I have been watching the electric vehicle charging market since 2010. Back then there were a few businesses kicking around with the idea. Boy have times changed.
Over the past few months we have had some major announcements:
ChargePoint going public and is now >$10 billion company
EV Box going public and is now >$2 billion company
EVGo going public and is now >$4 billion company
Ubitricity getting acquired by Shell
Volta raised $125M Series D (Energize an investor, participant)
It is easy to look at these numbers and say “of course”… but I can assure you that even while EV adoption felt inevitable… it is agonizing being “early” to a market. In this “too early?” stage, executives and investors are looking for any signs to double down or accelerate investment… while always being mindful of cash. I call this the yo-yo effect. And this yo-yo effect of being early is very hard on founders and their employees.
I am glad that the industry has tipped. And that all of these firms can firmly and perpetually lean into growth and investment. Let’s throw the yo-yo away.
I posted this post to Forbes as part of my regular M&A and energy transition observations. Link here. Re-posting here.
We all know TeslaTSLA is the current crown jewel of the automotive industry. And investment analysts know of the budding traditional energy business growing like a weed within the Tesla income statement. Alongside their sleek cars, Tesla has rooftop solar and consumer and utility-scale batteries. Tesla makes energy tangible and cool.
While Tesla’s market position in the EV space is strong now, the competition is coming. Sure, they will be able to maintain slightly higher margin than their historical automotive peer set. I argue, however, that being the energy company of the future is a much more lucrative position.
And Tesla’s real competitor in that next-generation energy business is SunRunRUN. They have a strong brand, a growing book of business, and they have a direct line of site to their customer with up to 20-year contracts.
Presently only about 3%, or 2.3 million homes in the US have installed rooftop solar. But rooftop solar is growing: SEIA and Bloomberg New Energy Finance guide that installation will grow from ~500,000 per year n 2020 to 2-4 MILLION per year by 2024. Yes, you are reading that correctly: we should be adding more solar rooftops in 2024 than we have throughout the entire history of our country leading up to that point.
Solar is a “long-tail” industry meaning that there is an incredible number of small, regional installers doing the majority of the work. As a result, SunRun is the leader but actually only owns ~10% of market share in the US, with a 60,000 installation run-rate in Q3 2020. And most interestingly, SunRun’s installation base is nearly 2x the size of Tesla.
If SunRun can hold or expand their market position as the rooftop solar industry grows, the firm should become one of, if not, the largest energy companies in the country. SunRun currently has 500,000 current customers and a customer book that could start growing by 250,000 per year. Within the decade they will be a “top 5 utility equivalent” in North America. Since SunRun will “own” that customer relationship, I expect that they will be well-positioned to be more active in the other home solutions including electric vehicle charging, batteries and other resilience solutions.
From a M&A perspective, I believe SunRun is an incredibly strategic asset within the North American energy markets. They have a strong and growing brand and are well-positioned for other distributed energy services. SunRun should be on the top of the target list for any forward-thinking traditional energy company. Similarly, if any enterprising automobile company is looking to create the next bundled mobility + energy company, they don’t have to look any farther than SunRun as their optimal partner.
The Energy Transition Makes Power & Utilities Pro-Cyclical?
Look up any historical investments book and pretty early on there is are definitions of cyclical, defensive, and counter-cyclical businesses.
A cyclical business is inherently discretionary and peak and bust at an economic cadence. Within my focus, this is oil & gas, airplanes, jewelry, construction, etc. A defensive business is easier to define: a staple where demand is consistent and swings more muted. By its’ regulated design, the power and gas utility business are inherently defensive.
What I find fascinating is how technology and the energy transition is going to move the overall power and utility markets from defensive stock characteristics to more cyclical in nature.
How? There are two reasons, I detail below:
1- Time To Value -> Mismatched Supply -> Cyclicality
Generally, the longer it takes for a good to go from raw materials to value delivered causes imbalances in the supply chain. Historically this delay in oil and gas has resulted in mismatched supply to the market due to decisions made under a different economic assumptions. (Other industries include airlines: the time from order to delivery may look quite different!)
