Nothing excites our readers like the scent of money wafting toward cleantech.
So it was bound to lead to chatter when, last week, SparkSpread reported that commercial storage pioneer Stem was accepting bids for acquisition. Don’t take it from another publication’s anonymous sources: I confirmed with Stem Chief Revenue Officer Alan Russo that the report was accurate. (Check out the story from Monday, which details the new pitch Stem is making for its growth potential.)
This news is worth taking a moment to process. Stem is one of the highest rollers among venture-backed storage companies, setting aside the EV battery companies, which operate in a very different world. Stem's last round, 2018’s Series D, netted $106 million, and it raised more than $200 million in total equity investment. Project finance facilities brought in another several hundred million to put batteries in the ground.
With more chips on the table, Stem will either pay out bigger or flop harder than anyone else in the sector right now.
Furthermore, Stem helped pioneer the conventional business model for commercial energy storage, which bundles bill savings for the customer with revenue from utility or grid service. This value stack says a lot about where the grid could be headed: If private energy investments can make the overall system cleaner and more efficient, that unlocks a golden age of prosumers and decentralized, democratized energy, et cetera, et cetera.
A competing theory holds that the cost of customer acquisition for small commercial batteries outweighs the thin margins that small amounts of capacity yield, rendering the proposition unattractive outside of subsidized markets, namely California. For empirical evidence of this argument, look to the companies that launched with this business model and have lately run away from it.
Stem remains as bullish as ever about its prospects, but many sharp storage observers take the opposing view. Informed disagreement makes the outcome all the more intriguing.
That’s why this week in Storage Plus, we’ll scrutinize the new sales strategy Stem is touting to fuel its growth and compare its prospects heading into a possible acquisition with other recent storage exits. Stem has little in common with any of them, but the forerunners can shed some light on the process even as Stem forges its own future.
Stem's strategic pivot
As it prepares to receive bids, Stem isn’t talking about its classic product: modestly sized batteries installed in commercial properties to predict and neutralize demand charges. Instead, it’s talking about commercial solar.
The company has firmed up sales partnerships with dozens of commercial solar installers that want to offer batteries to customers but don’t have years of experience dealing with the technology. Stem even worked things out with major solar distributors BayWa r.e., CED Greentech and Soligent to let installers order through them, simplifying the process of adding storage.
Most crucially, this setup means solar installers do the expensive work of identifying and selling customers, and Stem provides those installers with a layer of hardware and software to enhance their projects.
This taps into macro trends: The New York and Massachusetts markets are heating up for solar-plus-storage, and utility tariffs in California undercut standalone solar but incentivize the time-shifting that batteries unlock.
Incidentally, the brisk business on the solar side means Stem can talk about something besides the prospects for standalone commercial storage, that thing it used to sell directly.
The commercial demand management battery market has stubbornly refused to grow beyond the borders of California, which subsidizes it. The commercial storage segment has never shown persistent growth from quarter to quarter the way the direct-to-consumer residential segment has for the last couple of years. And it lacks the heft of the utility-scale segment, which will catapult to tremendous growth in the coming years as utilities start building a slew of megaprojects.
Stem remains excited about standalone storage in Ontario, Canada, where a potent form of demand charge has compelled large industrial facilities to buy large batteries — as big as 10 megawatts, which is unheard of for commercial customers in the U.S. Stem also branched out into front-of-the-meter storage in New England.
I’ll leave it to My Esteemed Readers to debate if this constitutes a pivot. Stem never definitively said it was ending the old business model. And it never gave up on the core energy storage technology driving its operations. If commercial solar installers start clamoring for your expertise, why not satisfy them?
But what would Stem be talking about if the solar channel play hadn’t fallen in its lap at the right time?
That pivot, or strategic shift, or what have you, will color the terms by which Stem negotiates a buyout.
It raised more than $200 million to develop, install and operate a fleet of commercial batteries; it reports 1,000 systems contracted or operating, adding up to a total of 400 megawatt-hours. That’s a capital-intensive business, expressed in a made-up but illustrative metric: For every $200,000 of equity investment, Stem built or contracted for one commercial battery system.
Now Stem bills itself as an AI-powered software specialist that makes AI-powered software that does things with battery hardware. That reformulation conjures vistas of scalable products and recurring revenues, the sorts of things investors salivate over. But would a company launching today to write software for 1,000 sites need $200 million?
That's a counterfactual, because there wasn't a commercial storage industry to supply code to when Stem kicked off; it had to do everything to create projects for its software. But buyers today will have to take that fundraising history along with the shiny modern software business.
An open question is what the different identities mean for a buyer. Plenty of infrastructure investors like buying and holding assets that produce dependable revenue, but they’re not the same folks who like making high-multiple bets on software companies. We also don’t know if the whole fleet of projects is Stem’s to sell; that depends on the arrangement with its earlier finance partners.
Here are three recent storage acquisitions that differ from Stem in notable respects but help establish some baselines for how a deal might go.
You could call this the greatest grid storage exit of all time, but it’s also a special case.
Saft manufactures a whole lot of batteries, from airplane batteries up to bulky stationary storage for the electrical grid. French energy giant Total — also a Stem investor — bought the company for $1.1 billion in 2016.
Stem also started out as a hardware company, but that was a means to sell the storage service; it doesn’t have loads of recurring hardware supply contracts to speak of for its future revenue. And Saft had a head start, having launched in 1918.
This company started with a business model very similar to Stem's: installing small storage systems at commercial sites. But it adopted a different path stylistically, taking a more modest level of investment and project finance, parceling it out for respectable growth and selling an 80 percent stake to an industry incumbent, French energy conglomerate Engie. That happened in 2016, when commercial storage was an even smaller market than it is now.
Founder Vic Shao didn’t disclose the sale price, but he did say at the time that “investors definitely made money.” We know that the Green Charge fleet totaled roughly 48 megawatt-hours in operation or under construction. And the company had raised a few significant rounds, including $56 million from K Road DG in 2014 and a $50 million non-recourse debt commitment from Ares Capital.
This exit sufficiently proved Shao’s reputation as a founder that he landed seed funding as soon as he decided what his next startup would be (hint: It doesn’t rely on storage).
This was one of the best exits, depending on who you talk to. This software-focused storage integrator built itself up a few rounds of modest venture capital investment, then sold to Finnish power giant Wartsila in 2017. CEO John Jung attests that he raised $34 million in early-stage funding and sold for $170 million. Turning VC money into five times more money is good news in the cleantech sector; the sale price reportedly doubled the startup’s previous valuation.
Greensmith has since become one of the more active storage acquisitions. It’s hard to know what some of these companies are doing these days, but Wärtsilä trumpets a new storage or hybrid plant integration on the regular.
The problem with comparing Stem to any of these companies is that they all sold in 2016 or 2017, well before the energy storage market had hit. Still, a few patterns emerge.
All these companies sold to European energy giants: Total, Engie, Wärtsilä. Add in Demand Energy, which sold to Italian utility Enel. Grid evolution moved faster in Europe, and those conglomerates wanted in on distributed storage controls. They got it, even as the companies were still relatively small and the broader market hadn’t thought to pay attention to the sector.
For Stem, this means several likely buyers already have the capabilities they need, and they got them for much less cash than Stem needs to be able to claim success.
But times are changing, and more capital is opening up to clean energy. Stem could look for investment firms that weren’t willing to take the risk four years ago, pushing hard on the argument that it’s the established market leader, offers low risk and is deserving of a generous valuation.
If someone buys the argument, this could be a historic cleantech exit. If the new solar story doesn’t sell, well, we’ll learn just how much runway Stem has to play with.