How to fall in love with your circular business and make it a success
The last weeks have been really exciting and a lot has been going on. Together with Andrea, we visited a couple of events and got to talk to many people and start-ups focusing on circular innovations. So much inspiration that we just have to share! As a starting business, you are in a roller-coaster of constantly verifying and adjusting your idea, value proposition and the need in the market. You are waking up with a strong sense of purpose, that could power a solid blockchain miner and give yourself a high-five in the mirror when you are leaving home. Then there are evenings when you are so overwhelmed by running from one place to another that even the mirror tells you to head straight to bed and get some rest. But the most amazing part is how everything suddenly starts falling together. When all the people you are meeting and the discussions you end up in just seem to be a part of a perfect plan. This is when you know that you are doing the right thing.
One of such events was the Circular Minds Conference organized by the SMO Promovendi in Delft last week. We had the honor to join the Triple Value Proposition workshop as the coaches of a roundtable focusing on the financial side of circular business models.
Nowadays people fall in love with the idea of circular economy. And that’s great – who wouldn’t like to save the world and earn some money while doing that? The latest research of the Ellen MacArthur Foundation shows that circular economy, enabled by the technology revolution, allows Europe to generate benefits of around €1.8 trillion per year by 2030. Clearly, much potential for existing companies to transform towards more sustainable operations and for circular start-ups to earn their place in the changing market. Yet, especially new businesses face a great challenge: after the initial lovey-dovey phase, reality kicks in asking: ‘How about money?’ We believe one of the biggest challenges in the transformation to more sustainable organizations, is the creation of financially viable business models. Sometimes it is easy to fall in love with the environmental and social benefits, yet financial value deserves to be loved as well.
Our role during the roundtable was to guide the participants in building a business case for a product proposition of a circular venture Coffee Based, presented by Remco Addink. This company is on a mission to turn around the industry chain by generating value from coffee waste. Keeping in mind that around 99% of a coffee bean is actually ‘wasted’, the proposition is clear – there is a great renewable resource to use! Coffee Based transforms the leftover coffee grounds into bioplastic and develops products such as notebooks, coffee cups or flowerpots. The question for the case was – How to improve the business model by increasing the financial value? The dilemmas during the roundtable were remarkably similar to the discussions we have been having the last months:
• Fall in love but don’t lose your head: There is a big difference between running a charity and a circular business. Unlike charity, businesses have to recover the investment costs over an acceptable time-frame. Many social & environmental entrepreneurs start their ventures with producing great environmental and social value. But after burning the initial cash, they are often confronted with the financial reality. Having fundamentally different business models and cash-flows than traditional organizations, circular businesses need a new approach to their financing proposition. Attracting funding might be a challenge since the investors are looking at revenue and costs from a classical ‘linear’ perspective. Think about how you will retrieve your start capital and remodel your cash flows to create sufficient profit by scaling up or a niche diversification.
• Make them fall in love too: In order to earn money or attract funding, you need to have a strong value creation proposition. Try to think ahead about these questions: Why would the customers buy something that is recycled or reused? What problem are you solving for them? What premium are they ready to pay? What are the alternatives? Next, think about how you can capture most of the value your product is creating: How is your innovation going to chain the industry value chain? What are the sweet spots in that you can profit from? Do you need partners to quickly gain strategic resources? How can you reduce resource costs or increase the price to be able to scale up? These concepts may be old but still working even for the most aggressive digital strategies: While Tesla is quite a big shots, it is a great example how the principles of value creation and value capture apply on a sustainable proposition.
• Find the right positioning: Circular products and services are typically sold at a premium – simply because their production costs are higher. To ensure competitive advantage, think carefully about how you want your products to be perceived by the market. One of the strategies that can be applied here is to introduce your product first in a niche market, where customers are willing to pay more for positive environmental or social impact. By selling in a niche first, you can develop economies of scale and decrease the price over time. This will allow you to penetrate new segments at a more affordable price.
• Close the loop: There is a lot of buzz around circular economy. Yet, its growth is not at the desired speed yet. In order to be fully circular, businesses need to close the loop of input materials and ensure there is no waste. If you can’t achieve this alone, join or create an ecosystem of partners to close the ‘circle’ together. We see so many businesses that do great things like producing clothes from recycled fibers or tiles from recycled plastic, but they do not close the loop (yet). Ask yourself what happens with your recycled product in the end of its life cycle and look for the value of bringing the material back to production through partnerships.
It’s very exciting to see all the ideas bloom and progress. If circular start-ups can clarify what problems are they solving, how are they creating more value, why are they better than alternatives, choose the right partners and adopt a sound market penetration strategy, they will have a better chance to build a viable financial proposition and attract funding. We absolutely see digitalization as the key enabler of the circular revolution and are positive that together, we can scale up and accelerate the speed of circular economy to where it needs to be.
Eva Nedelkova & Andrea Kralikova