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Tuesday, September 22, 2009

Serious RE money

On Monday, one of the Bay Area’s biggest (if not the biggest) energy efficiency companies announced that it had doubled its venture invested capital from $60 million to $120 million.

It certainly is a major development for Serious Materials. As one VC press release explains:
Navitas Capital, a venture capital firm investing in green technology solutions for the built environment, announced today that it participated in a $60 million Series C investment in Serious Materials. According to an Ernst & Young LLP analysis based on data from Dow Jones VentureSource, this transaction represents one of the largest U.S. venture capital deals year-to-date in 2009 and is the largest cleantech deal in the Energy Efficiency category. …

The new funding was led by Mesirow Financial Capital and included New Enterprise Associates, Foundation Capital, Rustic Canyon, Enertech Capital, Cheyenne, and Saints Capital. Navitas is a returning investor, its principals having led Serious Material's initial financing round in 2005.
The Mercury News reports that Serious was founded in 2002 and employs 250-300 people at its Sunnyvale headquarters and five plants around the country. (The company was prominently in the news last April when Vice President Biden visited its Chicago factory).

As it turns out, early this month I met the CEO, Kevin Surace, at a Menlo Park renewable energy event. I had a brief chance to talk with him about his business, although the seating arrangements didn’t allow a more detailed conversation (which I hope to have later).

From talking to Keven, what caught my attention is their efforts to transform the definition of energy efficient windows. Energy efficiency is normally thought of in terms of SHGC or U-value; instead, Serious is selling R-6 windows to save energy over the customary EnergyStar windows rated at R-2 or R-3. I know less about its drywall products, although an architect recommended its unique (and patented) QuietRock for remodeling a room that would be used for practicing music.

I can see why VCs are excited about Serious: it has achieved differentiation through innovation in two huge industry segments. As best as I can tell, the drywall industry in the US is $40+ billion in revenues every year, while the US window industry is about $12 billion/year.

Looking to history, a sudden desire to increase energy efficiency — whether through regulation or market forces — provides a sizable market for both new construction and retrofit applications.

From my childhood, I remember my parents trying to retrofit their 1950s-era designer home with ceiling insulation, which was basically limited to those places that could be covered with blown-in cellulose. Decades later, my girlfriend (now my wife) and I scampered through the rafters of the brick home where I lived, laying down batts of fiberglass insulation to make the summer heat tolerable.

One could argue, in fact, that Owens Corning was the biggest winner of the (limited) US push for energy efficiency in the 1970s. Its pink fiberglass batts (with the Pink Panther branding) have become both a company trademark and the country’s ubiquitous solution for bringing walls and ceilings up to R-19 or R-30 efficiency standards. The ease of installation, low cost and quick payback means that (even without government intervention) that buying yards and yards of pink fiberglass is a no-brainer when building any new home. Today Owens Corning is a $6 billion/year company.

For cold weather locales, SeriousWindows™ offers a similar value proposition. In the Merc story, its CEO emphasizes the bottom line benefits of energy conservation investments that pay for themselves:
The company says its SeriousWindows line reduces heating and cooling energy costs by up to 50 percent, enabling users to recover the additional costs within two years in many climates.

Its EcoRock drywall alternative required 80 percent less energy in its core production than conventional gypsum drywall "and has the potential to save billions of pound of CO2 annually," the company says.

But, Surace added: "We're not out there selling green. We're selling that we can give you your money back."

While Serious Materials supports proposed policy reforms to promote a low-carbon economy, the company doesn't require such reforms to succeed, he said.
An IPO is always a CEO’s first choice, but Serious will also be well positioned for acquisition. Given the most recent valuations, I’m guessing that the acquirer would have to have at least $3 billion in revenues (perhaps more, given Serious will have a high growth multiple). Today, there are a few public building materials companies that big — names like Georgia Pacific, Masco, Mohawk — or Owens Corning.

However, if Serious grows for another few years, it will be too big for an acquisition, and thus a favorable IPO market would be the only option. This would require the IPO market improving from the doldrums it’s been in for more than a year.

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