Startup tech firms need to hire good people - and bring kolaches.

There are a few really irritating things about the oil industry if one is trying to form a new company around new technology.

For one thing, the industry behaves as if each incremental dip in commodity prices is a certain harbinger of doom and despair. For another, it's by far one of the most conservative industries when it comes to adopting new technology, despite its ability to manage exploration risk.

And it seems unable or unwilling to acknowledge the key role technology has played in the decline of finding and development costs, said Tom Bates, managing director of Lime Rock Partners, showing a "counterintuitive trend" by investing less and less in research and development.

Bates' presentation was one of several at a recent seminar hosted by the Houston Technology Center titled "How to Overcome the First Mover Disadvantage." The seminar focused on the obstacles faced by small technology startups trying to sell their concepts and products to the oil industry.

Bates outlined several obstacles. Exploration and production companies benefit from technology but tend not to invest in it, leaving the brunt of the research and development investment to the service companies. But service companies' roles are changing as they fail to reap the value from their technology developments. The seismic industry is a prime example. While 3-D seismic is given the lion's share of the credit for declining exploration and production costs, the geophysical contracting industry has lost a huge chunk of money. So large service companies often rely on smaller entrepreneurs to develop new technologies and then buy either the intellectual property or the company.

Those small entrepreneurs, meanwhile, have significant barriers to entry, including little seed capital and an end-user group that's slow to adopt new technologies and very averse to risk.

In addition to those external barriers, there can be internal problems that can derail a small company. Peter Duncan, a geophysical consultant and president-elect of the Society of Exploration Geophysicists, has been involved in several such startups and discussed potential pitfalls.

Startups, he said, are of course concerned about money. But if the seed capital is in place, a viable company can be dragged down by the egos of its principals. "There can be ego conflicts amongst the founders of the company or between the company and the marketplace," Duncan said. "The principals become arrogant and think they know more than their customers, and that's killer to any new venture."
A new company has to have a single vision, and everyone from the chief executive officer to the file room clerk needs to judge their actions based on whether or not they're advancing the vision. Furthermore, the client is always right.

Duncan identified three potential client groups: the end users, the managers and the financial community. End users often refuse to try new technology for reasons that aren't particularly valid - the "not invented here" attitude, for instance, or "we didn't think about it, therefore it can't be good." Furthermore, they're often hesitant to take new ideas to their managers for fear of either wasting the manager's time or introducing an outside idea that the manager might think really should have been thought of by his or her own staff.

Managers, meanwhile, see their jobs as not to make a decision until the right decision is so obvious that it's no longer a decision, Duncan said. Any startup has the monumental challenge of convincing the managers that the concept has validity.

Analysts should not be overlooked. Duncan told a story of a West Texas company representative that asked him to shoot a 3-D survey, not because he understood the value of the data but because his bank wouldn't give him money to drill additional wells without it. "You need to keep the analysts in the loop, and they're the hardest group to approach," Duncan said. "Collectively, they're also the most clever because they're not afraid to make decisions quickly. They've seen all the tricks. You need to present your concept like you mean it."

For Craig Jarchow, a region exploration manager for Apache Corp., any startup company must put the right people in place from the outset. He discussed creating a "3K team" consisting of people that know the market, know the people in the market and are well known themselves.

He explained the constraints under which exploration and production companies operate. They're in "the mother of all commodity businesses," and there's nothing operationally they can do to affect the price of their product. Economic tools available to other industries, such as differentiation or a system lock-in such has been exercised by Microsoft, are unavailable to them. And the business is very cyclic.

Additionally, there's very little slack in their organizations. So only a few technology "champions" have the time to evaluate new concepts, and it's hard for an outside company to get a foot in the door.

What can a technology provider do? Jarchow had several suggestions. The 3K team should include at least one person from the target customer sector as well as talented sales and marketing people. It should align itself with technical "celebrities" and engage "marquee" customers, companies that historically are open to trying new things, early in the process. And it needs to focus on alleviating the customer's pain by offering real savings, for instance the ability to lower drilling costs.

"There are no solutions in search of problems in this industry," Jarchow said.

Finally, it helps to know what the customer wants. Entertaining potential clients can grease the skids. And, he added, if a salesperson shows up with a box of kolaches and stands around the kitchen chatting with whomever strolls by, it can definitely increase that company's recognition factor.
(This works well with magazine editors too, by the way.)

Is this a hopeless climate for startups? No, but it's not an easy one, either. Jarchow said companies wanting to sell new technology need to be aware of the difficulties and plan accordingly, by putting together a star team, by delivering results on time and under budget, and by resisting the temptation to hype their products.

"Nobody wants to hear about the latest forked stick," he said.



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