The Next Sunrun? The Case for and Landscape of Heat Pump Start-Ups
With the tailwinds of government incentives, regulation and commitments, consumer demand, and climate funding, new ecosystems of decarbonization companies are getting formed and funded. ‘Blue-oceans’ exist and there are ample opportunities for founders to build gigacorns in emerging categories.
Electrifying the built environment — or the transition of heating, cooling, and cooking — to use electricity and not fossil fuels is one of these categories. For starters, the climate opportunity is dramatic: heating and cooling account for 15% of global carbon emissions.[i] Second, the economics should yield category winners: the global heat pump market is estimated to hit around $139.4B by 2030. [ii] Lastly, significant work needs to be completed: to-date, nearly 60% of US households are still heated using natural gas, heating oil, or propane.[iii]
Investors and founders are beginning to capitalize on this opportunity as seen by the market developments in 2022. The ecosystem of 18 start-ups, 13 of which are Pre-Series B, raised $442M in total (click here to see the details). This excludes energy efficiency start-ups (e.g., building management) and companies finding alternatives to leaked refrigerants (see ClimateTech VC’s article, The Cooling Economy of F-gases and HVAC, for more information).
Looking into this sector further, I have found that built environment electrification companies are primarily broken down into three broad buckets:
- 🏡Residential Integrators and Marketplaces (‘22 Funding $178M)🏡— Companies installing heat pumps and often other home electrification offerings. They do this by acting as the developer or by setting up marketplaces. Companies in this segment offer a one-stop shop to coordinate what can be a complicated and confusing customer journey of installation. Examples include:
Dandelion (Series B), founded in 2017 — offers home geothermal installation for heating and cooling in Connecticut, Massachusetts, and NY State.
Sealed (Series B), founded in 2012 — retrofits homes with heating and cooling heat pumps and, if desired, smart thermostats, LED lighting, insulation, and air sealing without the homeowner paying any upfront costs.
· 🏬Commercial Integrators and Marketplaces (‘22 Funding: $234M)🏬— Companies facilitating the installation of all-electric heating, cooling, and hot water systems, typically bundled as part of a broader sustainability roadmap for buildings.
BlocPower (Series B), founded in 2014 — provides turnkey engineering, financing, procurement, and project implementation services for a wide variety of energy efficient, renewable energy, and/or HVAC upgrade projects around the country, with a focus on low-to-moderate income (LMI) and environmental justice communities.
· 🫕Next Generation Appliances (‘22 Funding: $20M)🫕— Companies developing sleek and high-performance heat pumps and electrical appliances, such as cooking stoves. Think the ‘Tesla’ of appliances.
Gradient (Series A), founded in 2017 — Developing easily installed, modular, smart heat pumps for heating and cooling that are more efficient, green, and comfortable.
Impulse (Series A), founded in 2021 — Developing next-gen home appliances starting with a battery-integrated induction stove. The company claims to be creating a premium performance oven — for example, one targeted feature is boiling water within a minute — to counter poor opinions consumers have of electric stoves, which are thought to produce uneven heating and scorched pots.
While groups of start-ups are getting formed in the above buckets, individual start-ups are tackling other problems. Conduit Tech offers a sales, design, and workflow tool to residential installers. Shifted Energy converts water heat pumps into a virtual power plant and Gradeyent, which raised $10M in 2022, optimizes district heating, a market need in Europe.
While strong tailwinds exist, there are threats to the development of the market, especially in the US. Two of these include:
· Potential Shortage of domestic heat pumps due to the reliance on foreign manufacturing — Global stock of heat pumps needs to reach roughly 600M by 2030 to meet prospected demand and to date, only 190M units are in operation worldwide. With the US significantly reliant on foreign suppliers, a short-term spike in global demand could create a bottleneck. This is a near-term problem that is mostly getting addressed. Rewiring America suggests that $500M is needed for domestic manufacturing. The US government has already earmarked $250M.[iv]
· Shortage of plumbing and HVAC technicians — This is an acute and long-term threat. In five years, it is estimated that there will be 1.8 US jobs available for every willing HVAC technician. Today, there is a 38% shortage of HVAC technicians and a 55% shortage of plumbers.[v],[vi] This labor gap is only worsening as an aging workforce is retiring — 8% of the total HVAC workforce is leaving each year — and young adults are joining the ranks.[vii] For decades, Americans have been pushed to attend college and avoid the trades. Consequently, start-ups will now be competing on recruiting, retaining, and training installer networks.
