In this part of a series of articles on the simple tests I quickly apply to new technologies and firms that cross my screen, I’m going to focus on business model red flags. As a reminder, there are three categories I look at, technology, business model, and marketing, each with their own nuances.
None of these red flags by themselves make a company, a product, or a purported solution a guaranteed failure or an outright scam. But the more red flags pop up, the less likely something is to be something worth bothering with.
Red flag: Do the principals in the firm have any related qualifications?
Dunning-Kruger hits us all, but the number of people with no experience or education in a domain tend to have it more than people with scars and tired eyes.
For Joi Scientific, a recurrent entrant in this series, the founders were promising a deeptech sea water hydrogen solution, but their experience was in music and software sales. Neither had a solid STEM background. Neither had chemical engineering backgrounds. Neither was an energy guy. Yet their names were on the patents. Red flag. On a related note to this, look for Google hits that say “also known as.” One of the Joi principals had two or three AKAs. The Eco Energy Joulebox guy has six or seven and is the son and nephew of two of America’s biggest con artists. I’ll just say here that people who have many AKAs are frequently professional con artists depending on people not looking at their online footprint.
One of my favorites in this red flag territory are the inventors of the Vortex Bladeless wind generator, the stick that oscillates as wind flows past it and purports to generate a lot of electricity. Those two guys made artificial noses before starting the energy company.
How do you test for this? Google them, of course, with their full name in quotes. Look at their LinkedIn profiles, if they have anything in them. Yes, I’ve seen firms promoting stuff where the LinkedIn profile was almost non-existent, if in fact I could find it.
Red flag: Are they starting from a product as opposed to a market?
People get enthusiastic about things, whether it’s kite-surfing or bingeing on old Jetsons cartoons. They get an idea that everyone else must be as fascinated with these ideas as they are, and that there’s obviously a big market for a product they dream up. Then they build it, hoping someone will come. Pro-tip: start with a big potential market and look closely at it.
The airborne wind energy segment is or at least was full of people like this. I used to say that if you scratch an airborne wind energy entrepreneur you’d find a kite surfer. Having kite-surfed (and windsurfed and paraglided) I know personally the immense power of the wind and kites. But instead of looking carefully at the energy generation and wind generation markets, they mostly made stuff up about the space as they lied to themselves about how great their products were.
And the urban air mobility electric vertical take-off and landing folks are like this too. Who doesn’t love the Jetsons? Who doesn’t love flying cars? How can there not be an addressable market bigger than all of commercial aviation globally? In all of North America, there’s only one operator with scheduled helicopter flights in only a couple of cities, but surely that’s just because helicopters are too noisy! And sure, the biggest market in the world for private helicopters, São Paulo in Brazil, only has about 750 of them and Uber couldn’t make a go of it in that megalopolis of 28 million including many of the richest people in Latin America, a city where people were carjacked daily, but that’s just a quirk. Really, all the world needs to start an airborne urban taxi service is a really complex gizmo that’s probably uncertifiable. On that note, the founder of Vertical Aerospace, the pre-eminent UK EVTOL failure in the making, recently admitted that they didn’t know that certification was required for commercial aviation.
My observation these days is that if you scratch an urban air mobility entrepreneur you’ll find an airborne wind energy failure. Uber’s UAM failure was led by an airborne wind energy failure. Joby grew out of an airborne wind energy failure. There are more.
How do you test for this? Look at their material. Do they start with who should buy their product and why, or do they start with a list of product features? Red flag. Look at their market claims. Look at the number of units that they are claiming they are going to ship. Do a bit of Googling to find out how many units ship in that market or adjacent markets. It’s not hard at all to find this information. Lots more units than comparable markets? Red flag.
Red flag: Do they claim that they are going to completely replace an existing cleantech solution?
You now, when you look around the world and there are about 3 billion solar panels and a million horizontal axis wind turbines in operation, claiming that your solar or wind collector invention is much better than them is pretty arrogant, and very likely wrong. If they claim that they are going to replace road cars with three-wheeled two-seater bubbles, that’s pretty unlikely. If they claim that they are going to replace trains and planes with de-pressurized 600 mph tubes, there’s just not a lot of likelihood of that.
In wind energy, the Sheerwind Invelox, the Saphon Energy Saphonian, the Vortex Bladeless wind generator founders, and every airborne wind energy entrepreneur all claimed that they were so superior to tall masts with three blades because <insert nonsense statement about normal wind turbines here> that surely the world would beat a path to their door. Yeah, no. All dead in the water.
Some small modular nuclear reactor (SMR) entrepreneurs, not all, as they aren’t all deluded about everything everywhere all the time, claim that thankfully the world is going to come to its senses and get rid of all these wind turbines and solar panels once we start rolling out SMRs on the back of trucks to every place that needs energy.
