Kirk Washington: The Realities of Investing

Blog - Kirk WashingtonKirk Washington of Yaletown Venture Partners treated the Northwest Energy Angels to an insightful exploration at their March Member Lunch. Washington has over 25 years of technical, operational, and investment experience in energy technologies, with numerous successful projects under his belt. But he was kind enough to share a case study about a venture that didn’t pan out exactly as planned. He reminded the Angels that we often learn more from our struggles than from our successes. The company in question, Microstaq Corporation, manufactured thermally actuated MEMS micro-valve technology. Their story was long and sometimes painful, but his main focus was the lessons contained in the evolution of Microstaq’s value proposition and go-to-market strategy.

It was the early days of clean tech. Energy efficiency was yet to emerge as a sector of investment interest, and Microstaq was seen as more of a nanotechnology or semiconductor company.  Washington explained that cleantech investments are too often classified by specific technology areas rather than vertical market applications. In this case the market application was HVAC, which accounts for up to 43% of building energy use, where buildings in turn account for 40% of all energy consumption in the United States. So Microstaq’s value proposition of up to 25% increased energy efficiency in HVAC systems had the potential to make a major impact in an industry underserved by innovation for over 40 years time. But as we discovered through Washington’s anecdote, it took a number of years to determine the right go-to-market strategy to target the end-user customer, who realizes the direct benefit of the product’s energy efficiency attributes. The lesson learned: don’t let simplicity guide your decision about what model is best for growing your business.

Washington observed that Microstaq was a capital efficient business with deep intellectual property, with both an environmental and an economic value proposition, and a capable team. It was a platform technology with huge potential, a good candidate to disprove the myth that it takes $100 million and 10 years to build a clean technology business.

Microstaq’s initial approach was to sell its valves to air conditioning OEMs. The notion of selling high volumes of relatively few product variants was alluring. However, Washington observed that the product attributes of interest to the OEMs were increased reliability of the air conditioning compressor, the source of highest service and maintenance costs in the field, and reduced size of the condenser coil – not increased energy efficiency. The OEM does not pay the electricity bill once the product is deployed. So their only interest was decreasing capital cost, and decreasing warranty expense – not enough to motivate widespread adoption, and not the primary value offered by Microstaq’s solution.

Ultimately Microstaq integrated sensors, a microcontroller, and developed software to enable replacement of conventional expansion valves with its electronic micro-valves in super markets and grocery stores. While the channels to market, and product development effort was much more complicated, Microstaq experienced rapid adoption and with much higher margins. Gross margins approached 90% with an 18 month time to breakeven because electricity consumption is a major expense for super market operators.

Management was reluctant to hire the electronics engineering and software development expertise necessary to development a comprehensive refrigeration and freezer flow control solution with additional functionality including defrost cycles, self-calibration, diagnostics, and various communication protocols to support interfaces with building energy management systems. Selling to OEMs seemed to be “cheaper” and “easier”. In the end, it was the difference between developing a technology and growing a business. And once their major customers began retrofitting Microstaq valves into their operations, it attracted the attention of the OEMs enabling penetration of the OEM market.

They were finally focused on building a business instead of building a technology. Perhaps most importantly, they were offering a complete solution to the customers who stood to benefit most directly. Their evolution took a lot of time, money, and patience from investors like Washington.

Ultimately, Microstaq did not achieve the goal it set out to accomplish. So while it did not take $100 million, it did take 10 years! It wasn’t Microstaq’s dazzling success that compelled Washington to discuss their journey with the Angels. Instead, it was the difficult lessons inherent in this type of story that made it such a valuable case study. Companies need customers; by failing to have a clear value proposition that connected with a well-defined customer segment from the beginning, Microstaq created unnecessary challenges that took time and money to surmount.