Understanding how the shortage could impact their businesses, some start-ups, such as Blocpower (NY) and Woltair (Czech), are already incorporating training programs as part of their operations.
Will Residential Players Grow into the Industry’s Sunrun or SolarCity?💰💰💰
While I see opportunity across the different electrification segments above, I am bullish on the US residential heat pump market. In particular, I’m excited about the prospects of newly formed, digital-first, US residential heat pump integrators because this ‘blue ocean’ needs trusted regional and national brands, and in other emerging industries, such as solar from 2006–2011, this has been indicative of climate unicorns.
Catalyzed by federal incentives baked into financial recovery bills, the first generation of solar residential integrators and marketplaces was formed and funded from 2006–2011. National and regional integrators — such as SolarCity, Sunrun, Vivint Solar — were able to grow because they were one-stop-shops that simplified the installation of solar. A national marketplace, like EnergySage, also gained traction because the market needed trusted connectors. During this time, expertise was not widespread, the economics of installing panels were variable, and consumer awareness was low.
Per the graphic below, investing in the right integrator or marketplace during this time yielded outsized returns.
Reflecting market needs, company formation in the US residential heat pump market today is similar to that of the solar market from 2006–2011. From my research, of the seven US residential heat pump integrators and marketplaces, five were launched in the last three years. These companies raised a total of $117.7M. With intensifying consumer demand, government incentives, such as the IRA, and state-wide commitments — for example, four states have explicitly called for heat pump deployment targets that total well over 12M by 2030 — a significant economic opportunity has emerged.[viii]
Within the residential heat pump market, I am most excited about the five US residential integrators, three of which were founded over the last four years, because, like solar in 2006–2011, the market needs ‘trusted-brands’ to streamline the retrofit experience and manage the arduous customer journey. This is primarily because:
· Limited number of technicians have expertise in installing heat pumps — 90% of all HVAC heat pump systems are installed incorrectly.[ix]
· Complicated value proposition — Value proposition varies per geography based on the combination of various rebates and incentives and the price of natural gas.
· Customer journey to deploy heat pumps is arduous and confusing — Work required may take the coordination of several trades professionals, in particular if the house requires an electrical panel or wiring upgrade.
While marketplaces have lower operational complexity, my lightly held opinion is that those that act as mere brokers, passing customers to installers after a quote, will have a more challenging time scaling than integrators for two reasons. One, marketplaces will find it difficult to oversee design quality and, two, integrators are better equipped to plan for supply constraints on labor and inventory.
Offerings Are More than Just Heat Pumps
Today, US residential heat pump integrators are building product offerings more extensive than the first generation of solar integrators, taking into account cross-cutting offerings across home electrification and business model innovations that have been developed over the last 10+ years.
First, companies are looking to meet residential customers where they are. Helios and Elephant Energy, both in Colorado with a sizeable segment of early adopters less sensitive to cost, are offering a one-stop shop, full-home electrification offering. This includes retrofitting homes with heat pump HVAC units and water heaters, EV chargers, solar and batteries, and electrical home appliances. Taking a divergent approach, Sealed, based in NY, is earning revenue via a homeowner’s energy savings for retrofitting HVAC units and/or weatherization. In the Northeast, the cost-savings for switching are greater and homeowners care less about sustainability.
My prediction is that many US residential heat pump integrators and even HVAC installers will evolve their business model to offer retrofitting and a bundle of maintenance services for a ‘low’ monthly fee. Service1st Financial, based in DC, is doing this. The company charges no upfront cost, no hassle to replace or manage home comfort services, and priority scheduling for repairs and maintenance. If we pay for cloud storage for a monthly rate, why can’t we pay for our heating and cooling for a monthly rate as well? Service1st addresses the customer pain point of poor customer service in the HVAC industry. Especially with a shortage of labor, wouldn’t you pay a bit more money to know that someone will be responsive and repair your unit in a timely manner?
