Managing Commercial Risk

The Overlooked Factor in Launch Success - 

Andrew Haughian, materials VC at Pangea Ventures commented recently on LinkedIn about an issue we commonly encounter, the idea of commercial risk.

Commercial inertia, not technical risk, is often the cause of timeline slippage. That’s true in venture, true in new products as well.

Here’s what he had to say on the subject.

The biggest barrier constricting VC capital flow is the potential for"death-by-pilot" where start-ups fail to secure the necessary funding required to support multiple iteration and scale-up phases often with moving goalposts from customers and partners. Contrary to popular belief, it is often commercial inertia that extends these timelines, not fundamental technology issues. While commercial partners need to manage risk, start-ups need to find partners where the highest levels of management see the vision for future alignment and are not just tinkering. And start-ups need to be able to give confidence to investors by striking early commercial deals with these partners that are subject to performance milestones and show real skin in the game.

The idea that commercial risk is a bigger issue in product development than technical risk isn’t commonly held and when we look, we usually find a lot of risk buried in a client’s commercial understanding of the project.

With a lot of steps in the value chain between fundamental demand and your material, it’s often true that we don’t understand how to interpret the signs or even how the downstream demand will be developed or confirmed.

This usually leads to missed expectations when launches don’t happen or customers decide not to pursue your solution, after a lot of lip service that they were committed.

What does Andrew suggest?

1. Plan timelines and fund for multiple iterations.

2. Make sure your value chain partners aren’t just “tinkering.”

3. Craft relationships where partners’ upper management is committed and has skin in the game.

4. If commercial partners don’t want to put skin in, then consider your solution is too incremental.

This is great advice, whether it’s a new venture or a new product. These are all ways to confirm customer commitment and risk sharing. Usually if a customer won’t enter into this type of relationship, it’s a sign they don’t really believe in the product either.

Upstream Position Magnifies Commercial Risk

• 🧪 needed to develop the downstream applications.

• 📦 needed to fill supply chains all the way to the consumer.

• 🎤 needed to allow for promotional tactics to develop end markets.

• 👨🏻‍⚖️ needed to create artificial volume demanded by govt mandates (which never last)

Only then do we start to get a read on how markets develop. And the final volume is what we should consider as true market demand.

We commonly see materials companies bank on growth, because their customers volume requests are growing, and never asking what sort of demand that volume represents.

And this leads to "band-wagon" effects, and walk-backs of growth commitments.

The best strategic decisions in the EV space, have been made by the contrarians, like Toyota, who haven't bet the farm on EV's.

Everyone else is already walking back BILLION dollar bets.

If you’ve got a material going in to EV’s, it’s probably a new disappointment.

Strategically, if you don’t understand downstream demand creation then you’ve got to be wary about commitments, and vigilant for indicators of true demand.

Until next week,

Kendall -

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