How do you test for this? Look at their business case and material. Usually they’ll be differentiating themselves not with certifications, technical documentation, and third-party validations, but by attacking the dominant technology in the field. I can’t tell you how many airborne wind energy websites have reams of anti-wind energy myths falling off their pages.
Red flag: Do they add major operational labor requirements, or are unaware of what that means to competition?
When a firm is entering a crowded market, or an innovator is proposing a solution for an existing market, one of the key questions to ask about the business case is comparative labor costs during operation.
For wind energy, it’s pretty straightforward. Wind turbines just sit there, spin, stop spinning, and generally mind their own business without anyone paying any attention at all. Usually there isn’t even any security, or if there is it’s a temporary night security guard because the local teenagers have taken to being idiots around the wind farm. I remember an airborne wind energy executive approaching me at Windpower 2014. We sat and had a conversation, and I told him that a bleedingly-obvious Level 0 requirement for airborne wind energy was autonomous, hands-off, no people, landing and launching. He said that they’d only figured that out the year before after working on their solution for five years.
There’s one energy storage innovator whose brilliant idea is to lower sand into mines on elevators and push it to the end of tunnels to generate electricity, then truck the sand back to the elevators when electricity is cheap to store energy by putting the sand in a big pile on the surface. The diagrams actually have little trucks driving around deep underground. It’s remarkably lacking in systems thinking or appreciation of labor. By contrast, when I was speaking to CLP, the Hong Kong electricity utility, a couple of years ago, they’d converted their 25 GWh mainland pumped hydro facility to hands-free over a decade earlier from the minimal onsite observation staff. And containers full of batteries dropped on fields and connected to the grid just sit there too.
How do you test for this? Well, Google the market the company is trying to enter. Look at the technologies in that market. Look at the labor requirements. Then look for labor requirements to run the solution being proposed. If the labor is higher than the current entrants, it’s probably not viable. The history of the past several hundred years can be read as a continued removal of human labor from everything possible because we’re both more expensive and less reliable than machines an awful lot of the time.
Red flag: Is the only current use of a solution in the military?
The military, especially the US military, has really weird niche requirements and more money than anyone but the Flying Spaghetti Monster. And while they don’t want to kill their personnel, the point of militaries is the high possibility of death for someone, so their idea of reasonable risks is very different. If as solution only exists in armies, or if it’s being heavily funded by the military, red flag.
The entire urban air mobility and electric vertical take-off and landing (EVTOL) space is like this. There are actually aircraft that take off and land vertically and then transition to horizontal flight, but they are all military with no commercial exceptions. They’ve existed for decades. The Hawker Siddeley Harrier is a fighter jet developed in the 1960s and used around the world by UK, Thai, Spanish, and American military groups. The Osprey is a tilt-rotor prop plane developed by the US military with a track record of killing 51 people when it fell out of the sky, with none of the failures in combat zones. The new multi-billion dollar F35B vertical take-off variant of the F35 had a fun incident where a ground crew member forget to remove the plastic cover over the intakes on top of the plane, so it fell into the sea instead of flying away.
When I was talking with Damon Vander Lind of Magpie about his concept of towing electric passenger aircraft with other electric aircraft for parts of their flights, the only example I could come up with for mid-air interception and alignment of a cable was refueling fighter jets on long flights. No one does it commercially.
How do you test for this? Look for antecedents for the solution, or examples of use for related technologies. If the only ones you can find are from the military, that’s a red flag.
Red flag: Is the solution claiming to be for one market, but it’s obvious that its natural market is something else entirely?
What’s a natural market? It’s the place where a product fits well, not one where it’s a square peg. It’s the place the product can make money, or be altered to make money.
Lightsail Energy’s compressed air storage carbon fiber tanks are an example of that. Compressed air storage works adequately at relatively small scale when you have an underground cavern. Danielle Fong thought going high-tech in a low-margin space where low-tech existed was a good idea. Instead, Lightsail ended up selling a bunch of its tanks for storing compressed natural gas, a place where there actually was a market, before failing anyway.
Carbon Engineering, the poster child for direct air capture, claimed to be in the business of making plug-compatible synthetic fuels with its natural-gas powered, mile-long, 60-foot-high wall of fans and heaters. It was obvious to me when I dug through its technology that the only natural market was enhanced oil recovery on tapped-out oil fields with unmarketable amounts of natural gas. And sure enough, the only place it is deploying anything as far as I know is in the Permian Basin with Oxy (née Occidental Petroleum).
How do you test for that? Ask yourself whether the technology is better suited for something else entirely. Check if similar technology is being used in other markets. Ask yourself about the market the firm is claiming to target, and whether the fundamentals make any sense.
And so, our tour of business model red flags that are fairly accessible to laypeople has reached its end. No need to understand EBITDA. No need to know how SPACs work. No need to look at massive spreadsheets. Just the basics. Does what they are claiming to be doing make any sense in the market they are claiming they are going after?
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