How will the Residential Heat Pump Market Mature? Lessons from the Solar Market from 2012–2015 💡
In a hot new market, new companies form to fill gaps along the customer journey. This is what occurred in the residential solar market from 2012–2015 and beyond. The early growth of solar installations and installers yielded venture-backable opportunities to bring down the cost of customer acquisition and reduce barriers of adoption. Tools for solar installers were built and some of these tools have emerged as winners.
For example, Mosaic, founded in 2011 and now valued at over $1B, was the first digital company to finance a 20-year solar loan.[x] The company’s platform empowers solar contractors to deliver financing at point-of-sale, lowering the upfront cost of the system and decreasing customer friction. Aurora, founded in 2013, addressed the need to lower soft costs by offering a remote-satellite design tool to streamline the sales proposal process. Aurora Solar is now valued at $4B.[xi]
Today, you have 40+ software tools across the residential solar workflow (see Equal Ventures mapping here on page 11), addressing needs of sales, design, financing, operations and maintenance (O&M), and customer experience. As the market continues to mature, some of these may become tuck-in acquisitions, such as Aurora Solar’s acquisition of Folsom Labs, developer of Helioscope, while others may close down. However, based on the size and growth of the residential PV market, expected to grow 15.4% to reach $44.8B by 2030, and the ability for installer tools to capture some of that value, the sector is ripe for a good number of $500M+ exits.[xii]
Similar to solar, the maturity of the residential heat pump installation market should yield a need for installer tools across design, sales, and O&M. Remember, to date, 90% of heat pumps are installed incorrectly, dramatically reducing installer profitability due to wasted repair time. Significant time is also spent on the design of heat-pump systems. In fact, pre-seed company Conduit Tech was founded to tackle this problem and could grow into the heat pump’s version of Aurora Solar. I’m very excited by them and this opportunity.
Furthermore, as business models in the industry potentially change to either a monthly fee, like Service1st, or revenue based on cost savings, like Sealed, the need for effective O&M solutions will intensify.
The question is whether these tools will be built by residential integrators, companies in adjacent sectors expanding into new verticals, or companies native to the heat pump installation space. When it comes to financing, venture-backed integrators, such as Sealed and Service1st, are already offering solutions in-house. No doubt, much of this will be determined by the execution skills of founders, the most important quality of a start-up.
To conclude, 2022 was a big year for heat pumps. The IRA got passed. The sector’s Sunrun and SolarCity, venture-backed integrators, raised early-stage funding. And the sector’s potential Aurora Solar, its first installer-focused workflow tool, was formed with the founding of Conduit Tech. Residential heat-pump installation is an area that is in the proverbial first inning and I will be watching it closely.
Thank you to Mathew Cherry, Chief of Staff at Aquicore, and Rebecca Glanzer, Columbia Business School student, for reading drafts. Austin Blackmon of Earthshot Ventures for the push to put some thoughts on paper. And thoughtful conversations with Jack Wardale of Undivided Ventures, Summit Rosenberg of Kompas VC, Guy Vidra at Collaborative Fund, Mona Alsubaei of Union Square Ventures, Kevin Gries at Slipstream, and Adrian Silver of Carbon Direct.
[i] How to heat up — and cool down — climate innovation, WEF, Feb 21. 2022
[ii] Heat Pump Market Size, Grand View Research
[iii] U.S. homes heating bills expected to surge this winter, Reuters, Oct. 12, 2022
[iv] The path to more heat pumps: Getting manufacturing and labor up to speed, Protocol, Nov. 2, 2022
[v] HVACR Industry Must Work Harder To Retain Technicians, March 1, 2022 Air Conditioning, Heating, Refrigeration
[vi] Construction Labor Market Report, Spring 2021, HBI
[vii] HVACR Industry Must Work Harder To Retain Technicians, March 1, 2022 Air Conditioning, Heating, Refrigeration
[viii] Millions of US Homes Are Installing Heat Pumps, Will It Be Enough?, Nov. 1, 2022, RMI
[ix] Residential HVAC Installation Practices, A Review of Research Findings, June 2018
[x] Kushner’s Affinity to co-lead $200M+ round for Mosaic at $1B valuation, July 5, 2022, Pitchbook
[xi] Why We’re Counting to Invest in Aurora Solar, Feb. 28, 2022, Energize Ventures
[xii] US Residential Solar PV Market, Nov. 22, 2022, Research and Markets
