Solar leasing company SunRun has emerged as one of the leaders in a white-hot solar market — and it started just three years ago as an idea in the minds of two Stanford business school students.
The company has managed the rapid rise by devising a clever financing model where everyone seems to win. Residents pay less for electricity, SunRun makes a profit, and the earth gets greener. And going forward, SunRun looks perfectly poised to keep exploiting the growth of the American solar market, which is projected to explode some 30-fold over the next decade. With revenues of its own growing three-fold a year, the company could be on its way to a classic success story of Silicon Valley entrepreneurship. It’s a tale punctuated by smart finance and strategy, as well as surprising endurance in the face of a brutal recession.
The brains behind SunRun’s business are cofounders Ed Fenster and Lynn Jurich, who met at Stanford. Both had significant experience at finance in their previous careers; both are confident number crunchers. But in 2007, they found themselves at Stanford University kicking around for the next great idea. That came when Nat Kreamer, a high-school friend of Fenster’s, returned from serving in the war in Afghanistan with a vision to launch a company in alternative energy.
Sponsored by VB
The three of them became intrigued with SunEdison, a fast-growing company founded in 2003 that was delivering solar power to utilities. By 2009, the company would sell for $400 million, an impressive exit for such a young company. Even back in 2007, though, the SunRun founders knew they were on to something: “We looked and said, ‘Oh, interesting, they have really no competition,'” Jurich said in an interview.
So the three decided to do SunEdison one better. They pioneered the idea of leasing solar panels to residential homes, starting with houses where electricity prices are the highest. The three made it dead simple for consumers to install solar on their homes — by allowing them to do it for zero money down. SunRun would handle the financing of the up-front installation itself, as well as repair and maintenance over the ensuing 20 years of a contract. Consumers would simply pay SunRun a monthly bill comparable to, or in most cases, cheaper than their original utility bill — using an innovative financing model that took advantage of federal and state subsidies.
The rest of the story has been one of steady execution. (We’re going to be hearing more of that story next week at GreenBeat 2010, a conference for green technology entrepreneurs and executives, which takes place at Stanford University. Co-founder Ed Fenster will be speaking about the “Rise of Distributed Solar,” on a panel at 1:30 p.m. on Nov. 4.)
So for now, the outlook looks bright for SunRun, at least from the outside — although the company won’t comment on how much money it is making on each home it finances. Much of its fate depends on subsidies. SunRun, like competitors who have launched similar offerings — SolarCity and Sungevity — earns a profit on these 20-year power purchase agreements with tenants. But it can usually only earn a profit if it can earn enough subsidies from municipal, state and federal governments — and so the trick is to do the hard math to figure that out where it can do that.
Thanks to subsidies, SunPower can sometimes sell electricity profitably as low as eight cents per kilowatt-hour. In some cases, it can make money even without subsidies. Without subsidies, it can sell at 30 cents. And here there’s still a market worth $3 billion, Jurich estimates.
Solar power offers the prospect of a cleaner environment, but solar system installations are expensive. They’re usually more expensive than the power most houses get from dirty fossil fuels. According to SunRun, the average solar installation costs $35,000. So rather than sell solar to a broad market, the company cherry-picks states where solar power prices can compete with traditional electricity sources. In California, for example, residents pay three times what commercial entities pay for power. So SunRun has focused on residential units there.
SunRun’s advantage is that it has hired financial experts who know which markets to target. In addition to subsidies, state permitting and other regulations also play a role in raising or reducing costs. That’s why SunRun’s rollout is currently limited to Arizona, California, Colorado, Hawaii, Massachusetts, New Jersey and Pennsylvania. As permitting processes become more streamlined, Jurich said she expects further cost cuts.
SunRun has come a long way from 2008, when the financial crash almost killed it. The three founders had thrown their own money into the business but still needed a lot more cash to get it off the ground. SunRun’s business required significant long-term financing in order to take on the solar contracts. However, in mid-2008, the nation’s leading financial companies were starting to founder. The cofounders visited a number of venture firms to get some initial backing, but most firms insisted that SunRun would have to line up some financing credit before they would invest. It didn’t look good. “When we saw the market crumbling, it was panic,” Jurich said. “We had no business without raising the project financing.”