What Changes? As the electrify everything mantra grows, I have been vocal how “the firm that controls demand will win the market.” And as power prices continue to plummet amidst an overbuild scenario, the firms that have demand are the ones that will set the terms. And those terms won’t be fixed rate, like they are today. The energy consumer will tie the power price to their underlying product demand and margin profile.
This moves the standard power contract from a more proximate and certain customer relationship to distanced and uncertain value payout. Power investments will have less certainty and mismatched capital allocations will occur as these power companies gain more exposure to their customer’s cyclical demand.
2- Technology Transition results in Power Quality Pricing
Most energy transition professionals assume some future rosy grid that is self-balancing amongst renewables, EV charging, consumer adjustments, etc. Maybe 50 years from now. But the intermediate steps are going to be messy. And
What Changes? I believe this “intermediate messiness” will result in greater awareness around power quality (Californians get this with the blackouts) and the ability for quality-based pricing around uptime, power quality (data centers, etc.) and source. This transition happens in most verticals: a commodity product ultimately leads to a premium version. That hasn’t happened in electricity yet but I suspect the new energy economy (wind, solar, batteries) and consumer willingness to pay for quality will happen here as well.
And when a product has multiple price points, the premium offerings are naturally more susceptible to economic swings and cycles.
Below is a press release that Energize wrote about today’s Volta Charging Series D.
While today’s announcement is a mini celebration along Volta’s EV journey… I have two items to elevate:
The line of success is never up and to the right.Rather, the story arc is a chaotic, meandering menace. To survive and thrive in the market swings of 2020 requires management and employees dedicated to the mission. Volta’s perseverance and growth in 2020 truly reminded me about the importance of mission and conviction. And Scott, Chris and the Volta team deserve a (brief) respite and congratulations for their efforts.
At different stages over the past 3+ years every member of the Energize team has helped with Volta. While Tyler and I are involved in board-related governance, I really enjoy how much team-driven support has gone into the investment. Katie has helped with policy intros and messaging… and pounded the table for increased investment in 2020. Juan has been steadily supporting financial analysis since our original 2018 investment. Tyler is a machine on key metrics, and utility introductions for the data product and Kelly is whipping together press and messaging as you read this. Even in his recency, Mark has helped with our most recent Volta investment. The best companies bring everyone involved along for the ride with a feeling of togetherness, and Volta has done that to Energize.
Energize Ventures is amped to announce its participation in Volta Charging’s $125 million Series D. This funding brings Volta’s total equity raised to more than $200 million.Goldman Sachs acted as exclusive placement agent to the company in connection with the financing. Energize managing partner John Tough will continue serving on Volta’s board as lead director, while principal Tyler Lancaster acts as a board observer.
Electricity will fuel the future
If you – like us – believe electric vehicles (EVs) will dominate the future of transportation, then ubiquitous charging infrastructure is required to power the movement of people and goods. We’ll need EV chargers at businesses, in parking lots and alongside highways, near supermarkets, stadiums and other places we all frequent. Volta Charging is meeting that need by building a free public electric fueling network “at the places you like to go.” How? Volta monetizes the network with advertising and real estate site partners, increasing the value of parking lot real estate and attracting EV drivers to the stores, shops, businesses and entertainment centers where they go.
In a wake-up call of sorts, COVID-19 has exposed that we can live with clean air by reducing or outright removing pollution caused by combustion vehicles. As we recharge our economy, it is more important than ever to accelerate the transition to electrified transportation. President Biden plans to push for legislation appropriating $5 billion to support the installation of more than 500,000 EV charging stations by 2030, according to Bloomberg Green. Rapidly electrifying the transportation sector will create thousands of jobs in construction and manufacturing, while cleaning the air in local communities at the places “you like to go.” We believe Volta is poised to lead as the most capital-efficient and highly utilized EV charging network in the U.S.
Capital-efficient EV charging infrastructure
Energize originally led Volta’s Series C in 2018, doubled down to lead the C-2 in 2019, and is tripling down in 2021 with this Series D. After closely tracking the EV charging market for years, we observed firsthand the challenges associated with building a profitable EV charging business by selling electricity or charging hardware alone. Like its gas station predecessors where most revenue comes from sales of coffee and snacks, the EV charging market was begging for a creative approach to monetize with revenue streams beyond selling electrons.
