Investors have heard it before: The business opportunities in clean, smart buildings are substantial. They’ve heard this for so long, in fact, that some have begun to wonder: Okay, so what’s the holdup?
“People always talk about the massive opportunity here,” said Paul Straub, director of Claremont Creek Partners. “And yet I’d bet you can count on ten fingers the number of hugely successful venture-backed startups” in the building efficiency space.
The problems, and the profitable solutions, lie not with capital-heavy investments in groundbreaking technology, said Straub and a group of smart-building experts during a panel discussion hosted by the Cleantech Group. That’s because most of the required technology already exists. Rather, they lie largely in finding new ways to bring existing technologies to the tangled webs of existing relationships already found in large modern buildings.
That often means leaving notions of efficiency and environmentalism at the door, and tapping into stronger motivations building owners might have for making costly but energy-friendly upgrades. It also means innovations in financing mechanisms plus cheap, bolt-on technology to expand the green building market beyond the core of government and corporate owner-occupied buildings.
“Whatever gets the bottom half of the market, the 7-11 by the side of the highway,” said Rohit Aggarwala, an advisor for theC40 Cities Climate Leadership Group and former director of long-term planning and sustainability for New York City. “Anything that is easy to install, cheap and speaks to that market is a huge and valuable opportunity.”
Why has adoption of efficient building systems been so slow? First, consider the different types of buildings and owners. Some, like the University of Chicago, may take a 100-year view on their buildings, said Kevin Self, vice president of corporate development at Johnson Controls. Others may look to flip a building in just three years. Still others may be reluctant to make major efficiency upgrades until feeling pressure from new LEED-certified buildings in their neighborhoods.
“The thing with building upgrades is that building types are different, upgrades are different, uses are different,” Self said.
Also there’s the tangled maze of relationships in an average high-rise office building. The owner may have little incentive to invest in expensive upgrades when most of the savings go to tenants, said Dan Probst, chairman of energy and sustainability services at Jones Lang LaSalle, or when owners who plan to sell in just a few years could boost their curb value by making simpler upgrades to the lobby or the elevators. Tenants may have little interest in investments in new windows or insulation if their utility payments are assessed solely on the basis of square footage, or if the construction will disrupt productivity in the office.
“The reality for most businesses is that energy is a relatively small cost compared to wages,” Straub said. “So if there is a loss of productivity, it’s difficult to make up for that with a small amount of energy savings.”
Such divided interests encourage building owners to take a piecemeal approach to efficiency, upgrading floor-by-floor, or when tenants leave. That makes it difficult for startups selling efficiency products to access financing and make a profit.
“You can’t just go in and knock out a whole building at once, and that’s an impediment to scale,” said Straub.
The Solutions: Hard, Easy and In-Between
The good news is that the answers to these problems may be found in capital-light, venture-friendly solutions. First, someone needs to invent a Solar City for green commercial buildings. The difficulty is that unlike distributed solar, which involves costs and payoff periods that are easy to predict, each large commercial building is different in terms of the technology it needs to run more efficiently, how much that technology will cost and how long it will take to pay for itself. All of this makes it impossible to find cheap capital that distributes transaction costs across a broad number of projects.
Whoever untangles that mess stands to make a killing, said Straub. “I think what it will take is somebody to crack the code for financing”, he said.
That will be hard; what’s far easier is installing efficient, off-the-shelf technologies like LED lights, which can be controlled remotely by a facility manager’s iPhone.
“It doesn’t take a rocket scientist to come in and swap out a bunch of lights,” said Mike Smith, director of building technology at Forest City Enterprises. “That’s why it’s the low-hanging fruit.”
Venture investors have shown interest funding LED lighting startups, including quantum dot developer QD Vision, which raise $20 million in a series-E round in March from Highland Capital Partners and North Bridge Venture Partners. And U.K.-based Isotera, which offers contactless connection of LED lights, raised $2.4 million in April from a group of angel investors including Qi3 Accelerator and the Low Carbon Innovation Fund (LCIF).
