostly expected” under existing market conditions. These are exciting times, when disruptive technologies finally meet the right market conditions and capital infrastructure that allow for the kind of unprecedented valuations witnessed in recent years.

Business Model Innovation: Why Building a Better Mousetrap is Not Enough

Posted on July 17, 2014 5:11 pmModified on October 10, 2019 9:33 pmby admin

SolarCity Corporation (Nasdaq: SCTY), a solar panel installation company, which is publicly traded with a market cap of over $7 billion; and
WhatsApp, the text messaging company which was purchased in February 2014 by Facebook for $19 billion.

SolarCity: making solar systems affordable
In late 2007 I was on the founding team of a residential energy efficiency start-up in Silicon Valley, engaged in developing a data-driven analytical platform for homeowners to understand their energy consumption and savings opportunities. The residential sector has always been a tough nut to crack when it comes to energy efficiency: homeowners are motivated by a complex set of incentives (saving energy, saving cost and reducing their carbon footprint) that often seem at odds with their actual energy consumption behavior. Utilities have been experimenting for years with all types of initiative, ranging from handing out free energy-efficient light bulbs to installing smart meters that would balance off the load during peak hours. Successful IPOs are the exception to the rule in an industry that has grown accustomed to a steady stream of bankruptcies, poor earnings reports and dwindling funding resources.

WhatsApp: picking up the slack in messaging services
Telecom research company Ovum Ltd estimated that service providers worldwide lost about $32.5 billion in 2013 in text messaging revenues to free social messaging applications like WhatsApp, a loss that is projected to reach $54 billion by 2016. Internet-based messaging services have particularly increased outside the United States, where carriers charge high fees for texting on top of the regular voice and data plans. In order to protect their text-messaging subscribers, US carriers began to offer flat-rate, unlimited text messaging in many of their plans. However, carriers in other parts of the world are largely affected by the proliferation of free social messaging apps: in Mexico, for example, it is estimated that about 90% of all instant messaging goes through WhatsApp.

In some industries it is not enough to build a better mousetrap. Often, the key to product or service success in the marketplace hinges on coupling intellectual property with the right business and revenue model.

When Big Iron Meets Big Data: Unlocking Value Creation Opportunities in the Internet of Things – Industry Report

Posted on June 25, 2014 9:07 pmModified on July 17, 2018 9:28 pmby Foresight Valuation Group

The physical world is becoming an information system, where connected objects and devices can both sense the environment and communicate data. The global enthusiasm surrounding the ecosystem known as the ‘Internet of Things’ (IoT) has positioned data as one of the most valuable intangible assets that a company can own and monetise. According to IDC, the worldwide market for IoT applications (intelligent and embedded systems, connectivity and security services, infrastructure services and platforms) reached $1.9 trillion last year and is expected to more than triple to $7.1 trillion by 2020. IDC expects the number of installed IoT units to grow at an annual rate of 18% to 28 billion units by 2020.

The valuation of technologies in the emerging IoT ecosystem will largely depend on the revenue models around data monetisation. The IoT data value chain, described by McKinsey in a recent IoT study as “sensor driven decision analytics”, includes the following elements:

Sensors and actuators are embedded in physical objects;
The objects are linked through wired and wireless networks;
The networks churn out huge volumes of data;
The data is analysed using data analytics platforms and applications; and
The analytics generate actionable decisions, which flow back into the IoT ecosystem.

It is becoming clear that controlling the data value chain from the point of data collection to the point of data analytics is key to unlocking these value creation opportunities. Hence, companies proceed through acquisitions to get better control over the value chain. This is key to understanding the valuation of recent large IoT acquisitions, such as Google’s $3.2 billion acquisition of Nest Labs. Google augmented its data analytics capabilities by acquiring control of the physical objects that collect the data. The acquisition granted it access to home data collection endpoints through Nest’s growing inventory of home automation devices.

One of the early leaders in IoT data analytics and monetisation is General Electric (GE), which developed advanced capabilities around the data collected through its vast network of industrial deployments referred to as the ‘industrial Internet’. At a recent conference in San Francisco, a speaker from GE Intelligent Platforms – the business unit responsible for GE’s IoT data analytics efforts – described how competition from small original equipment manufacturer service operations pushed the industrial giant to take the plunge into big data analytics. According to GE’s 2013 annual report, service revenues represent 75% of GE’s industrial backlog and 75% of its industrial earnings. Seeing the threat to its service revenues segment from smaller service operations, GE originally launched a massive data collection effort which aimed to leverage data as a strategic asset that cannot be replicated by smaller competitors or, in GE’s own words: “merge big iron with big data to create brilliant machines”.

There are several areas where IoT data analytics can increase original equipment manufacturer profitability and create new revenue opportunities, including longer asset uptime, enhanced customer experience and reduced maintenance and service costs. GE started launching its industrial internet platforms in 2012 to airlines, energy companies, hospitals and other industry segments. According to company reports, the products have brought in $290 million in revenues and another $400 million through the end of 2013. The examples below illustrate some of these data platforms and their benefits in different industrial areas:

Transportation – RailConnect 360 collects and analyses performance data during locomotive operations, automating diagnostics to enable optimal and proactive repairs and advanced planning of resources and materials for building, running and routing locomotives.
Energy management – Grid IQ Insight provides utilities with advanced analytics of data collected from equipment along the grid to predict, manage and forecast potential problems that a utility’s electrical grid may face. The software monitors data (eg, electrical usage, grid performance and weather) to lower operating expenses and increase revenues.
Aviation – Flight Efficiency Services collects real-time data generated by an aircraft and analyses it to improve an airline’s overall efficiency in four areas: fuel management, flight analytics, navigation services and fleet synchronisation.

As seen from these examples, there are some interesting opportunities related to the value creation associated with data in the IoT ecosystem. These opportunities exist not only in the industrial space, but also in consumer-facing IoT applications such as home automation and wearables, as well as in industries such as agriculture. Putting privacy and security concerns aside, data represents the promise of new economic benefits that are only possible when big data is leveraged in big ways.