Enter Volta, whose brilliant business model not only can pay off infrastructure costs, but also drives industry-leading utilization – ensuring the EV charging infrastructure we build is actually used. Volta installs EV charging stations with large digital screens in premier parking spots, gives away electricity, and generates revenue from advertising and site hosts. That revenue has the potential to more than covers the costs of charging equipment capital and ongoing maintenance and electricity, which would provide healthy margins as well.
When Energize first met Volta founders Scott Mercer (CEO) and Chris Wendel (President) in 2018, they had deployed a few hundred EV charging stations in Hawaii and California to prove the model. Their team had grand aspirations to expand nationally, and we had plenty of questions on if and how they could replicate their success in other geographies across the U.S. The EV charging landscape was then littered with the corpses of failed pursuits. However, we gained conviction in the team’s single-minded pursuit to build a scalable, profitable EV charging business. We believed their striking product, superior unit economics and long-term contracts with site hosts were strong competitive moats.
Fast forward to today: Volta operates a network of 1,500 EV charging stations around the continental U.S. – including 200 stations here in Energize’s home base of Chicago. The company recently launched a DC fast charging offering to complement its core Level 2 charging product. Additionally, Volta’s internal software can intelligently site EV charging stations, helping utilities evaluate the impact of electric vehicles on electricity demand and plan grid infrastructure upgrades. Volta truly is a full-stack EV charging network.
An EV charging pioneer reaches scale
The Series D capital infusion will enable Volta to expand their network by installing thousands of new EV charging stations – which we believe will create a ripple effect across the market and broader economy. Volta’s infrastructure will be a key platform to publicize the launch of myriad new electric vehicle options planned for release by automotive OEMs over the next five years. It draws EV drivers to retail locations, increasing revenue at a time when many local businesses are struggling. Hundreds of electricians and construction workers will help build and maintain Volta’s EV chargers, employing skilled trade workers on the heels of COVID. Investing large amounts of capital in Volta’s network will create tremendous benefits for communities and the environment, right when we need it most.
Congratulations to Scott, Chris and the entire Volta team on what they’ve built so far! Energize knows that this is just the beginning in the company’s mission to replace fossil fuel molecules with electrons, helping people get where they “like to go” entirely with electricity.
I prefer writing, but occasionally share some of my market sentiment through audio channels! And so, today I am pleased to share that I spoke with my “Industrial Exit Tracker” partner in crime on his podcast…
Ty Findlay @ IRONSPRING Ventures is the host of the “Heavy Hitters” podcast. The podcast speaks with investors and operators in/around the digital industrial ecosystem.
In this podcast we covered some lessons I learned from the initial energy investing wave. I also cover the internal evaluation parameters for an Energize investment… as well as some of the average statistics for our investments. And perhaps define a new term… “pre-growth”.
I recorded a podcast with Ty Findlay at @ironspringVC to share my pulse on entrepreneurial state of the energy & industrial markets. Lots of nuggets in here how @EnergizeVc works as well… https://t.co/9jApYTdbJf
I first learned about venture in 2009 and quickly became consumed with the idea of integrating my interests between innovation and finance. I would start my day back then like many still do… by opening up avc.com and reading Fred Wilson’s daily post.
His candid and “bring-along’ approach to investing ran counter to my early investment banking experience. I reached out to Fred back then… and for some reason he would always respond with just a small note. He was building the entire venture ecosystem.
Today Union Square Ventures officially threw their hat into a world that I know well: the climate theme. Here is a link to the post and a summary of the theme from Brad:
The USV Climate Fund invests in companies and projects that provide mitigation for or adaptation to the climate crisis. And here is an incredibly succinct summary of what mitigation and adaptation mean to them:
Here is my take: We are ALL so fortunate that some of the absolute best investors AND community builders are bringing their focus to the climate arena.
At Energize we know that you can generate great financial and social returns addressing the climate crisis. And I know that we are all in a better spot by having Brad and USV show up with their Climate Fund. I can’t wait to see the upside they generate for the entire ecosystem. Hopefully we get to work with them 🙂
Consolidation at the top of industrial sensor market: Teledyne Acquires FLIR Systems
I am trying a slightly different format for this announcement. Because this is a slightly different type of M&A event I usually cover.