In between the easy and the hard solutions, there are vast opportunities to make all these different systems work better together, the panelists said. Many companies have smart buildings capable of telling their owners when the HVAC system is about to die. But those smart detectors aren’t connected enough with the company’s other systems to run their own diagnostics, figure out what’s wrong, tell the repair crew which tools to bring, and schedule the job on the company’s work order management system.
“We don’t need more data. There’s a lot of technology deployed today to pull the data out of the buildings,” said Dan Probst. “We have to close the loop, so we can make better decisions based on that data.”
Smart systems also can do a better job talking to one another. For example, many of the federal Transportation Security Administration buildings tie together the security, lights and HVAC so that all the systems shut down at night, and turn on automatically when the first employee arriving in the morning swipes her electronic key.
“When you have more and more intelligence deployed in buildings, there will be exponential opportunities to leverage all the opportunities,” Straub said.
Startups that develop smart building software have been hot with VCs recently:
– BuildingIQ (named to the ’12 Global Cleantech 100 and Bloomberg New Energy Pioneer lists), a developer of energy management software that optimizes HVAC systems, raised $9 million in January from Aster Capital, SFS VC (Siemens), and Paladin Capital;
– PoweritSolutions (named to the ’12 Global Cleantech 100 List), which makes energy demand response and control software, received $5.5 million in series-C funding led by Black Coral Capital last December;
– Optimum Energy, whose software collects data to manage HVAC systems, received a $2 million venture investment from Edison Energy in August, an extension of $12.2 million series-B round they raised in June by Navitas Capital and Johnson Controls;
– Vigilent (named to the ‘12 Global Cleantech 100 List), which makes intelligent energy management systems, received an investment from TELUS Ventures, the VC arm of TELUS (NYSE: TU) in June; and
– Aircuity, a maker of energy-use sensor and control systems for air ventilation, raised $3 million in July from CCM US, LLC.
These two building efficiency startups are seeking new funding:
– Sefaira, web-based energy efficiency software, is currently looking to raise $8 million. It received a $10.8 million series-A venture investment in April 2012 led by Braemar Energy Ventures.
– Greensleeves LLC, whose software can reduce HVAC energy consumption and pollution by more than 50%, is looking to raise $5 million. It recently raised $3 million from private investors and is a potential competitor to BuildingIQ.
The key will be to look beyond traditionally conceived “green” opportunities, panelists agreed. That means selling the owners of smaller, nondescript buildings on how easy and cheap efficiency upgrades can be. Hannah Grenade, CEO of Advantix Systems, a maker of highly efficient HVAC systems, does not sell her products based on their environmental benefits, or even their medium-range cost savings. Instead, she focuses on her systems’ better performance, lower maintenance costs, lower employee absenteeism due to indoor mold and bacteria—and explains that she sells her product at the same price most building owners already pay for air conditioning.
“The fact is that people don’t do what is good for them. They do what they like,” Grenade said during the recent Bloomberg New Energy Finance Summit, where Advantix was named a Bloomberg New Energy Pioneer. “And that’s a winning business model, much more so than encouraging people to put on a sweater.” Advantix received financing from private equity firm MatlinPatterson Global Advisers.
And, to that point, Straub of Claremont Creek recounted how one of his current portfolio companies, Project Frog, a manufacturer of resource-efficient modular buildings, pivoted from selling on the basis of energy cost savings when they realized that their strongest selling points were their predictability of construction time and the occupant factors, such as better lighting and ventilation of their semi prefab units. Project Frog raised $4.1 million in a private debt offering in April.
Blu homes, another maker of prefab green homes, received $65 million in series-B funding from Brightpatch Capital and Skagen Group in June, in one of the biggest cleantech venture fundings of the second quarter.
Aggarwala told a story of theater owners along Broadway in New York City who didn’t care about the electricity savings of replacing incandescent bulbs with LEDs, but loved the fact that longer-lasting LEDs would help them to fire the union members who worked daily to replace the old bulbs.
“These guys didn’t care about energy, but they knew labor was their single biggest cost, and they hated the unions,” Aggarwala said. “So it’s all about designing products that people want for their own reasons.”