So, you’ve got a great idea for turning your hard-tech research into a product or service. Great. But no matter how miraculous your discovery sounds, it cannot be turned into a viable commercial venture unless it can be scaled to meet the demand of a target market, and then manufactured and sold at a price that both sustains your business and meets your customer’s requirements for price (what they pay) and value (what they get). You have to obey the laws of capitalism!
So how much does it actually cost to produce a kilowatt-hour? What's the value of the technology to an industrial customer? Until you can respond to those questions with informed estimates, you cannot ensure that there is a market for your product. Yet, many founders fail to focus on these fundamental questions as they launch a startup to commercialize a scientific innovation.
Cyclotron Road, a fellowship program for entrepreneurial scientists and engineers, provides tools to help people understand the fundamental economics of their ideas. Techno-economics analysis is a process for assessing the economic viability of manufacturing a product or of integrating a new process technology into a given industry, and it’s an important part of introducing any new industrial product. Beth Zotter, Cyclotron Road's resident technology economics expert, has launched a new resource based on techno-economics analysis. It’s called Techonomics and it is designed to help any budding technologist answer those thorny questions.
Doing back-of-the-envelope calculations and cost models is easier than you might think. The new Techonomics website includes short videos and downloadable, easy-to-modify Excel models to estimate cost of production of a widget, chemical, or other product, and see how various product design choices impact the cost and value of the product. Starting this fall, Techonomics is now part of the curriculum at Berkeley Haas business school's Cleantech-to-Market course.
Want to learn more? Here are some the topics you’ll delve into once you start studying Techonomics:
The First Law of Techonomics: Value>Cost
The most important job for any entrepreneur, regardless of the types of products she sells or the customers he’s targeting, is to create value. The same holds true for you. Your job is not to sell a technology, it is to create value.
Customer value is the economic benefit that the customer gets from using the new technology, whether that is a new biological manufacturing process, a component in a product or process, a technology that can reduce waste, or something else that lowers costs or improves a business process. Let’s say you’ve got an idea for a new type of battery. What’s the value of that innovation? It could be high power, durability, or longer life, but probably not all of them equally. Depending on where that battery is used—whether it’s in an electric car, a flashlight, or an industrial sensor—the advantages of your innovation may be very different. But the first law of Techonomics, the one that governs every aspect of this quantitative analysis, is that value has to be larger than cost.
When you’re just starting to think about commercializing an innovation, it might feel like it’s too early to estimate costs, because of all the unknowns. But doing this work early will keep you from hitting dead-ends and turn your attention to better opportunities for your technology—just as building a spec sheet at this early stage can. Your first cost estimate will be a simple back-of-the-envelope calculation you can do by hand.
Defining the Product: Performance Specifications
Unlike with software, you can’t just sit on a sofa and hack away at your laptop to develop your prototype, and you can’t sell investors or customers on your product without proving it can be manufactured and sold with at least a slim margin. In order to prove that, you need to determine your costs using back-of-the-envelope calculations, and create models so you can see how various product design choices impact the cost and value of the product.
In software, it’s a pretty straightforward process to create an initial or beta product, which you can use to learn what your customer thinks about your product before spending lots of time and money making something they don’t want. But for many physical technologies, the cost to make a working prototype can be enormous. If you’re making a device, a new process technology, or new material, you can use the performance specifications, or spec sheet, in place of a prototype. The spec sheet is what you take to potential customers to see if your product meets their job requirements—it links your technology with the ultimate value proposition.
Give Techonomics a whirl. Even if number-crunching is well outside your wheelhouse, you will find it very informative. And once you start to turn an idea into a real-world product, you will find Techonomics indispensable.