Energy Industry Founders Need to Allocate for Risk in Pitches

A lot of the problems that entrepreneurs are hoping to address in the energy/oil and gas industry in Texas are complex. And the solutions are often complex too. 

And that's fine. 

But changes to complex systems also come with a lot of risk. If you're going to change something to that system or add/take away something, consider the risk that your customer/client is taking. 

Things could break. No, let me change that. Things do break. Operations get disrupted. Efficiency may be lost. Even if they don't explicitly tell you, customers that you are pitching to want to know how you're allocating for risk to their operations. So what do you do? How do you address risk? 

You need to show them a few items:

1. Show why the change you're making to their oil and gas operations is painless

Your product needs to fit in without being negatively disruptive when it's being integrated. Make changes as smooth as possible. This requires a very good knowledge base of how your potential customers' systems work. Thankfully in the energy industry most of the founders I've spoken to as a startup attorney are pretty good about this. So the knowledge base is there--make sure you account for it in incorporating your product into their system. Demonstrate this knowledge at pitches. 

2. Founders need to show that change is not costly 

Unless you're making an important efficiency gain or your product boosts productivity and is growing the system, it has to cut down costs. Remember, that customers, investors, etc. want to know how much of a risk a new product is to their bottom line. If it's not going to cut down costs, then you need to address costs in other ways. Check out the blog post I wrote about who is going to pay for your solution. 

Also remember that deploying your product is not costly in less obvious ways. Implementing a new system can, at least at the beginning, reduce efficiency. A new system has a learning curve for staff and employees of the company. This is COSTLY. And this cost can be quite substantial in the case when the change you're trying to attempt is large. 

Accomplishing these two items demonstrates to others that you've accounted for risk. As I've mentioned elsewhere, you always have to pay attention to risk. 

As a reminder, risk comes from every direction.

Hell, most of a commercial contract is about risk allocation through terminology, standards, boilerplate language, reps and warranties, etc. Half of what a lawyer is doing when creating and analyzing a contract is identifying and allocating for risk. 

Risk is going to come up again and again in every part of what steps your company takes. Always account for it. And when it comes to pitching to customers, clients, investors, etc. make sure you address it either directly or indirectly--especially when it comes to integrating and using your product. It's something that these individuals are thinking about whether or not they verbalize it. 

Founders: Who is going to pay for your energy tech solution?

A lot of entrepreneurs/founders are really good at identifying a problem in a system. Many entrepreneurs are able to take another step. They are able to identify and create a solution--so that's even better.

Here's the sequence that these entrepreneurs go through: 

1. They identify the problem that the energy tech industry has

2. They identify a potential solution

3. They create the solution

Simple enough, right?

While that's all well and good, but it's not good enough if you want to be a successful founder. 

There are still some steps that are missing. Yes, actually there are tons of steps missing in there, but there's an extremely important step that a lot of entrepreneurs/founders don't consider that I want to discuss today. Here's what that sequence should actually look like:

1. Identify the problem that an energy company has

2. Identify a potential solution

--> 3. Figure out who is going to pay for the solution

4. Create the solution

You have to take this extra third step if you want to create a company that you will grow. You have to figure who is going to pay for the solution. People forget about this part. If no one will pay for the solution, then it's not the best solution. The answer is NOT founders, by the way. If someone pays for the solution, in some ways that is how your operations get validated. So it's pretty important. Ask yourself if your solution is something that customers will pay for it--either directly or indirectly. 

Here in Houston, Texas and Dallas, Texas this is what investors want to know. They want to see if founders can answer this question. 

Don't think that the solution will simply be paid for by oil and gas investors. That's not how this works. The investors themselves are wondering who will pay for the solution. As a startup lawyer I see this question being asked of founders all of the time. "Is the solution something that customers will eventually pay for?" 

The sad reality is that if there's not someone who is going to pay for the solution, then the company just won't be fruitful even if everything else the company is doing is pretty badass. The customers/clients won't be there; the investors won't be there; there will be a lot of important parts missing. 

So don't forget this important step.