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Business Strategy

Connecting legacies to the new

Hidden champions must bridge the gap between "digital natives" and their expertise in industrial engineering as startups continuously emerge in tech hubs like Silicon Valley, Tel Aviv, London, and Berlin, aiming to enhance value through digital services for machine and tool users. Berlin's WATTx exemplifies this approach.

It will be crucial for hidden champions to meaningfully connect the knowledge of ‘digital natives’ with their own knowledge of industrial engineering. Almost daily, new startups emerge in Silicon Valley, Tel Aviv, London, and Berlin. The business model of these new companies is to create even more value through digital services for users of machines and tools. WATTx in Berlin is developing exactly such services.

Werner Vogels
CTO of Amazon.com

One of these hidden champions Werner Vogels is referring to is the Viessmann Group. At 2.2B EUR annual turnover, it is entirely in the hands of the Viessmann family and one of the largest companies in the German Mittelstand. It is also the lead investor in our deep tech company builder wattx. Why would a 100-year-old family business invest in a now almost 2-year-old company builder? How is wattx uniquely positioned to help tackle Viessmann’s massive challenge called digital transformation? And with Rocket Internet and Project A, the premier names in company building, cutting more than half of its staff (in the case of Rocket) and rebranding themselves as operational VCs, does company building even make sense? These are important questions to explore, so let’s tackle them one by one.

What’s the value add to traditional industrial companies?: The short answer: very early access to technological trends, facilitated the translation of these trends to the specific context of the company’s business and strategy, as well as financial upside via exit returns from our portfolio companies. In order to illustrate why these aspects are of such critical importance to companies like Viessmann, we have to look at the context of these firms. In my previous post on the wave of deep tech (AKA the age of automation), I emphasized the threats that deep tech presents traditional players. The core takeaway is the following: deep technologies do not simply create new products or services; they create entirely new industries well beyond the scope of incumbent players at unprecedented velocity. Case in point: the automotive sector and the rapidly emerged and quickly growing mobility industry, powered by technologies such as AI or IoT. If you believe your industry is not at risk of being outpaced by advances in deep tech, take a look at this heatmap of deep tech innovation intensity — you will find many familiar names.

Illustration of startuo innovation intensity based on each deep-tech wave
Source: From Tech to Deep Tech, Hello Tomorrow and The Boston Consulting Group, 2017

In order to avoid the same fate as pretty much all automotive manufacturers, traditional companies must find ways to get early and transparent access to these newly created industries and leverage them to their advantage.

Illustration of wattx as Viessmann´s bet on deep tech development

That is precisely the reason why Viessmann invested in WATTx. It provides them with dedicated access to newly created industries before and as they develop, with a high degree of technological change (top right-hand corner of the matrix). A word of caution: one investment or activity like this is not a silver bullet to solve your digital transformation needs. It is an important cornerstone of a portfolio of digital activities that are carefully curated and serve an important purpose. Viessmann understands this very well. The family has made great strides by investing in deep tech VC Vito Ventures and recently establishing a new company called VC/O to fast track new products and services in the area of proptech. All initiatives are gradually further away from the bottom left-hand corner, which is the core business of any incumbent player marked by a slower pace of change and less radical technological advances. Max Viessmann offered additional interesting insights in this podcast.

What’s the value add of company building?: With the value add to traditional players clear, let’s tackle the second burning question: why company building? In tech ecosystems filled with startups, innovation labs, accelerators, incubators, and VCs, why does it need a company builder like wattx?

Display of a publication by BCG and hello tomorrow called "From tech to deep tech - postering collaboration between corporates and startups"

The answer to this question lies in the big difference between deep tech and everything else we’ve seen before. A recently published report by Hello Tomorrow and TheBostonConsultingGroup surveyed over 400 deep tech startups transparently lays out the challenges related to the founding and building a deep tech startup: lengthy time-to-market (27%), high capital intensity (25%), technology risk and complexity (17%), and yet-to-be-developed commercial applications (14%). To cope with these challenges, startups most frequently cited the following aspects as their top three remedies: funding (80%), market access (61%), technical expertise (39%), and business expertise (26%). The complexity of deep tech and the associated challenges often require startups to partner as a great product in and of itself will not necessarily take off.

If you really want to revolutionize health care, it’s not about the app. It is about working with doctors, hospitals, and health plans.

Steve Case
Author of the book The Third Wave and co-founder of AOL, Inc.

