Case Study: Demand Response Corp.
You represent a venture capital investor on the Board of Demand Response Corp., and you are facing the decision of going forward with another round of funding. As part of its decision process, the Board is reviewing the Business Model. Is the one that got us to this point still the best one going forward?
Background
Demand Response Corp. is a privately held, VC backed startup company created to bring to market new hardware and software technology capable of managing commercial office building demand in times of peak demand on the electric grid serving those buildings. Large scale success of this "demand response" solution could mean significantly relieving stress on peak electric generating capacity for a given area.
Demand Response Corp.'s current business model calls for
- Developing manufacturing capability for the devices in China.
- Working through a variety of public forums to promote the concept of demand response as an alternative to building more peak generating capacity or as an additional to other energy conservation efforts.
- Working through utilities, regulators and environmental groups. These groups seem to be warming to the idea; however, building owners, who will be the target customers, are still cautious, as the payback period is a little long for their liking.
You retain the Chesterfield Group to help with the analysis of the current Business Model and its application going forward. Following is a summary of factors to be considered, together with some preliminary recommendations for changes.
Strengths
- Patent protected devices and software
- A commanding lead in understanding the potential for its products in the realm of demand response.
Constraints
- Demand Response Corp. is running short of funds.
- Its target customers, the office building owners, remain somewhat reluctant.
- Potential competitors are much larger, stronger and more established than Demand Response Corp..
- Demand Response Corp. lacks manufacturing capability, despite the fact that the bulk of their cash burn to date has gone toward the development of production capacity.
Summary of Analysis and Recommendation
- Demand Response Corp. has two competitive advantages at the moment, some good technology and a good position in the demand response market. Importantly, however, manufacturing is not an advantage. In fact, it is probably a competitive disadvantage, relative to their much larger and more well established competitors.
- We recommended that the Company consider reallocating its human and financial resources where they will do more good than development of manufacturing capacity. Likely, this will be in patent protection and market development.
- One way to do this is to change their Business Model from a manufacturing company to a licensing company. This would involve approaching various competitors to establish non-exclusive licensing arrangements for the Demand Response Corp. technology and then work with those partners to cooperatively develop the market.
Rationale
- In a situation where they are running short of capital, they can now avoid their largest use of capital, manufacturing. Using existing manufacturing capacity should have the additional advantage of compressing the time required to get to market.
- They can avoid the need to establish their competitive moat solely through achieving First Mover status in the demand response market a dicey proposition, given that they have to develop the market from scratch and have limited resources compared to their potential competitors.
- To the extent that they can bring some of their primary potential competitors "inside the tent", they dramatically reduce the potential for aggressive competitive response.
- They virtually assure that their technology will become the standard, which bodes well for their market development efforts.
- They gain access to fully developed distribution channels, avoiding the time and expense of having to build them.