Smart cities are a growing and interesting playground for innovators and entrepreneurs. According to many municipal initiatives, the cities of the future will become greener, more digital and smart, affordable, socially inclusive and overall more livable.
A range of different aspects such as mobility, governance, environment, energy, water supply, health, and many more, are frequently put under the umbrella of “Smart City” by city administrations and urban planners. Often global cities such as Singapore, Dubai, Hongkong or New York are highly ranked when it comes to Smart City capabilities. And since the so-called ‘Leipzig Charta’ was signed by the ministers responsible for city development of 27 EU states in 2007, developed a model for the ‘sustainable European city’, many European cities like Barcelona, London, Copenhagen, Munich and Amsterdam have also enforced their smart city initiatives.
However, in this article I want to focus specifically on the technologies and ideas that build on or influence the physical infrastructure of urban cities, but also rural areas – something better called ‘Smart Infrastructure’. The essence of this is that innovation in this sector requires the regulatory support and the approval of authorities, and therefore differs from many mobility innovations such as cargo bikes, some micro mobility services or proptech services that can often be introduced without public permits.
But how can founders establish and scale startups in this sector?
- There no such thing as ‘the city’
First of all, you have to understand that a city is quite a complex interaction of different actors such as policy (e.g. city parliaments, mayors), administrations (e.g. environmental department, smart city department), municipal companies (e.g. public utilities, public transport providers) and even federal and regional institutions. Sometimes, these actors act highly strategically and compete with each other.
Even if you have convinced the mayor, the city administration can still block everything, and vice-versa, even if you have support from the city administration, there can still be strong opponents in municipal companies, for example. This means you have to understand the setup and agendas of those actors and you have to address their perspectives in your sales pitch. Consider different strategies for policy makers, administrators, etc.
Also worth mentioning, is that even if you understand everything in one city, the setup and conditions and also the tech stack in the next city can be completely different – especially across national borders. As Martin Yates, Digital Cities Chief Technology Officer at Dell Technologies sums up: “Across the world, many city leaders have begun to release that the delivery of city digitalization and citizen outcomes is more complex than initially expected. Not just the diversity of technology and vendors to address all the needs, but the realization of needing to bring multiple city leaders together on shared data governance and security agreements in the future.”
- Respect cultural and historical circumstances
Besides organizational aspects, the culture and historical dependencies of your customer are much more important than in most other sectors. And this is especially important for European cities, while Asian and North American cities are comparably young. So, in this way, traffic management systems in the narrow alleys of Italian historic city centres work differently to Chinese inner-city highways. German cities might be the ones paying most attention to data privacy and security, etc. Before you contact potential customers you also have to understand their emotional and even linguistic barriers, which makes it very important to build up inter-cultural and diverse teams when you start to grow.
At the same time, any smart city business is a global business when you want to scale. If it is easier to sell your solution in South East Asia – go to South East Asia. If the application is more interesting in cities with high traffic jam incidences – go there. It is most rational to be where the problem is most painful and the need is higher, and not just sell in your home region. Many European founders internationalize too slowly, and especially in a smart infrastructure context this is problematic.
- Budget is everything
Not only since COVID-19 municipalities are quite budget-sensitive and they can’t just buy products and services as private customers. Typically, if they place an order above a certain threshold, they need to force national or even European tenders, not only slowing down the process, but also with an open result. Many tenders include conditions that can’t be met by new companies at all, e.g. sending annual reports of the last three fiscal years. Additionally, it is harder to place returning revenue models in those tenders. Startups should know these barriers when talking to a city and check the fine-print. Especially at the beginning, your pricing should simply be under this threshold to place pilot projects easier and faster.
A second way to enter the market is via R&D projects, usually limited to calls for applications by public grant providers. Thus, many smart initiatives of European cities are re-financed by European, federal or regional funds. And due to European public funding schemes and its innovation ecosystem, you are often not only competing with other private technology providers, but also with research institutions that tend to grab a big share of the available funds for one-time projects, just because they are just more “eligible” and write a perfect proposal. Especially at the beginning you have to play that game, which means considering joining consortia with more experienced proposal writers or hire consultants to write your own. It can be beneficial to not take the lead position in those consortia and even take one step back to being a ‘subcontractor’, cutting out a lot of bureaucratic efforts.
Another rather new and innovative option for getting a foot in the door are city ‘challenges’ such as the Smart City Challenge Leipzig, the Innovation Challenge of Munich or the Nordic Smart City Challenge (a dozen of Baltic cities). These describe concrete problems and offer a call for solutions, awarding the most promising ones with a mix of financial support and a real-world application. Processes are quite quick as the setup is comparably lean – as typically budgets are as well.
Lastly, it’s not uncommon that municipal companies, public (and some private) IT providers have long-lasting and trusting relationships with ‘their’ cities, which means that they can be a bit more flexible when it comes to realizing projects. Founders should also check if their product or service can be also used or introduced by said companies, which usually requires incentives for them reducing your own margins. However, personally I would always prefer to sell to municipal companies or IT providers than to city administrations.
- Take your time
When complex organizational, regulative and cultural setups meet budget restrictions, it is not a surprise that sales cycles are quite long. Moreover, even when the deals are closed and your service is delivered and invoiced, still a long time can pass before you receive payment in your bank account, as many public authorities tend to go through lengthy payment processes. You have to consider this in your financial models/planning and explain this to investors, especially if they do not regularly invest in similar fields. It is reasonable to include and focus on impact-driven and also strategic investors, who might have a better acceptance of less exponential sales curves. Having reliable but slow customers like public authorities may also fit to alternative financing instruments like factoring, where you get directly get charged but outstanding money earlier from a factor against paying a small fee.
This doesn’t necessary mean that smart infrastructure ideas are less profitable – they just tend to need more time in the first few years to cover the long sales cycles and adopt products to very specific needs. This also means your sales pipeline can never be broad enough. You shouldn’t leave out any opportunity to fill the pipeline with new leads.
- Selling “the old way”
Besides scanning tender platforms, joining smart city challenges and answering calls for applications to public grants, where the request comes from the customer, active sales in this sector works rather traditionally. Smart infrastructure innovations are seldom sold via social media, but via traditional fairs and conventions such as the Smart City Expo in Barcelona or the Smart Country Convention in Berlin. Booking booths there can be a differentiator. It is necessary for your local sales representatives (inhouse or external) to acquire customers at those international and regional events. In addition, many traditional associations that connect city administrations (such as Eurocities, CCRE) have working groups on smart city and innovation topics, where new ideas could be introduced.
Many established IT companies are also suppliers to various cities and municipal companies for a long time and built trusted relations. Cooperating with those system integrators helps to scale faster and globally, even if they cut off a big share of a deal.
So why should you start a smart infrastructure startup anyways?
Although it may require more time and effort than innovation in other sectors, the positive thing about this sector is the reliability and stickiness of customers. If you manage the obstacles and your solution performs well, it is likely to stay for a long time. Even more crucial: isn’t it more satisfying to improve the life of the inhabitants of a city compared to selling them something they don’t really need online? Many founders in this sector are enthusiasts who want to make our society more sustainable, more inclusive and more livable – and therefore live up to what the Leipzig Charta required for future cities.