The industrial environment is now rife with cameras, sensors and lasers. Yes, the same infrared and LIDAR technology on your new iPhone is now present across manufacturing, energy and critical infrastructure sites across the world.
An example of the products can be seen here: infrared cameras, thermal screening cameras, lasers, and high performance digital capture.
Yesterday, FLIR Systems announced they were acquired by Teledyne for $8 billion. Why is this relevant?
The Acquired: FLIR
Founded in 1978, FLIR is a world-leading industrial technology company focused on intelligent sensing solutions for defense and industrial applications. FLIR’s vision is to be “The World’s Sixth Sense,” creating technologies to help professionals make more informed decisions that save lives and livelihoods
The Acquiror: Teledyne
Teledyne is a leading provider of sophisticated instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems
What makes this transaction unique is both the scale and the potential synergy. Here are some facts:
Teledyne has $3BN of revenue and is valued at $14 billion. FLIR has $2 billion of revenue and was acquired for 4x revenue. This makes the combined company an approximate market cap of $22 billion – a stalwart of the industrial and defense sensor market.
The transaction is unique in that Teledyne expects the acquisition to be immediately accretive to results – an incredibly rare M&A feat in the industrial technology products world. This accretive expectation shows that the firms serve complementary markets and can leverage a consolidated back office.
The Executive Chairman of Teledyne summarized the complementary nature well:
At the core of both our companies is proprietary sensor technologies. Our business models are also similar: we each provide sensors, cameras and sensor systems to our customers. However, our technologies and products are uniquely complementary with minimal overlap, having imaging sensors based on different semiconductor technologies for different wavelengths. For two decades, Teledyne has demonstrated its ability to compound earnings and cash flow consistently and predictably. Together with FLIR and an optimized capital structure, I am confident we shall continue delivering superior returns to our stockholders.”
Robert Mehrabian, Executive Chairman of Teledyne
Here is a summary of the complementary product suite
On the financial side:
Teledyne acquired FLIR for ~4x 2020 revenue. FLIR also had ~20% operating margin and a dividend. Net, the company had a strong profile within the industrial technology industry. However, growth was neutral to slightly up. Given the growing demands for industrial (and defense) sensors, I suspect the Teledyne – FLIR combination is well-positioned to capture market share while sharing backing central services and R&D resources.
Valuation: Growth /Margin Trade-offs
As a venture investor, the moderate revenue multiple for a low-growth/higher margin company is a reminder that growth is currently rewarded with greater multiples in the public markets than margin. For example, if FLIR was growing at >10% with a slightly lower operating margin, I would imagine FLIR would have received a higher M&A offer. I have to admit that this remains an anomaly to me as I see the FLIR profile as a strong brand in a consistent market that has customers committed to the FLIR product line.
They NEVER mention software…??
Finally, none of these companies talk about software in their press release about the transaction. That is crazy. I believe there will be many very valuable software companies in the computer vision/ digital imagery sphere that operate within the industrial and built environment. If you know of any in this area, please let me know.
Lots of predictions out there these days. At Energize we get to see potential future outcomes… and I have to admit that it is hard to make a high-probability prediction.
I’ve read predictions about a COVID resurgence, cloud’s continued dominance, hyper-inflation, remote work, Miami, accelerated industrial and workplace transformation, digital healthcare, digital currency… the list goes on.
The dispersion of outcomes and how they will affect our team, the portfolio, and the broader economic economic environment is a bit overwhelming.
My response to this unknown is two-fold:
1- Know your Circle of Competence
This helps define parameters for focus. Knowing my area of influence and competence makes it clear where I can be a well-positioned expert on a topic. When something distant comes up, knowing when not to swing or even get involved in a topic can be incredibly freeing.
2- Invest in what you can Control: People. Process.
People and process are the two fundamental assets for an investment firm. Everything else is extra.
At Energize we make pretty substantial investments in our team’s growth, communication channels, and feedback structures. Every team member has access to a professional coach for 2-3x per month meetings. Every team member receives feedback from their manager 2x / year with a full 360 review process at year end. We ask co-investors, entrepreneurs, portfolio companies, and LPs for feedback. And one of the most unique trends we established was a 9:30am daily meeting… and I think we only missed it 3 times from mid-March through the end of the year. Showing up for the team and building trust together is a muscle we are developing.
