Stem Confirms It’s Looking for Potential Buyers

The energy storage pioneer has a new growth story to tell around selling through solar installer partners.

Bay-Area startup Stem used to sell standalone batteries to save businesses money on their utility bills. Now the company increasingly reaches customers through channel partners in the solar industry, and that shift may strengthen its position in recently revealed sales talks.

Energy finance publication SparkSpread reported last week that Stem is seeking a buyer with the help of Morgan Stanley and Greentech Capital Advisors, with bids due recently. 

The following day, Stem published new details about a three-tiered solar partner program, through which it will provide technical and software assistance to commercial solar installers that are seeking to add batteries to their deals. Hot on the heels of the buzzy report, Wednesday's announcement could have been intended to regain control of the narrative.

But in an interview Friday, Stem Chief Revenue Officer Alan Russo told Greentech Media that the SparkSpread story was accurate.

"Everything I described should make it no surprise that people are interested in acquiring Stem," he said, referring to earlier discussion of the new solar channels. "As a leadership team, we need to take that seriously."

That perspective indicates a subtle evolution from last summer, when CEO John Carrington told GTM that he was more interested in growing the company and executing its strategy than seeking an imminent exit for investors.

"Good things happen with execution," he said. "By no means is there a 'for sale' sign up in front Stem today."

The energy storage market has grown since then, posting record deployments and revenue in 2019, according to data from research firm Wood Mackenzie. Overall U.S. installations are expected to triple in 2020, on a megawatt basis, and increase twelvefold from 2019 to 2024, although commercial batteries represent a fraction of the overall market.

Increased interest from solar developers only enhances the energy storage growth potential, Russo added. 

"There are a lot of companies that need to decide, 'Am I going to make it or am I going to buy it?'" he said. "We have a 10-year head start."

Those years have given Stem ample opportunity to learn and adapt as the tiny storage market grew to where it is today.

Hitch your wagon to the sun

Stem's latest business model reflects changes both internally and in the market at large.

When Stem launched in 2012, as a rebranding of power electronics startup Powergetics, lithium-ion batteries powered phones and laptops but otherwise had little role in businesses' energy strategies. To sell a vision of actively managed batteries reducing power bills and helping modernize the grid, Stem had to do it all: design hardware, develop and install projects, control the assets with software and predictive analytics, and finance that newfangled product. 

Stem hit the trade shows to talk up the "value stack," the theory that storage can pull multiple revenue streams at once by serving different needs for customers, utilities and the broader grid. The company won contracts with utilities, including a major capacity deal for Southern California Edison, and signed up customers for bill savings in those territories.

Sometimes the company's growth strategies provoked controversy. After California opened up the Self-Generation Incentive Program to subsidize energy storage, Stem won a disproportionate share of a $40 million tranche offered in 2016 on a "first-come, first-served" basis. Scrutiny of the outcome prompted Stem to voluntarily return half of the funds it won in order to resolve the dispute.

The SGIP subsidy evolved and continues to support energy storage installations in California. But regulations to clarify how customer-sited batteries can participate in multiple market roles didn't move as quickly around the country as advocates had hoped. The commercial and industrial storage market largely failed to spread beyond California, which hosted 75 percent of the market in the third quarter of 2019, according to WoodMac. In previous quarters, California held nearly all of the market.

Fellow C&I storage pioneer Advanced Microgrid Solutions responded to these and other challenges in 2018 by recasting itself as a software company. Instead of investing in capital-intensive project development, it would use artificial intelligence to dispatch other people's energy assets for maximum gains.

Stem, too, started talking more about software and AI and less about developing battery projects, but it maintained focus on commercial customers (and entered the larger front-of-meter market). The preeminent challenge in commercial sales, whether for solar or batteries, is a costly and time-consuming customer-acquisition process. Stem found a way around that: partner with the people already selling clean energy to those customers.

California utilities' recent shift to time-based rates undercut the benefit of standalone solar and created a price signal for storing solar generation and releasing it in more valuable evening hours. 

"The biggest solar market recognized that storage wasn’t [just] nice to have anymore but [rather] really critical to maintaining their economic value proposition," Russo said.

Stem began retuning its team to emphasize solar expertise. That transition included layoffs last summer. After years leading the regulatory push to open new markets for standalone storage, Stem cut ties with its veteran regulatory advocates Polly Shaw and Jim Baak.

"I think we kind of carried our unfair share of the water for a long time," CEO Carrington said of that decision in the interview last summer. "Where we need regulatory support, we will certainly continue to invest in that. But we just felt like it was a little more than we could manage as a company this size."

The shift to partner-driven sales seems to be showing results. About 75 percent of domestic business was solar-paired in 2019, Russo said (the large-format Ontario market remains attractive for batteries on their own). The partner network brought in 159 megawatt-hours of contracts with more than 50 companies last year, the company noted.

"Now there are far more partners than we can handle directly," Russo said. "The inflection point is here. We need to be able to scale without scaling our costs."

The largest solar developers still deal directly with Stem as "Premier Partners," but smaller outfits can book storage deals with Stem through major equipment distributors BayWa r.e., CED Greentech and Soligent. That process lets installers acquire all the storage hardware and software through the distributor they already have contract terms with.

Smaller installers can also train in storage expertise and earn certifications from a forthcoming "Stem University."

"You can’t credibly teach the channel to do something if you don’t learn to do it yourself first," Russo said. With more than 1,000 systems in the field, he added, "We think we can credibly teach the best practices in energy storage."

What's the price?

Now Stem's leadership can try to convince a larger company to buy into this vision. The crux of that argument lies in how much value a potential buyer sees in the assets Stem installed and owns, and in its future business prospects.

These are distinct, or at least distinguishable, entities. The old Stem portfolio could make a natural fit for an infrastructure fund, in much the same way that AMS handed off its installed, revenue-generating Southern California portfolio to Macquarie and Susi Partners.

"There’s a ton of capital out there that loves to own these kinds of assets," said veteran cleantech investor Abe Yokell of Congruent Ventures, who has not invested in Stem.

But Stem's newer model of selling technology and services to solar installers poses a different kind of offer, one with potentially higher multiples, because it requires less capital to generate value. The partner network is well timed to offer buyers a different story than the one that earlier investors heard, about the money to be made installing standalone commercial batteries and unlocking those stacked values. 

Those earlier investors contributed more than $200 million in equity investment over the years, culminating in a 2018 Series D for $106 million. The long roster of backers spans venture capital firms like Mithril and strategic partners like Exelon subsidiary Constellation and European utilities Iberdrola, RWE and Total.

"Given the current capital environment, they’ll find a buyer," said one storage industry insider. "It’s just a question of what valuation and how well or poorly the early investors will be treated."

How happy those investors end up depends on the undisclosed details of their term sheets. In any case, Stem will be looking to show it put $200 million of equity investment to work and generated several times more than that in value.

"I wouldn’t be surprised if it was a good outcome: 'good' meaning the investors made some money and the team took something home," Yokell said. "But I wouldn’t call it easy either."

Billion-dollar exits remain exceedingly rare in the cleantech sector, and in the energy storage sector in particular. Battery manufacturer Saft sold to Total in 2016 for more than $1 billion, but then Saft is more than a century old.

Among modern venture-backed startups, commercial storage developers Green Charge and Demand Energy found buyers in European energy companies, but they had raised less money and deployed a fraction of the storage capacity Stem has.

Buyers will have to evaluate Stem without a precise analog, for the very reason that no other company is doing what Stem does at the same scale.