Rise of the Startups
Rise of the Startups
Written by James Ruiz, Founder of Q Engineering
We’re not witnessing the Uber for oil & gas, Skynet for HSE (health/safety/environment), or Instacart for equipment rental, but there are a growing number of exciting oil & gas startups on the horizon!
I’ve been in the industry for a little over ten years now and am amazed with the transition this space has made in such a short amount of time. In the past decade we have seen horizontal/multi-frac wells unlock hundreds of thousands of acres that were previously written off, we have witnessed the explosion of private equity backed E&P companies spur exploration in almost every North American basin, and are now seeing the next wave of innovation, the rise of tech startups in the oil & gas Industry.
In this article, I will share my perspective on:
- What it means to classified as a startup
- The historical challenges that tech startups have faced
- The new opportunities and challenges these tech startups are facing
- How their work effects the oil & gas industry as a whole
- What the exit could look like for many startups
What does it mean to be a startup?
One of the first points to understand is that startups are not smaller versions of big companies. There is no HR department in a startup, no accounting department, rarely do you find administrative staff, or layered org-structures. In a startup, each team member handles the roles of 3-5 traditional positions that you will find in a large organization. You will never hear a founder, or any team member say “that is not my job.” This small team places an intense focus on customer discovery and the search for a profitable business model.
Steve Blank put it best1.
“Startups are temporary businesses in search of a repeatable, and scalable business model.”
“Companies are permanent businesses designed to execute a repeatable, and scalable business model.”
Startups do not have proven business models, they spend years searching for one by finding a product/market fit, then testing the scalability of their solution. The skillsets required to search for a business model typically do not transfer well when it comes to executing one, and running a large organization. This is why many founders have been replaced by their sponsors during this transition, and why many startups are purchased by mature organizations, which have effective processes in place, designed to execute a known business model.
Oil & Gas Startups Have Historically Faced Barriers to Entry
I spent the early days of my career as a reservoir engineer working for a large independent. During those days my workflow was heavily governed by legacy software, sold by very large organizations that have been around for decades. My work was marginally improved in yearly cycles as new releases were made available. The market was ripe for competition, but startups were not common, the few that I remember coming to our doors rarely matured into profitable businesses.
Reflecting on my past, I realize that there were many barriers to entry for these early startups in the oil & gas space. For starters,
- The required data to create a solution is difficult to get from operators
- The startup teams rarely had a deep understanding of the customer’s workflow
- The oil & gas workflows have evolved quickly over the past decade, requiring startups to pivot and iterate quickly
- The historical desktop software deployment model took several weeks to months to deploy, requiring considerable resources from a small startup to get a single customer
Historically, these barriers have filtered out almost all but a few of the earliest startups in the oil & gas space, the ones that found repeatable & scalable business models have matured into companies, many of them purchased by their larger counterparts.
The Current Wave of Startups
The startup community has learned from the past, and we are now seeing early signs of success. We are seeing more and more teams come to the market with many oil & gas veterans on the founding roster. Many of these startups have shifted to cloud based deployment models making it easier to iterate on, and scale their solutions, reducing the time to get to market and search for a valid business model.
The applications have been heavily focused on AI/ML models focused on production optimization, completion optimization, seismic evaluation, digitization of physical records, and applied data analytics.
This wave of startups have faced increased competitive activity from each other, and even from the customer segments that they are serving. Competition from E&P companies’ internal technology groups have been a great sight to see, once these startups discover that customers are working on similar solutions, they have validated that their search for business model is heading in the right direction.
It is too early to tell which startups are going to make the leap from customer creation, the search for a repeatable business model, to company creation, the execution of a repeatable business model. As a whole, most of the startups exist firmly in the customer creation phase of a startups life-cycle.
How Will This Wave of Startups Effect the Oil & Gas Industry?
With the explosion of startups in this industry, we have seen a wide range of attempts to improve the efficiency, and effectiveness of E&P companies. As a whole, I believe that the industry will make very large strides in driving down operational costs through production optimization, reducing F&D costs through enhanced exploration workflows, and find tremendous gains in the ability to improve due diligence through digitization/interpretation of physical records.
When it comes to individual E&P companies, however, an interesting dynamic occurs. E&P companies are building similar workflows that startups are attempting to commercialize. Well funded E&P companies have found a tremendous amount of early success when compared to their lean startup counterparts. However, the startup universe as a whole has caught up with, and perhaps exceeded the ability & speed of select E&P companies to innovate in this field.
Due to this phenomena, I would expect the early advantage that many E&P companies have had over one another, to disappear in a short amount of time due to the startup community’s melting pot of ideas. During the early days of seismic, some early E&P companies had a competitive advantage based on their proprietary algorithms that they developed. It took years for software companies to scale these creations to the broader market, which eventually leveled the playing field for exploration companies. Today, fast followers can build on winning strategies in months, rather than years, leaving little time for E&P companies to reap the benefits of their internally developed solutions, which are largely built using the same libraries and building blocks that tech startups often use.
What Is Next For the Oil & Gas Startups?
It’s important to realize that most startups will fail. In fact, 94% of startups fail to ever reach $1 million in revenue2, leaving the industry with only a handful of startups that will become mature companies ready to push innovation forward in this industry. As a whole, the startup universe is still in search of a business model, it’s too early to tell how many of them will succeed, and which ideas will take off to change the way the industry works.
If the Silicon Valley startup history is any guide, most of these successful startups will sell to larger organizations, with one interesting caveat. Many of the Silicon Valley startups have sold shortly after validating their business model, and before turning into a large company. I have not witnessed this dynamic in this industry – I’ve heard theories that the amount of time that a startup needs to spend in customer discovery is inversely proportional to the amount of risk capital available to the sector. Recently, acquirers have focused on purchasing software organizations that have matured into larger companies, years after they have proven to execute a repeatable, and scaleable business model.
This correlation tends to place an interesting pressure on a startup team, many founders can prove to be very effective at searching for a successful business model, and fail miserably at actually building a company. This can lead to a period of value destruction, where founding teams will have to search for talent in the highest ranks of their team to make up for lack of skills required to build a mature organization. Alternatively, they will be forced to learn on the job, and attempt to survive the transition to a mature company, eroding valuable time needed to build a successful company.
Will the startups begin to exit more quickly as more venture capital enters the oil & gas tech space?
This is an exciting time for the oil & gas industry, I’ve never seen so many startups in this space and am very excited to see current mix of entrepreneurs succeed. As an entrepreneur, my goal is to improve the industry that I operate in by advancing the technology, and knowledge needed to make effective decisions. I seek to improve the number of successful startups that operate in this space by sharing my experiences, meeting with other founders, and at the very least, highlighting my missteps that I have made in the past.
Thank you for reading my perspective on this topic, I am on the continuous search to learn as much as I can in this field, so please share your thoughts in the comments below.
About the Author
James Ruiz is a Founder of Q Engineering (www.q.engineering), a cloud-based software company that provides SaaS (Software as a Service) that specializes in solutions for Reservoir Engineers, Business Development Engineers, and professionals in the M&A space. Q Engineering is his third startup and he has been a lifelong entrepreneur. James seeks to advance innovation in this industry, learn from, and help other entrepreneurs that he meets. James can be reached at firstname.lastname@example.org, he responds to every email, just not always in a timely fashion.
- Why Companies Are Not Startups, https://steveblank.com/2014/03/04/why-companies-are-not-startups/
- Most Startups Never Reach $1 Million in Revenue, https://davidcummings.org/2016/03/31/99-of-tech-startups-never-hit-1-million-in-revenue/