What’s happening at building energy management startup SCIenergy? Last week, the company’s board of directors replaced CEO Russ McMeekin, who led the company through last year’s acquisition of energy services company Servidyne and this year’s purchase of efficiency financing startup Transcend Equity, with Steve Gossett Jr. of Transcend Equity.
The move comes one year after a very public lawsuit pitting McMeekin against company founder John Pitcher and members of his original software team, who left last summer to join rival firm Serious Energy.
It also comes amidst anonymous reports that the San Francisco-based startup is struggling to get and retain customers for its core software product. One source said that the firm has laid off about 55 people in the past month, and may be close to tapping out the roughly $50 million it has raised from venture capital investors.
Gossett Jr., who has brought in a new executive team, including his father Stephen Gossett as COO, confirmed in a Friday interview that the company did recently downsize its workforce, though as part of an integration of SCIenergy’s software business, Servidyne’s building auditing and retrofitting business and Transcend’s novel efficiency project financing, rather than as a result of running short on money. The company had about 160 employees as of last year.
As for how much of the company’s $50 million remains, Gossett Jr. wouldn’t provide specific details, but said in a Friday interview that the startup has “more than enough capital to meet our financial needs, and our investors are committed long-term to the business."
“This business has a great idea, and has always had a tremendous amount of vision,” he said. “What’s been at issue with SCIenergy, and the other companies like it -- well, I won’t say 'like it,' because there’s nothing exactly like it -- is that this industry has been long on vision and short on execution.”
Gossett Jr. said he intends to change that, with the goal to land paying deals for the company’s software, as well as for its Servidyne and Transcend lines of business. The longer-term goal is to integrate the three, and go to market with mid-level, regional contractors, installers and other boots-on-the-ground channels to market. Upcoming announcements include a utility test of SCIenergy’s platform to lure building owners into efficiency programs, as well as ongoing work with pilot customers such as General Electric, which is also a strategic investor.
Specifically, he contrasted SCIenergy’s position from that of the collapse of Serious Energy, a rival VC-backed startup which announced in April that it was abandoning its building energy software and project financing lines of business to focus on its initial business of building drywall and windows.
A Promising Concept
Now the question is, how will the startup grow the pilot project stage of its first rollouts, which required a high level of manual support to keep its data-intensive software running, to grow to commercial scale?
That’s still very much the plan for SCIenergy, by the way. Some sources speculated that Gossett Jr.’s ascendance as CEO meant that the company would fall back on the energy services of Servidyne and the efficiency project financing of Transcend.
But according to Gossett Jr., “Our cloud-based solutions remain the core focus of the business.” That includes SCIwatch, the name for the fault detection and continuous commissioning software that comes from Scientific Conservation, the startup founded by John Pitcher in 2007 with complex technology that essentially creates a living, growing model of a building and how it uses energy.
SCIenergy has raised roughly $50 million from investors, including a $5 million round in 2010 and separate rounds of $19 million and of $9.6 million in 2011, to bring that technology to commercial scale. Investors include venture capital firms Draper Fisher Jurvetson, Westly Group and Triangle Peak Partners, as well as GE Energy and Intel Capital, which announced last year that they would test the startup’s software in real estate and data center environments, respectively. (On the outflow side, SCI paid $12.5 million for Servidyne, which was a publicly traded company at the time, and didn’t disclose the price it paid for Transcend.)
By creating a real-world model of a building’s energy use, using thousands of data points and complex math to model its performance, the company says it can determine how a building should be consuming energy, and then compare it against real sensor data to find discrepancies. From there, it runs more complex math to pinpoint the source of the problem, to differentiate between things like mechanical failures, preset mistakes, or human intervention. That can guide building facilities managers to save money and energy via retrofits, preventative maintenance and predictive diagnostics.
That’s a far more complicated undertaking than the simple energy usage “dashboard” products out there, with potentially greater rewards for the additional investment. But it hasn’t been an easy task getting it to work for customers, Gossett said -- a view echoed by sources critical of the company.
SCIenergy has some big-name clients, including Boeing, Neiman Marcus, Apple, Google, NASA, GE and Intel, testing out its software over the past several years. But several sources told me that those customers have grown increasingly dissatisfied with the poor performance of the software, leading some to cancel their contracts and others to stop paying for it.
Gossett Jr. denied that any of the company’s customers had canceled their contracts with SCIenergy. But at the same time, he did note that many of the initial pilot project deals were done without upfront payment, in order to get the technology into deployments where it could be tested.
Founder and CEO Fought -- Did Software Suffer?
What happened? According to one person with knowledge of the matter, the problem lay in the data-intensive nature of the Scientific Conservation platform that became SCIwatch, now SCIenergy's core product. From the start, SCIenergy’s data-intensive, building energy modeling approach meant that it faced challenges in scaling from single buildings to multiple properties, Gossett Jr. said. It also meant that the software required a lot of hands-on support from the company’s software engineers, and much of the company’s focus -- and money from investors -- has been focused on solving those problems, he said.
But two sources with knowledge of the company said that former CEO McMeekin, who came on in 2010, decided to short-change investment in these areas, choosing instead to concentrate on marketing the product to more and more customers. Those sources say that this led to disappointed customers -- as well as to a major split between McMeekin and founder Pitcher and his core software team.
That dispute came to a head in June 2011, when Pitcher and about a dozen other employees from the original Scientific Conservation software team left the company. McMeekin reacted to the employee exodus by filing a lawsuit in July against Pitcher and Pieper, as well as Serious as a company, for alleged misappropriation of trade secrets.
