Three keys to the next green business boomApril 30, 2012: 10:20 AM ET
Until we see big changes like a price on carbon or an affordable, scalable source of clean energy, it's probably best to focus on small moves that can add up to a big difference.
By Dan Yates
FORTUNE -- The clean-tech world keeps looking for a revolution, but that kind of change requires shifts in technology or policy first. Until we see big changes like a price on carbon or an affordable, scalable source of clean energy, it's probably best to focus on small moves that can add up to a big difference.
When would-be entrepreneurs come to me for advice on how to turn their clean-tech plan into a thriving business, I share the following lessons with them.
Focus on incremental changes.
Many businesses are created with a revolution in mind, but most successful ones start with a small improvement. Google (GOOG) didn't create the web search, it made the web search better. Facebook didn't create social media; it made a better social media platform. While there is an occasional homerun business that can change an industry, it's better to focus instead on the underappreciated potential of incremental change.
Take the Chevy Volt. It's one of the most technologically exciting cars out today. Yet despite its buzz, the Volt has struggled to find a market. In 2011, Chevy sold only 6,000 Volts, leading to a temporary halt in production. Consumers want fuel economy, but few are ready to pay a premium for it.
But General Motors (GM) has another green car that's doing booming business: the Chevy Cruze, which can get 42 miles per gallon in highway driving and costs about half as much as the Volt. In the Cruze, Chevy brought together hundreds of incremental design changes, from its specially designed Ecotech engine, to wheels that increase aerodynamics. Last year, Chevy beat expectations and sold almost a quarter of a million Cruzes.
Look for ways to make big ideas capital efficient.
Many businesses require large amounts of capital to get off the ground. To develop wind turbines or electric batteries, for example, you first need a large manufacturing facility. It just can't be done at a small scale. But some of the most successful green businesses have been taking big ideas and scaling them down.
In the solar industry, companies like Solar Millennium, which entered bankruptcy $500 million in debt this month, focused on massive centralized power projects. Other companies, like Sunrun and SolarCity, have focused on residential rooftop distributed solar generation -- and they are flourishing. By focusing on winning over one home at a time and utilizing existing solar technology, these companies have found the lowest hanging fruit in their business area. Their approach reduces the risk to both investors and households. Pike Research recently forecasted that this particular segment of the solar generation industry can expect 18% annual sales growth through 2015.
Keep your potential customer base fairly broad.
Another trap for green businesses is that they often benefit only one type of consumer or one portion of the country. What state you are in may have an impact on your views about solar power, natural gas, or coal. Just as energy policy debates have divided Americans along geographical, ideological, or demographic lines, too many energy business strategies appeal to just one group.
Typically, energy efficiency programs have been targeted at the wealthiest groups -- people that can afford an expensive rebate or piece of equipment. A more promising approach would seek to engage a broader segment of the customer base with products and services that can satisfy different types of consumers.
Incremental changes have a way of snowballing over time. The clean-tech community would do well to keep to keep that in mind.
Dan Yates is the CEO of Opower, an energy information software company.