The end of the cleantech leasing model?

Will your clever cleantech business model bankrupt your company?

If you spend enough time talking to people in cleantech, you’ll often hear them talk excitedly about how new business models will be key to unlocking the low-carbon energy economy. But what if it could end up killing your company?

Let’s start with the basics: a business model is “all the parts of a strategy necessary to deliver a product to a customer and make money from it,” as Steve Blank describes it. As Blank tells it, this includes “the product itself, the customer, the distribution channel, the revenue model, how to get, keep and grow customers, resources and activities needed to build the business, and costs.”

In world of Silicon Valley-funded software startups, the subscription model where customers make recurring payments (software as a service, or SaaS) has come to dominate, even if it’s not a new idea. For software companies, this has been enabled by relatively cheap cloud computing. But other benefits such as increased customer retention (“stickiness”) have helped justify the old-fashioned magazine-and-newspaper subscription model in other industries–think razors, snacks, clothes, and even dog toys.

In cleantech, business model innovation often means a different revenue model. The first version of this was a leasing model, which gives customers the advantage of low up-front costs and gives the startup predictable cash flows. Think of a company that, instead of selling solar panels, installs the panels on a customer’s roof, maintains ownership of the panels, and simply sells electric power. There are some very inventive new revenue models that take advantage of “ancillary markets” which are in essence things a utility will pay you to do or not do. For instance, a smart battery system in your garage can communicate with the utility to help regulate the frequency—and the utility will pay you for that service. Some new startups are building businesses around these multiple revenue streams, and offering the battery hardware for free, up front, with recurring payments based on these new revenues. This is a very clever variation on a lease, and while it’s tempting to compare the leasing model to SaaS and consumer goods subscriptions because all three models yield monthly cash flows, the reality is that the differences make leasing a tough route for new startups.


Cleantech leasing models aren’t a new concept. (You could even argue that electric utilities have been operating a kind of leasing model since the 1880s.) In the early 2000s, Jigar Shah’s SunEdison LLC began developing solar projects where they provided the up-front capital for the equipment and installation, then sold electricity via Power Purchase Agreements (PPAs). This meant that a customer who was interested in solar didn’t have to worry about buying, installing, or maintaining the solar power plant, but still got to enjoy the benefits. This model meant that not only did the customer avoid worrying about the risk of the new technology (if the panels broke, the customer wasn’t on the hook to fix them) but also let them avoid the hefty up-front investment.

In 2008, SolarCity applied the model to residential rooftop solar. A homeowner could have solar panels installed on their roof with no money down, and simply pay a monthly fee. Other solar companies quickly followed suit (including Sungevity, BrightGrid, and SunRun) and the model was ported to other technologies (LEDs from Lemmis Lighting and Green Ray, fuel cells from Bloom, electric vehicle chargers from ChargePoint, batteries from Stem, as just a few examples).

Problems with the No Money Down Model

“No money down” is very appealing to customers, especially for energy efficiency technology, so it’s not surprising that so many cleantech startups raising money today pitch some sort of recurring revenue or subscription model. Of course, there are cleantech software businesses that might be a great fit for the model, but let’s focus on the companies selling tangible energy products.

There are two interrelated problems with the leasing/subscription/cleantech-as-a-service model. The first problem is one of mismatched growth expectations and the second is that these companies will run out of cash, fast.

Problem 1: Growth

When you read that a SaaS startup is valued at 10x ARR (annual recurring revenue), it’s easy to run the numbers and try to guess what that means for your company. But here’s the key difference: investors in the private and public markets place a value on subscription businesses based on their revenue and their growth. Subscription companies grow by spending huge amounts of money on sales, and they can afford to do this because their product is scalable. Once the software is written and sold to the first customer, the cost of delivering the software to the second customer is very small. Take a company like SalesForce, an industry-leading SaaS company, as an example. For every $1 of revenue, SalesForce spends about $0.50 on sales, $0.25 getting the software to the customer, $0.15 on writing the software. The sad reality is that making physical products is more expensive. For every $1 of Tesla’s revenue, $0.70 goes into making the product. (And for those who are counting: at Ford the number is $0.77).

This model works well for software startups. Acquirers are willing to pay for that future growth. Over the last decade, we’ve seen the acquirers in the cleantech space are not willing to pay that growth premium, and instead focus on profitability.

Problem 2: Cashflow

That brings us to the second problem: running out of cash.

Let’s say your company is selling solar panels. You have a bit of seed money in the bank, so you use that to manufacture your product and then go out and make a sale. You take the money your customer just paid you and plow the profits back into making more panels.

Suppose instead you adopt the leasing model. You take your seed capital, manufacture the product, and install it at the customer’s site. Instead of the customer paying you $20,000 up front, maybe they’re paying you $120/month. Maybe you can repeat this a few times, but sooner or later, even with customers and revenue, you won’t have the cash on hand to continue to grow. This isn’t just a hypothetical problem: SolarCity just ran into this issue and solved it by selling $227 million of installed systems to a bank. Unfortunately, your startup isn’t likely to get the same deal.

Making the Model Work

Given the difficulty of scaling companies that make physical products, is there a path forward for the leasing model for startups?

A handful of investors are working on solving this exact problem by separating equity finance from project finance. For mature technologies, Jigar Shah’s current venture, Generate Capital is actively providing funding for projects using reliable and proven but under-installed technology. This model is fundamentally different from venture capital, because it doesn’t assume the high risk and therefore doesn’t require the same rocket-ship growth. For those slightly less mature technologies, there is also hope: Rob Day at Black Coral Capital has structured a few deals where the equity for the startup has been separated from the debt for the projects and installations.

So what does this mean for your cleantech startup? On the one hand, high up-front costs are likely to remain a deterrent to customer adoption, and “no money down” will remain an attractive option. At the same time, banks will remain unlikely to lend to a risky startup without a balance sheet and investors are keenly aware of the pressures this model will put on the business. Investors like Generate and Black Coral who understand project finance for emerging (but not totally new) technology may be the only path forward. But beware: if your company is developing a next-generation battery AND trying to sell it using a no-money-down model, the leasing model just might kill your startup.