Antler - Day 5

Recap from last week. Again, if you've been following along, you know what I've extracted here.

There's been some changes to the schedule; based on feedback from the group, it looks like a bunch of people want more time to work on their idea. So there's some alternate programming that lets the founders that have tracked out already/are more focused on building a team (because they already have their starting idea) focus on their own thing. Everyone else is still encouraged to go socialize.

Office hours

• come prepared with update since previous coaching
• seek advice by asking questions on top priorities
• self assessment/reflection on how you are performing
• review action items (next action items and previous ones you've still got/knocked out)

For week 2, there will be one office hour. It'll vary going forward, based on the founder teams

Bernie Li's Founder Story

This is the story of Pure Energy

What did you do before your startup?

• Local kid, short stints in private equity and consulting (just enough to know he doesn't like huge companies or corporate culture)
• Returned from New York just after the internet bubble comploded
• Worked for a firm called Inovia
• This amount of exposure to founders and the energy involved in building startups eventually got to him and he decided to give it a shot
• The defining moment was sitting across from a founder during an advisory session wherein he realized that, in order to up his VC game, he was going to need some experience on the other side of the table

How did you go about trying to find an idea and cofounders?

• Basically started talking to people and keeping his ears open
• This was the era of Gilt Groupe and the group-buy/coupon model in e-commerce
• He heard a lot/was interested in clean tech, and in particular in renewable power generation
• There was a confluence of economic, regulatory, political and social factors converging in Ontario that made it a good place to start up green energy companies
  • Something called a "feed-in tariff"
    • Basically, the government refused to build their own infrastructure
    • But they did guarantee a price floor for energy coming from green facilities
    • This included individuals that wanted to generate power and selling it back to the grid.
• The math worked out such that any Ontario homeowner could invest ~$50k in solar/wind infrastructure, and use it to make ~$200k over 20 years.
• The market failure here was that a lot of people didn't want to make that investment. The company Bernie's had the business model of
  • Go to homeowners who didn't already have solar rigs on their roof (most of them) and made a deal to install infrastructure, keep most of the payout and give the homeowners $1200.
  • This is effectively free money for everyone involved.
  • The homeowner gets $1.2k per year for giving the company access to their roof
  • The company gets to run a solar rig on the roof in exchange for maintaining it. All-in, after the maintenance cost and payout to the homeowner, they get to pocket something like $20-30k per homeowner they sign up. (Or rather, that much at the outside. Spoiler warning).

Why did you get excited about building Pure Energies?

• The business model was obvious from the number
• Solar wasn't a new technology; battle tested in lots of places, but it hadn't been deployed on this scale
• No real competition
  • Their main competitors at the time were satellite dishes (for the roof real-estate), but no other companies were doing what they were doing
• A pro-social, well regarded industry
  • He's a bit shame-faced about this; how your friends see what you're working on has a big impact on how you feel about it.
  • Friend of his moved over to advertising, and people don't like that :p
    • What do you do?
    • Oh, I sell ads online!
    • Ugh...
  • Compare to
    • What do you do?
    • Oh, I'm building out Ontario's solar infrastructure
    • Oh! Nice! Tell me more about that.

How did you finance the business initially?

• Apparently not a lot of VCs were into this
• Their consistent questions are "where's the hypergrowth coming out of this?" and "where's the novel technology? What's your edge?"
• So, VC play didn't end up happening. They worked on a lot of sweat equity (that is, two to two and a half years of basically not getting paid)
• Some small angel/friends-and-family financing rounds
• Very capital intensive; it's basically a construction project. So VCs weren't into this, but private construction finance firms and debt financiers were all over it.
  • Lesson: if you've got an idea you're convinced of that VCs aren't biting on, you might look into specialty financing instruments to help bridge the gap. Especially valuable for things that are more slow-roll.
  • Clearco is an example of this sort of financial instrument. They're a very specialized financier focused on advertising spend for starutps/e-commerce companies with inventory

What were the first key steps?

• We had the founders, we have the vision and we had a plan
• We needed a contract. So, when we go to the homeowner, if they said "yes", we need an agreement to hand them.
• We borrowed a lot of terms and details from hot water tank rentals, which is a mature industry, has a lot of similar properties in terms of maintenance/homeowner interaction.
• One frequent point they had was "Hey, you're all smart, but none of you have ever installed a solar panels. Are any of you an electrician or carpenter?". They had to add someone to fill this credibility gap.