We evaluate what procedures are working and what is no longer a positive contributor at our stage. Flexibility in process development and learning as we grow is an area of budding strength here at Energize.
I hope you have a great 2021. Stay grounded, flexible, and invest in your people/process.
About a decade ago scientists, entrepreneurs, government and capitalists unified to focus on decarbonizing energy generation. As a result, the cost curve for new power solutions plummeted.
As Michael Polsky says “nobody built renewables because they needed electricity”… the fact is that the cumulative we had to come together for the long term benefit of our environment and drive efficiencies and growth in a new technology. The cost to deliver utility scale wind, solar and batteries is now dropping 5-10% each year. The focus and execution of the “we” won.
The same group of technology actors, policymakers and financiers is now focusing on the next sector: the decarbonization of mobility. Earlier this month Credit Suisse posted a report called “Energy Transition in 2021”
The most interesting page for me in the report is where the capital for the 2021-2022 “green stimulus” in Europe/US is focused:
“Electrification of EVs” “Electrification Charging Inrastructure” “Multi-modal transport support”… all about decarbonizing ground-based transportation
This capital towards EVs now far outpaces energy generation and industrial / building energy efficiency. Given our previous success effecting change in energy generation through focused innovation and investment in the 2010s, I am very bullish on significant changes ahead in our mobility sector. Whatever the “LCOE” equivalent for mobility… the cost of the decarbonized mobility solutions will plummet. Change creates opportunity and as electrification and hydrogen grow in usage, a number of new businesses and business models will emerge. New titans are being built now.
The scale of change ahead will make our current mobility market unrecognizable by 2030. Here we go!
A green bond is when a company raises debt and promises to use the proceeds to fund for climate, environmental, or resilience projects. These financing vehicles have been around for a while…. but the issuers and banks are just starting to get creative. 2020 saw the first hints of this creativity… and two of these transactions caught my attention this year:
Schneider Electric is leaning into the energy transition. They provide energy and digital solutions for efficiency and sustainability. Led by Jean-Pascal Tricoire, the company is moving from incumbent to innovator and is now the de-facto leader of the digital energy transition. the company has now taken their progressive stance to the financing markets:
Schneider launched the first ever sustainability-linked convertible bonds. Sustainability-linked bonds (SLBs) are bond instruments that embed environmental, social and governance (ESG)-related indicators that issuers commit to achieve. If they fall short, bondholders receive additional payments. Several SLBs have already been issued (by companies like Enel), but this is the first sustainability-linked convertible bond (SLCB).
Schneider Electric is tracking three indicators, and the metrics will be verified by EY.
Deliver 800 megatons of saved and avoided CO2 emission for customers by 2025
Increase gender diversity: 50% of hires to be women, 40% women among front-line managers, 30% women in leadership teams by 2025
Train 1 million underprivileged people in energy management by 2025
If the company fails to achieve a minimum sustainability performance measured by a combination of these KPIs, it must make a premium payment on the loans. Incentives at work… and setting the bar high for others!
Hannon Armstrong is the first U.S. public company solely dedicated to investments in climate change solutions, providing capital to leading companies in energy efficiency, renewable energy, and other sustainable infrastructure markets. With more than $6 billion in managed assets as of June 30, 2020, Hannon Armstrong’s core purpose is to make climate-positive investments with superior risk-adjusted return.
With this focus on climate and financing, Hannon Armstrong is pioneering new approaches to lowering the cost of capital for climate-oriented investments. The 0% convertible note is only the second of its’ kind: a slightly larger firm (Microsoft) did this a few years ago. With a lower cost of capital for their own investments, Hannon Armstrong can now relay those savings along to the projects they are financing in-market.
Summary
The energy markets are undergoing change. Now the most innovative firms pioneering that change are also implementing new financing structures to enable and incentivize the transition.
This innovation will drive down the cost of new infrastructure projects for the entire ecosystem. Greater innovation and competition in the financing vertical means the project owners win.
I suspect 2021+ we will see many more 0% convertible green bonds and sustainable-linked bonds throughout the entire energy ecosystem: from startups to Fortune 100.
