Is being an early mover essential for startup success in maritime cleantech?
In this article, we pose the question of whether being an early mover in the cleantech maritime sector is a pre-condition for success.
As the maritime sector propels itself forwards to meeting its decarbonisation targets, it is clear that startups are responsible for developing many of the innovative technological solutions directed towards a cleaner future. The question posed is whether being a first or early mover is essential for startup success. It is a key one for startups as they race to grow and scale and attract the necessary investment to do so. Being first or an early entrant is widely recognised to bring many advantages to those companies which pioneer new markets as the importance of entry timing for firms entering new markets relates to the ability of firms to pre-empt resources and create barriers to entry. The answer, however, is perhaps more nuanced; while there are advantages to being an early mover, the timing of entry is not necessarily a pre-condition for success at this early stage of market maturity.
Technological Leadership
In cleantech maritime, first or early mover advantage is likely to arise from technological leadership, with this being one of the main ways in which advantage can be gained. In relation to technological leadership, the two basic mechanisms through which a first mover advantage can be gained are learning or experience effects or success in patent races. Many of the startups in the cleantech maritime space have developed patents to protect their innovation and, given nascent markets, we are witnessing multiple entrants with different (patent-protected) solutions to tackle the same or similar problem. Which one will be successful? The market is wide open at this stage as the markets are new and emerging. With potential global and regional demand huge and growing, the greatest constraint facing the industry is on the supply side to ensure that demand can be satisfied over the next critical years to 2030 and beyond. There is no major deterrent at this early stage for other startups to come in with competing solutions – the markets are not mature and are, hence, not characterised by a dominant design, i.e., a de facto standard for the market. If we look back at the evolution of the MP3 market, there were a number of competing MP3 players in existence when Apple came in with its iPod. It was the iPod though which had developed the product features which established a dominant design in the market for MP3 players.
However, the race towards a dominant design has already begun. There are likely to be learning curve effects for those companies able to gain traction with end users where this often starts with end users often trialling new innovations to prove the value of their solutions. In late 2022, the IMO endorsed the findings of an earlier report by CE Delft[1] stating that learning curve effects of 10% are likely to be seen in relation to wind propulsion technologies, for example. This implied cost reductions of 10% for every doubling of installed capacity or significant economies of scale over a relatively short period of time, an obvious benefit to early movers. And this is before perceptual advantages are considered.
Pre-empting the Competition
The other two ways in which a first mover advantage can be gained is through the pre-emption of assets and buyer switching costs. Pre-emption can be a factor even in relation to perceptual assets such as the dominance of product space, i.e., a company is already perceived by others to dominate a particular market space and can therefore deter others from entering. The learning curve effects borne out in cost advantages shown in the wind propulsion example illustrate how a perceptual advantage can also be gained. Early movers can also benefit from ‘customer lock-in’. Buyers or users of products and services can often gain familiarity with a product/service and be loath to switch to another (sometimes improved) product that comes on to the market at a later date given the potential costs of retraining staff and adapting systems and ways of operating.
Network Effects
Over the last twenty or more years, since the arrival of the dotcom boom, we all understand the value of early entry in those online markets where the number of users of a product or service can scale very rapidly given the existence of ‘network effects’, i.e., the value of a product or service to one user increases with the number of other users. If we take a look at history, it is possible to argue that companies like Amazon or eBay would never have been as successful as they have been without the advantages of being first movers. Today, network effects are prevalent in the AI sector. OpenAI launched ChatGPT at the end of 2022 and huge numbers of AI startups have rushed to join the party since – in fact, over $40B has poured into venture capital to support new AI startups in the first six months of 2023[i]. AI’s own revenue growth provides evidence of the value of their first mover advantage – revenues have increased from $28M to $1BN year on year on an annualised basis.
So, are network effects relevant to cleantech maritime? For those launching digitised services or platforms, network effects suggest that early mover advantages could be a major or even determining factor in success. Starlink Maritime, a satellite communication service specifically designed for maritime applications offering advances over the existing VSAT technology, is already proving the power of network effects since its launch in July 2022. It has been estimated that more than 5,000 vessels have adopted Starlink’s services by April 2023 with adoption poised to increase rapidly over the next two years with increasing numbers of vessels going direct rather than through a service provider[ii]. Flexport, as the maritime sector’s first fully digital freight forwarder, also highlights the advantages of being a first mover, albeit its experience acknowledges the challenges of disrupting a complex traditional industry. The company connects data across all the different companies involved in each shipment, providing real-time information and tracking and saving freight users hours of time each week. With over three-quarters of its revenues from medium to large companies, the company’s target markets are limited since the largest global brands have the scale to negotiate directly with carriers[iii]. Network effects might, of course, also assume importance in relation to those maritime products or services where standards play a role. If regulatory bodies decide to establish standards in relation to how net zero might be achieved through specific elements of product or vessel design, for example, those companies leading the way might find themselves establishing the dominant design for the standard and benefit from this early advantage.
Does it pay to be a late mover?
So, can we assume that the advantages of early entry outweigh any potential advantages in being a late mover? Not necessarily. Research across both consumer and industrial sectors shows that rewards ultimately accrue to followers rather than pioneers although the profit advantage to pioneers has historically been as much as twelve years in industrial businesses. The rationale for late mover advantage is often attributed to the ‘free rider’ effect with late movers taking advantage of the investment made by first or early movers. In effect, the costs of imitation are lower than the costs of innovation. However, whether or not you are likely to gain a late mover advantage tends to depend on what type of company you are since late movers tend to be those established companies with the complementary resources required to scale further the innovation developed by the pioneers. Taking a closer look at cleantech in maritime, it could be argued that many of the late movers will be those established companies looking to acquire the technologies needed to decarbonise their fleets and related activities. Whilst the largest shipping companies, for example, are engaging in their own R&D, it is questionable whether they will want to or will be able to replicate this across the wide range of cleantech solutions being developed given not only the costs and time involved but also the level of risks and uncertainty which work against early market entry. On balance, it could be anticipated that many late movers will present a welcome M&A exit strategy for many early movers and contribute to scaling the wider adoption of cleantech across the maritime sector.
Summary
In summary, it is clear that there are advantages for early movers who are developing the cleantech solutions urgently needed to support decarbonisation of the maritime sector. In particular, those startups who are early movers and who are also able to gain a headstart in sales traction are likely to have a significant advantage over later entrants through gaining substantial economies of experience and learning. For now, however, potential demand for cleantech outstrips supply. From an investment perspective, investors should also be reassured of investing in these pioneering startups at the current time whilst also being ready to welcome late movers, those established companies who need these pioneering cleantech technologies to decarbonise their own operations.
Dr Anjali Bakhru
pH3 Capital Ventures
[1] CE Delft (2016), ‘Study on the analysis of market potentials and market barriers for wind propulsion technologies for ships’.
[i] ‘Smart Money’, The Economist, September 23rd, 2023. https://www.economist.com/business/2023/09/18/could-openai-be-the-next-tech-giant
[ii] https://valourconsultancy.com/how-is-starlink-maritime-really-doing/