Serious denied the charges, and the parties reached an undisclosed settlement in April. Pitcher told me in an April interview that he personally settled with SCIenergy for $10,000, plus the agreement to not develop software based on his founding work at the company until July 2012, but with no admission of wrongdoing.
The bigger question for SCIenergy is how Pitcher et al.'s departure affected the company’s software development. Sources critical of the company told me that SCIenergy’s ability to manage and improve its SCIwatch software platform has suffered from the lack of the core team that created it. That may have created problems in the marketplace -- one CEO of a rival building energy software told me that his company won a contract from a customer last year that had previously tried SCIenergy’s platform, only to find they couldn’t get it to work properly.
But Gossett Jr. denied that the departure of Pitcher and crew put an end to software development at SCIenergy. “To say somehow the product regressed after the departure of some of the original development team is completely false,” he wrote in an email. CTO Pat Richards has led this development effort since mid-2011, and the company has also kept key executives such as Andy Tang, a former Intel executive and head of Pacific Gas & Electric’s smart grid efforts.
In the meantime, SCIenergy’s June 2011 merger with Servidyne led to the company launching another software platform, known as SCItrack, meant to supply the energy dashboard side of the building energy efficiency equation. But it’s unclear just what parts of SCItrack came from SCIenergy. The CEO of a Canadian startup told me in April that his company’s building energy software was being white-labeled as SCItrack in customer deployments in the second half of 2011, but that the companies ended their partnership after SCIenergy didn’t give the company credit. Since then, another third-party software platform has taken his company’s place, he said.
Gossett didn’t deny that SCIenergy has used other companies’ software tools to back up its SCItrack offering, but pointed out that this is not unusual in the software industry. What’s important is how SCIenergy merges these disparate platforms into a single cloud-based service for its customers, he said.
Problematic Track Record for Former CEO
Critics of the company have focused their complaints on ex-CEO McMeekin, who joined the company in early 2010. Beyond their charges that he failed to give the software team the time they needed to get the product up to commercial-ready status -- an ageless dispute in the high-tech startup world -- several sources describe a leader with an abrasive, and even abusive, way of dealing with subordinates.
Gossett Jr. declined to comment on McMeekin’s conduct as CEO, though he did say that he has been a “polarizing figure” during his time at SCIenergy’s helm. McMeekin’s building energy technology pedigree lies in his decade-long career at Honeywell, where he led business units including Honeywell’s Hi-Spec Solutions business unit for industrial controls automation.
His history as a CEO includes a position at wireless software company ViaFone, as well as a six-year stint (2002-2008) as CEO of Progressive Gaming International Corp., a Las Vegas-based gambling technology provider with a troubled history. The publicly traded company went bankrupt in Jan. 2009 after failing to meet a $17 million obligation to a lender, the Las Vegas Review-Journal reported. The company had seen its share value fall nearly 75 percent from 2007 onward, wiping out about $200 million in shareholder value. In 2007, the company settled with plaintiffs in a class-action lawsuit alleging fraud and misrepresentation of financial information by agreeing to pay nearly $3 million in exchange for all charges being dismissed.
A Multi-Pronged Approach to an Emerging Market
As SCIenergy moves forward under Gossett Jr.’s leadership, one of its key challenges will be to reassure its customers that its core technology platform can work as promised at commercial scale. Another key challenge will be integrating the different lines of business represented by the original Scientific Conservation and its acquisitions of Servidyne and Transcend Equity.
First of all, Gossett Jr. doesn’t intend to try to keep all of SCIenergy’s business within its own walls. Instead, he envisions creating a cloud-based technology, service and financing platform that can be used by regional energy services companies to offer building owners a cheap and effective way to do energy efficiency projects.
“You have to go to an indirect model of selling this to partners,” such as regional contractors and installers, he said. “That’s how this thing gets into a million buildings.” That’s an important way that Gossett Jr. envisions being able to compete with giants like Honeywell, Johnson Controls, Siemens, Schneider Electric, Eaton and other big energy services (ESCO) companies, which are all rolling out software platforms of their own.
“I don’t want to be an ESCO,” he said. “I want to be a software company that sells building optimization systems to these people who are the real boots on the ground." Of course, this also means that Servidyne, which has a going business in building energy efficiency contracting, won’t be the only company able to offer the technology smarts of SCIenergy.
As for Transcend, it has about 30 projects representing about $30 million in invested capital for its MESA (managed energy service agreement) financing model. In simple terms, Transcend (and its financial backers) agree to take over a building’s utility bills completely, in exchange for being allowed to own the assets of an energy efficiency retrofit, as well as all the savings that the retrofit delivers on monthly power bills. Transcend has a joint venture with giant Japanese trading house Mitsui & Co. that’s meant to supply the financing to grow its business.
That’s different than the traditional ESCO models that rely on guaranteed savings and other measures that can lead to complicated contracts and disputes between contractor and building owner, Gossett Jr. said. Other startups with different variants on the model include Metrus Energy and Skyline Innovations, and Serious Energy had plans for a similar financing scheme, though those are now on hold.
Not all of Transcend’s projects involve SCIenergy’s cloud-based software platform, though it is being used for some showcase projects like its New York City project at 125 Maiden Lane, Gossett Jr. said.
But in the future, he sees SCIenergy’s cloud-based platform being a natural add-on for partners that want to prove that its efficiency investments are paying off over time. That could include the building owners themselves, or the indirect third-party contractors or financing parties that SCIenergy is working with, he noted.
Tags: building automation, demand response, energy efficiency, finance, general electric, green building, honeywell, intel, investment, johnson controls, metrus energy, policy, schneider electric, scienergy, scientific conservation