Case summed up the major difference between the internet economy and the now digitized industrial sectors in his talk at TechCrunch perfectly. Directly linked to the pain points Hello Tomorrow and BCG highlighted, it provides the rationale for why company building, if done right, has an important role to play in the wave of deep tech.

A team of experts: The wattx core team today consists of 26 people, covering all disciplines that allow us to find specific industry problematics, ideate on novel solutions, rapidly prototype by involving users and customers, and then spinning these ideas out into stand-alone, autonomous ventures. These disciplines are User Experience (Research and Design), Data Science and Engineering, Tech, and Venture Development. With respect to technical capabilities in the deep tech stack, our skillset contains motion and environmental sensing, mesh networking, distributed systems, real-time big data streaming and processing, real-time learning, data privacy, and infrastructure monitoring, among others. The important aspect is that all of the expertise is available in this core group within wattx and can be leveraged for any new idea we tackle.

A boots-on-the-ground process and rigorous killing of ideas: If an idea makes it through our funnel and lives as a venture, it has gone through four dedicated phases: discovery, ideation, prototyping, and venture. In each phase and in-between stages, we rigorously evaluate our ideas and our progress, constantly questioning our assumptions and the impact the topic can have. In total, the entire process takes less than 6 months.

Display of our venture development process with the steps discovery, ideation, prototyping and venture

If we can’t get an idea of the ground within that time span, we will kill it. If the business model likely won’t scale and reach critical market share within four years. Guess what? We’ll kill it. This rigor has allowed us to evaluate over 230 ideas in the past 12 months, of which we’ve prototyped only 11. The quantity and quality of our ideas come from our ability to landscape industry problematics (discovery phase) and creatively find solutions (ideation). In both phases, we rely on user research techniques (like ethnography and user interviews), expert interviews, and desk research to find unsolved problems with big addressable markets and ideally homogenous customer groups. Since technology is not a panacea, spending time with users to identify the problem will save a ton of time during prototyping and development later on. That’s why we go to where the problem is first, and narrow the problem we’ll address before building a solution — not the other way around (product-market fit, anyone?).

It’s all about the partners: Another benefit of our approach laid out above is the fact that we identify first users, early customers, and partners from day one while working on an idea, and work with these stakeholders. To quote Steve Case again: it’s not about the app, you have to work with doctors and hospitals if you want to innovate in the health care space. Our portfolio company loopstock is active exactly in that space. It provides an RFID-based automated inventory management solution for hospitals. From day one, we worked with doctors, nurses, hospital managers, etc. to ensure we understand their problems and provide the most value to them. Now, a few months into loopstock’s journey, pilot customers are in place and interest is growing rapidly.

Additionally, our investor base is aligned with the industries we focus on. Hence, every investor in wattx provides value to our portfolio companies by serving as a pilot customer or helping with market access. And incentives align: by supporting our portfolio firms, each investor ultimately improves her own investment.

A founders-first approach: To ensure our founders really own their idea and their venture, we try and onboard them as early in the research process as we can. That way, they shape the idea with us, intimately understand the pitfalls of the industry, build a valuable network of partners immediately, and accumulate a knowledge base they take with them into the venture. The fate of our ventures lies in the hands of our founders, who hold a large chunk of the equity, ensuring a long-term alignment of interests.

A platform for acceleration: With every research phase, we conduct in any given industry, our expertise and our knowledge repository grow. This allows us to vastly accelerate the company-building process the more experienced we become because in each research phase we identify more than one problem that is worth solving. The same goes for our technical capabilities. Each new topic and tech we use can likely be repurposed or leveraged in another case. That is the true beauty of these deep technologies — they are almost agnostic to the industry in which they are deployed. Think back to our example loopstock. RFID-based tracking is a technology that has immediate application in settings outside of hospitals: tracking of goods along any supply chain, or measuring inventory turnover in warehouses.

Closing the portfolio gap:With our unique approach to company building, wattx not only has an integral role to play in tech ecosystems. We also close an important portfolio gap many traditional companies have as they create their digital futures. Our thriving portfolio of companies shows that our model works. Our work with Viessmann highlights the critical insights we provide in the digital transformation of legacy companies. And as the deep tech wave advances, so does our opportunity to grow and provide an even greater impact.

If you’re interested in working with us or with our portfolio companies, feel free to reach out via simon@wattx.io

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