The Challenge of Innovation for New Ventures and Startups
The need for significant technology innovation is the most important challenge we face in the transition to low- or no-carbon energy sources. In response—and in part driven by various economic incentives—several new companies have started up, or existing companies have started new ventures, to address this issue. During IPA’s 30+ year history, we have seen several such cycles in various process industries, and we have studied what makes these ventures succeed or fail.
One of the broad systemic challenges of innovating in the process industry is the comparison to innovation in other, less process-focused industries, such as consumer electronics and software solutions. Because these industries innovate at a much faster pace—and therefore form the base of our innovation experience—most parties involved in innovation base their assumptions and expectations on them. These expectations and assumptions, however, are often unrealistic. The belief that the typical startup development approach can be applied to the process industries is incorrect.
Innovation in process technologies is unique because of the requirement to run at large scale in a reliable 24/7 operation over many years. We often see new ventures with a very good understanding of the chemistry and the underlying science behind their process; however, there is almost always a major gap in understanding how to deliver the technology on a large scale in a commercially economic fashion. Addressing this gap by planning for regular re‑starts, upgrades, modifications, and rapid prototyping typical of electronics and software development is just not a viable or economically possible approach in developing process technology. Having a clear, empirically based understanding of the economics behind a commercial‑type operation of the process is critical, because margins are typically significantly smaller than the error associated with any extrapolation from non‑commercial type operations. To prove commercial-scale technical and economic viability, a careful analysis and optimization of the technical risks and associated development costs needs to be done. The development path has to adequately represent the process and economic complexity, at an appropriate scale, and with sufficient run times. These requirements usually mean a different level of capital investment and different time horizons than our experience in other industries would suggest. When the development path does not accurately identify and address commercialization challenges, fixing things later often requires so much money and time that it renders the venture unviable.
Throughout the years, IPA has observed several root causes of failure, many of which stem from reliance on innovation in other industries. These failure modes can be grouped into three interrelated areas: inexperience with commercializing new technology, lack of funding, and lack of experienced personnel.
Inexperience With Commercializing New Technology
Inexperience with commercializing new technology starts with the inability to recognize and accurately gauge the degree of newness, associated risks, and consequently development needs. This is not because these ventures lack technical capability—quite the opposite, they tend to have a significant organization focusing on the technology, often including the inventor. The issue is that the inventors have a detailed familiarity with the science that underlies the technology, leading to overconfidence in its application to commercial operations despite having only limited empirical data for that application. We have also noticed that inventors often focus on continuous improvement of the technology and not on systematically de-risking toward commercial operation.
Lack of Funding
Another challenge that new ventures face is around funding. Because these ventures are most often debt or equity financed, the cost of money plays an important role in decision making. Restricted flow and limited availability of funds early on can significantly curtail the commercialization process even when the new technology risks are correctly recognized. Limited funds for piloting and attracting the right talent, and for allowing enough time to prove out viability, often lead to development at a commercial scale rather than at a pilot scale. This is of course not feasible: facilities designed for commercial operation, particularly in a low margin business, are too expensive and take too long to fix to allow for development. Running partially functioning facilities is a safety and economic liability.
Even when technology development is not an issue, not having enough funds early on will undermine developing appropriate plans for project delivery, and restricting the flow of funds can hamper efficient execution. Any issues during the venture’s development can further exacerbate funding issues and thus impede making the right decisions. We often see ventures experiencing development issues lose control or undergo disruptive owner changes as investors pull out of the venture or sell their stake. We rarely see success when investors take control of critical decision-making because their experience is often not directly applicable to process commercialization.
Lack of Experienced Personnel
The third main challenge new ventures often face is having the right organization and personnel. This is typically due to the combination of the above two issues—lack of commercialization experience and funding challenges—as well as general inexperience with major project delivery. The most common shortage is in resources with deep experience in process commercialization and project planning and execution. The consequences are lack of project development discipline and overreliance on contractors.
Heavy reliance on external help for process development, such as vendors and contractors, has proven problematic. These external entities usually do not have the right tools and equipment to do the right experiments and tests, and their priorities are not aligned with those of the technology owner. As a result, they rely on assumptions and extrapolations to commercial‑type operation that are often proven wrong later on.
Similarly, relying on engineering contractors to do everything during project planning usually does not serve the owner’s best interest. Engineering contractors rarely have the required commercialization experience and are not in a position to make the best decisions for the owner company. Contractors are also not in a position to manage the often‑complex shaping challenges we see with low margin energy projects (see IPA’s latest article on contracting for green hydrogen projects).
Other common organizational gaps in new ventures include the lack of ability to manage multiple contractors responsible for various components of the effort. Communication challenges and gaps between different scope components, different roles, and different phases are common root causes of failure. These organizational gaps often lead to out-of-sequence work, undue optimism in cost and schedule targets, and substantial misses in operational performance. This optimism is a key cause of failure of new startup ventures.
In our experience, all new ventures have some combination of these issues—the extent depends on the technology step‑out. Recognizing these challenges—and addressing them early on in the development cycle—is a hallmark of successful innovation in the process industries. Not following these practices can lead to the ultimate failure: an otherwise viable technology branded as failure because of taking a wrong commercialization path.