Sustainability Investing: Pattern Recognition and Searching for the next K.I.S.S.

Pattern Recognition for Investors

For many investors who have been backing ‘Cleantech’ or Sustainability innovation companies since the first wave of ‘Cleantech.1’ nearly twenty years ago, enough water has now passed under the bridge for certain ‘pattern recognition’ outputs to emerge. 

Pattern recognition is another way of describing the brain’s conscious (and unconscious) attempts to sift and boil down the learnings from a legacy of successful/unsuccessful portfolio companies, research papers, board meeting debates and extensive café conversations with co-investors. (My own experience has been based on investment into a portfolio of around 40 UK sustainability businesses since 2002 with its fair share of successes and failures!)

For me, the K.I.S.S. principle is one of those emerging pattern recognition outputs.

The K.I.S.S. principle (‘Keep It Simple Stupid’)

The KISS principle is based on the view that most systems work best if they are kept simple rather than made complicated, and simplicity should therefore be a key design principle of any system.

The term was reportedly used in the 1970s by the US Navy and first coined by Kelly Johnson, a lead engineer at Lockheed Skunk Works. The story goes that Johnson in the 1960s handed the Lockheed engineers a very limited set of tools to design a jet aircraft. This was based on the deliberate design parameter that an average mechanic in the field should be able to repair the aircraft in combat conditions with only those tools.

Similar minimalist concepts have of course existed historically from  Leonardo da Vinci‘s “Simplicity is the ultimate sophistication”, Shakespeare‘s “Brevity is the soul of wit”,  and Antoine de Saint Exupéry‘s “It seems that perfection is reached not when there is nothing left to add, but when there is nothing left to take away”. Albert Einstein is often attributed to have said “Make everything as simple as possible, but not simpler”, (although this could be a paraphrase)[1].  Apple Inc of course have applied this brilliantly to product design.

How to disrupt in a complex system

You might ask what all this has to do with investing in Sustainability tech companies?

In a complex system, those companies that can integrate a simplicity-of-use design parameter into their customer value propositions are the ones that are most likely to get rapid customer traction and disrupt the marketplace.  

The importance of a whole system analysis approach to understanding the complexity of how new products and services can affect change in a modern complex economy has been highlighted by a number of groups including the Energy Systems Catapult in the UK.  As part of that whole system analysis, the first step is to start from the customer and really dig down into why and how they make decisions.  This may not seem like such a ground-breaking concept, but it is one that some companies inadvertently take for granted in the rush to market, and it was one that was perhaps not sufficiently well recognized in the early wave of cleantech start-ups, nearly twenty years ago.

The challenges of Cleantech v.1

Perhaps it was human nature in those early Cleantech days for companies and optimistic investors to sometimes assume (or hope) that consumers would buy an environmental solution because of the sole benefit of it being ‘environmentally friendly’, despite it potentially being more expensive, complex, unfamiliar, disruptive, fragmented or inconvenient.

Does anyone remember those companies that tried to sell cement that could absorb carbon but was not load-bearing, or electric cars that looked terrible and could not go very far, or energy software systems that could not scale and integrate with other operating systems?  

Maybe I am being a bit unfair here. There were also lots of companies in the early cleantech wave that had good single-product point solutions with decent economic pay-backs but which could not overcome customer inertia, unfavourable regulatory barriers or embedded incumbent networks that ultimately favoured the business as usual over the new.

Current cleantech success stories

Of course, the sector has evolved since those early days, and we now have lots of cleantech success stories that are rapidly disrupting industries.  EVs now look and perform better than existing internal combustion engine cars with price-parity in sight, LED lights last forever and cost very little to run, and Solar/Wind-based electricity generation has now become the lowest price option with negligeable fuel price volatility risk.

The ability of these companies and technologies to truly disrupt the market is based partly on their clear environmental benefits but also on the fact that they provide a simple solution to customers that is better on all sorts of levels. It is likely that the simpler and more compelling the customer value proposition, the more design and development work has gone on in the background to manage the high levels of complexity and drill down to what really matters.

Next area of opportunity

As we enter what could be the most interesting decade in sustainability investing, where can the next KISS opportunities be found?

One area where we are still in the foothills of change in the UK is the building sector. This is a sector that contributes over 20% of UK carbon emissions but has historically been plagued by innovation-averse incumbents that sit on landbanks and play the market property price cycles.  The tide has been kept high (and the quality levels low) by a seemingly unlimited market demand for housing irrespective of quality levels. Attempts to push change through government regulation were lobbied out by some of the large housing companies who effectively ran the ‘unnecessary red-tape’ argument to a government scared of anything that might slow down new housing.

However, watch this space as things could be about to change. 

Backed by strong headwinds from a raft of incoming government regulations and multiple social and private landlords signing up to Net Zero plans, innovative new companies are bringing to market  carefully crafted KISS type customer value propositions around service, comfort, cost savings and green technology. 


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