What did go-to-market look like?

• "Free" solar offering contract to homeowners. Basically went out to some homeowner trade shows
• They used it to go talk to homeowners and build a client base
• Experimented with door-knockers. "There's a very interesting set of characters that get into this". Those that can excel here tend to be incredible sales people.
• Later discovered Facebook ads. This was huge, because at the time, no one was buying those keywords in Ontario, so their cost per lead was about as cheap as it could possibly be.

Was the journey straight up and to the right?

• For the first four months, yeah. Got all the stuff set up, homeowners had a great reaction, etc.
• "Oh yeah! Entrepreneurship is actually really easy!"
• The big hit was a year in, when the Ontario government starts looking at their tariffs and deciding that it's going to be too much of an electoral debacle. They froze the program and provided no insight on when it was going to get unfrozen (while trying to keep hope on it alive)
• It would have been easier if there was a precipitous cliff falling downwards, but it was a slow decline. Because the lack of tariff tanked the business model.

When did VCs get involved?

• After the freeze happened, his company had a bunch of construction contracts up and running that they didn't have the capital to build out
• A competitor of his had the reverse problem; lots of capital raised, but no customers to build. They ended up combining their powers and putting something working together.
• At that point, there was a solar boom in the US, even though the Ontario government wasn't building. So there were a lot of companies getting funded out there that had similar problems as his Ontario competitors.
• They stated scaling out their online customer acquisition and moving out to the US market. Once they demonstrated scaling potential like this, VCs started taking notice. They raised something like ~$125m (which sounds tiny by today's standards, but was a significant amount of money for the greentech industry at the time)

How did the acquisition come about and why did you exit?

• Over the course of regular fundraising, got talking to other companies/VCs that were building out their own internal systems doing this
• Remember, when someone gives you $10m, what they're probably expecting you to turn that around to create $50m worth of value
• And, basically, at this point (about late 2014), there were enough competitors in the space and enough capital making the rounds that he thought there wasn't another 5x left
• Also, they were tired at this point. ~6ish years of hustling takes it out of you, especially when some of it is unpaid :p
• So, at one point when they were doing a raise, they got everything together to make it an exit instead. Took about 5 months to sell to another funding company in the space that thought they could scale harder than a short team

Q&A

• North America has a lot of seasonality in solar generation. Did you account for that when you dealt with homeowners?
  • Didn't really care about seasonality, we cared about raw yearly output. Homeowners didn't care, because they were getting a flat cheque per year, the people that did care were our financiers and they had all the regional solar maps ready to double check numbers.
• Your business plan was targeting homeowners. So we have a decision to make regarding going to consumers vs businesses. What are your insights here?
  • Three different types of setups.
    • Huge solar fields
    • Warehouse rooftop solar generation
    • Homeowners
  • We basically did a market analysis. The construction companies/developers were going to win on the solar fields front (which would have been the "B2B" equivalent here). And large warehouse builders would win the second category. But there was basically no one going after the homeowner space. They basically went after B2C because B2B was too crowded at the same time that the direct space was open.
• Were your homeowners diversified or homogenous? How easy were the conversation?
  • B2C is weird. You get constant insane questions about like "If my kid climbs up and slides down the solar panels and gets hurt, who's liable?", and getting lambasted no Facebook (like, "I signed up for this a year ago and they haven't said anything. It's a total scam!"). So they were very different from each other, and we benefited a lot from getting boilerplate out.
• How did you guys get past the "poking holes" stage and give it a shot for two years?
  • The reality is that we didn't. We aligned on the vision and had the attitude of "let's fucking do this".
  • Also, the finance guys were putting in their time and committing
  • There wasn't really a concerted "poking holes" stage here
• Four co-founders, not necessarily typical, putting yourself in our shoes, how do you make the call on number of co-founders?
  • Well, basically, four people aligned on vision and ambition. Four... wasn't too many. One of them left during the sweat equity process, which is fine, some people need to do that. There isn't really a right number. It depends on the nature of the business, and it depends on how many people align with the vision.