Startups in the Energy Industry: 5 Reasons They Often Fail

Posted by BBL Ventures on Mar 13, 2019 9:36:00 AM

 

What We’ll Cover in This Piece:

  • Why the energy industry is ripe for disruption
  • The unique challenges of startups in the energy sector, particularly the oil and gas industry
  • How to successfully break into the energy industry as a tech startup

Breaking into the energy sector, especially the oil and gas sector, has proved challenging for many tech startups, and resulted in lots of failures. However, despite the unique challenges, the potential in this industry is huge for tech startups, particularly since many oil and gas CEOs have directed their managers to embrace emerging technologies.


The Energy Industry Is Ripe for Disruption

According to the business intelligence firm IBISWorld, the worldwide oil and gas drilling sector portion of the energy industry alone was worth more than $2 trillion in 2017. In the U.S., it’s a $280 billion a year industry.


This is an industry whose leaders have mandated the better use of technology, and where every gas and oil company has some type of digital transformation initiative. 

A World Economic Forum/Accenture white paper explained: “As other capital-intensive industries (such as aviation and automotive) have revolutionized their business and operating models through a holistic application of digital technologies, the opportunity for the oil and gas industry to leverage the transformational impact of digitalisation has become more evident. The growing consensus is that the oil and gas sector is on the cusp of a new era. A second wave of business and digital technologies looks set to reshape it, propelled by a series of macroeconomic, industry and technology trends.” 

And no wonder. The savings potentials are huge. McKinsey & Co. estimates that digital technologies in the oil and gas sector could reduce capital expenditures by up to 20 percent; cutting operating costs in upstream by 3 to 5 percent and by about half of that in downstream. 

This demand for new technology comes from the smaller independents to the super major multinational corporations. Because of this, startups are getting funded for oil and gas technologies more now than in prior years, with funding coming from private equity, VCs, and angel investors alike.


5 Unique Challenges for Startups

Unfortunately, trying to break into the energy sector has a tech startup requires a company to overcome unique obstacles. Often, this means that tech startups end up burning through cash too quickly, before they can get any traction, resulting in frustrated investors who pull then plug on funding. The unique problems include:


1. The oil and gas sector is slow to make decisions and adopt new technologies.

This can often be the killer of the startup by the nature of how these large oil companies operate. Their slow decision-making becomes a draw on cash flow for an entrepreneur, and frustrates the investors, and the funding dries up. 

2. Many startups pursue a technology solution that works for a single energy company.

Even if that saves an oil and gas company millions of dollars — it’s not enough to keep the startup in business when oil and gas corporations are slow to adopt new technologies and to make decisions. The startup then goes out of business before the corporation can implement the technology. 

3. Startups create a solution for a problem that doesn’t exist.

AI, robots, blockchain and other disrupting technology all come from outside of the oil and gas industry. Consequently, entrepreneurs often don't know the oil and gas industry well enough to know how to apply this technology to the industry’s unique pain points. Oftentimes, this means that the entrepreneurs think that there's a pain point where there isn’t one and pursue the wrong solution. 

4. The lack of industry knowledge often means that startups can’t implement a successful solution in another department within the same oil and gas company.

Often, an entrepreneur doesn't have the skills, industry knowledge, and connections to understand how to navigate a mid-sized oil company or a super major corporation, which are some of the largest, and oftentimes, most bureaucratic organizations in the world — resulting in failures. 

5. Many startups don’t know how to scale their solution.

This takes knowledge — and more funding. To grow from a pilot to scale requires expertise that many startups lack.


Steps for Startup Success

A key step for success is to find a solution that can be implemented across the industry, as opposed to solving a particular pain point for one client. This is critical.


Another key step for success is that the startup must learn how to scale their solution beyond the pilot to the rest of the oil and gas company, and then to the rest of industry. Being able to scale requires:

  • A large number of people
  • Funding
  • An understanding of change management processes. Going from a pilot to full-out implementation is not easy — and it requires different capabilities to do that

 

A third and vital key to success is to partner with the right early-stage/seed who have the industry connections to the oil and gas industry to guide you through this unique industry — like us.


How BBL Labs  Our Angel Investing/Houston Innovation Hub — Works

Here in Houston, we've created BBL Labs within the accelerator community that connect our oil and gas company clients and entrepreneurs into the same ecosystem. This approach is unique, relying on our deep knowledge of the oil and gas industry, our connections, our accessibility to financing, and our experience in angel investing.


Six key factors that make this approach more successful:

1. We use our connections with the large oil and gas companies to help these clients understand how to help the entrepreneurs.

We sometimes play the bad cop on behalf of the entrepreneur to explain to the client how their behavior is stifling this start-up. They are receptive to this now, from the right people. 

2. We're sharing information between other startups and our clients.

We can see a good idea and tell whether it’s applicable to the oil and gas industry, too. Then, we can connect these startups with the right oil and gas industry people to get a pilot started, and with the right investors. 

3. We can better serve our energy clients.

We can show them what a technology does and how it helps solve a problem — and we can help connect with them the right startup to properly implement it (when there might be several startups attempting something similar). 

4. We can connect two startups and create something that’s truly a game changer for the industry.

That's where we are really excited because we're creating new companies, new technologies, and new ways of thinking. 

5. We’re helping to create a tremendous amount of interest in this sector.

Developing BBL Labs, our innovation hub, and the accelerators here in Houston means that we are able to take actual industry problems into the universities — or to a tech startup — and see these problems solved. It's pretty exciting, and it will impact Houston and what the energy industry will look like. 

6. We're seeing more deals in the Houston angel network around oil and gas getting funded through the innovation hub.

That's good for the entrepreneurs — and it’s great for the oil and gas industry.

 

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Topics: Startups

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