In a stroke of luck, a long-sighted venture capital firm, Foundation Capital, decided to back SunRun with $15 million, in June 2008 — amazingly, right before Lehman Brothers crashed in September and completely destroyed the confidence of most lenders. Foundation’s backing was a godsend, but SunRun still needed to raise hundreds of millions of dollars from the credit markets. “It was just devastating,” recalls Jurich of the time, adding that there were plenty of “dark moments.” Somehow, in November — at the depth of the crisis — SunRun’s founders managed to secure $100 million in financing from U.S. Bancorp. “We just showed up at their offices and charmed them,” Jurich says of the multiple desperate meetings at the time.
Part of a growing market
The third co-founder, Nat Kreamer, has since moved on. Jurich and Fenster now run the company and have hired 75 employees. They’re doing their best to stay up with market growth. The U.S. residential market is expected to see 44 gigawatts of installed solar capacity in 2020, from just 1.4 gigawatts today, according to a recent report from Bloomberg Energy Finance. Most industries double in seven years if they’re lucky. SunRun’s business itself is growing three-fold a year right now, and could grow faster — if things keep going its way.
Indeed, the nascent residential solar market is still very tiny. About 80,000 U.S. homes have solar roofs, far less than one percent of the 126 million homes in the U.S. But residential solar should grow to 2.4 percent of U.S. houses by 2020. In the majority of cases, residents with solar panels choose to buy them directly from installers rather than tapping into a leasing company like SunRun. Right now, SunRun has only 6,000 customers.
But it’s catching up quickly. Solar power service agreements, of the type SunRun and its competitors offer, took up 21.5 percent of all new California solar homes in 2010, or double the 11.2 percent they claimed in 2009. In California, which makes up half of the nation’s solar market, the non-leasing solar homes grew 19 percent this year, while SunRun claims it is seeing 300 percent growth.
Money in hand, surging forward
Clearly, the co-founders’ finance background is a key part of the DNA that has made the company successful. It’s instrumental to SunRun’s ability to raise capital: SunRun claims to be the only home solar company that has had an uninterrupted stream of project financing. Fenster worked at Blackstone, a leading private equity group that raked in profits by making smart bets on which companies to buy out or invest in then flipped them for vastly higher amounts of cash. Fenster says he helped complete more than $10 billion worth in deals. Jurich previously worked at venture capital and private equity firm Summit Partners, where she says she worked on investments worth $900 million in technology and financial services.
Because SunRun’s business model involves contracting with local installers and Home Depots, its entire model hinges on project financing. SunRun announced yesterday a new round of financing with U.S. Bancorp; it has also raised $300 million in project financing from U.S. Bancorp and PG&E. The company has raised $85 million in venture capital from Foundation, Accel Partners and Sequoia Capital.
Armed with cash, SunRun has surged ahead. In California, which is half of the nation’s solar market, SunRun leads with 55 percent of market share for 2010, according to the California Solar Initiative. But SolarCity and Sungevity have chipped away at its lead. SunRun’s market share of solar power service in residential markets is down from 62 percent.
“It’s not easy maintaining 50 percent-plus in a competitive market,” said SunRun spokeswoman Susan Wise. “In fact, it’s natural for market share to dip slowly over time as new entrants join the market — Sungevity and other small entrants were able to nick away a bit of share.” She said SunRun is still two times larger than the nearest competitor.
There are other positive signs for the company — lately, Chinese solar panel manufacturers have been growing stronger and getting cheaper, challenging American solar panel makers. It’s good news for SunRun in a market where panels are a big part of cost. Half the cost of a SunRun installation goes to panels. “As the Chinese panel manufacturers make cheaper and cheaper high quality equipment, that really helps drive consumer adoption,” Jurich said.
SunRun has also been looking for other ways to expand its reach. It has teamed with homebuilding company Toll Brothers, which is building houses with SunRun systems pre-installed. Through Home Deport, SunRun gets additional exposure to potential customers in Colorado, New Jersey and Pennsylvania.
If you listen to Jurich talk about the company’s future, you’ll notice she sounds like Microsoft founder Bill Gates when he promised to put a PC on every desk. For SunRun, it means putting solar on every roof: “Our company mission is that every homeowner should have a choice of clean energy in their new home,” she says.
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