Episode 138: Dave Riess, Wunder Capital
Today's guest is Dave Riess, Co-Founder & CEO of Wunder Capital.
Wunder Capital is a technology company that's financing the renewable energy revolution. It develops software and partners with leading solar organizations and financial institutions to build large scale solar projects for businesses, municipalities, nonprofits, and communities. Founded in 2014, Wunder Capital is the #1 commercial solar financing company in the U.S.
Coming out of undergrad amidst the chaos of 2008 with a degree in electrical engineering, Dave interviewed at SD G&E and quickly realized he didn't want to work in a sea of cubes. He landed at an early-stage tech company in New York and later worked at Facebook in software advertising for big brands. One day, Dave woke up wanting to feel that his work was purposeful. He decided to reorient his career around climate change. Dave was fascinated by the energy ecosystem and took a research job at the Lawrence Berkeley National Lab. While at LBNL, Dave discovered the growth rate disparities in the various solar market segments, and he knew that software could help solve this problem. In 2014, Dave co-founded Wunder Capital and, in 2019, assumed the role of CEO.
In this episode, Dave walks me through his career path and how he got hooked on energy. We talk about Wunder Capital, its initial hypothesis, and how the company has evolved. We also dive into how the solar revolution has developed, Dave's thoughts on the future of solar, and how to accelerate the clean energy transition. I enjoyed having Dave on the podcast!
Enjoy the show!
You can find me on Twitter @jjacobs22 (me), @mcjpod (podcast) or @mcjcollective (company). You can reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.
Episode recorded April 26, 2022.
In Today's episode, we cover:
Growth disparities within the solar segments (residential v. commercial)
How and why Wunder Capital started
The deployment problems that climate tech faces
How capitalism can drive positive social impact
Steve Case & The Third Wave Concept as it relates to climate solutions
How the solar market has evolved in the last 15 years
Wunder Capital's initial hypothesis for the product and value proposition
Commercial solar deployment and the fundamental challenges of crowdfunding
Barriers to commercial solar projects
A conduit versus a marketplace
How Wunder Capital evaluates assets
The lifecycle of a Wunder Capital transaction
Wunder Capital's business model
Friction points when evaluating assets and risk in the solar market
Barriers holding back widespread adoption of commercial solar
Wunder Capital's fundamental revenue contracts
Where Dave sees Wunder Capital in the next 12 months
Dave’s thoughts on a carbon tax
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[Music plays] Hello, everyone. This is Jason Jacobs and welcome to My Climate Journey. [Music plays] This show follows my journey to interview a wide range of guests to better understand and make sense of the formidable problem of climate change and try to figure how people, like you and I, can help.
Today's guest is Dave Riess, co-founder and CEO of Wunder. Wunder is a technology company that's powering the renewable energy revolution. They develop software and partner with leading solar organizations and financial institutions to build large scale solar projects for businesses, municipalities, nonprofits and communities across the US.
I was excited for this one because Wunder Capital is a clean tech veteran and Dave was there from the get go. We talk all about the origin story for the company, how they got going, their initial hypothesis coming in. How the company has navigated the twists and turns along the way? What the capital markets have been like?
How the solar revolution has evolved over the years? Where things are today? Where they need to get to? Some of the barriers holding them back. And what Dave's thoughts are on not only what we could do to unlock solar happening faster, but also innovation, and even more broadly, addressing climate change overall. This is a great one and I hope you enjoy it. Dave Riess, welcome to the show.
Dave Riess: Thanks, man. Thanks for having me. It's good to be here.
Jason Jacobs: I'm psyched to have you. Gosh, I feel like Wunder Capital is kind of an OG in this whole climate tech landscape. It probably wasn't even called climate tech when you guys started working on this?
Dave Riess: That definitely wasn't in our vernacular when we started this. I know, it's wild. We're closing in on our seventh year actually. Been around since the beginning of 2014.
Jason Jacobs: We have a lot of other things to cover besides the company, but as a starting point, I typically just ask guests to talk a little bit about the company and what it does.
Dave Riess: Wunder is very, very simple at our core. One of the things that makes Wunder pretty special is that our mission has never changed since the very beginning. You see in tech, as you probably know all too well, a lot of times companies will enter into a market with some sort of a thesis.
We'll start building, start better understanding the customer. Start better understanding the market dynamics and then we'll quickly find an adjacency that's very, very attractive and they'll pivot into it or mutate the business slightly.
And, you know, seed investors tend to know that, that the thesis you start with at the seed stage is not always the thesis that you're raising against in the [inaudible 00:03:39] stage and later stages. But for Wunder, it's always been exactly the same. And we exist explicitly to crack wide open the commercial segment of the solar market.
So solar, if you look at it broadly, has three segments. Has at the small end of the continuum from a capacity standpoint, the residential segment. And then the very, very big systems out in the middle of the desert. Those would be utility scale systems.
And then the commercial and industrial segment is really everything that sits in between those two ends of the spectrum. If you look at growth rates across solar, we've seen pretty spectacular growth over the last few years. In particular, we've seen really really a lot of durable, robust growth within residential. We've seen pretty durable robust growth with the utility scale segment as well.
And we've seen actually very, very flat growth within the commercial and industrial segment. And so that's really the problem that Wunder set out to solve back in 2014, at the very beginning of 2014. And if you look at the nature of that problem, it turns out that it's actually pretty well understood why there is those disparities within the context of growth rates a, amongst those segments. And really, it boils down to transaction costs.
Where in residential, you've got these really cookie cutter transactions. Really, really simple risk evaluations to be done in that context. I can elaborate on what that looks like, at least at a high level. And it's a type of transaction that you can rinse and repeat pretty readily.
And then at the utility scale in the continuum, you've got these very, very big transactions. 50 million dollars and up. And those are ... That's a type of infrastructure investment that Wall Street knows how to do. It's called project finance.
And those transactions get done relatively readily as well. In the middle of that is where you find a lot of challenges, where you need a lot more bespoke underwriting. You need a lot more bespoke structuring. Bespoke financing, et cetera. But you don't necessarily have that 50 million dollar deal size to absorb all of those transaction costs. And so fundamentally, that's why we exist is to break open the commercial segment of the market and drive dramatic growth within that segment.
Jason Jacobs: And what's the origin story of the company? How did you guys come upon picking this market and picking this entry point?
Dave Riess: If we go way, way back in time, you know the early part of my career. Because my background is in electrical engineering. And as an undergrad, I was really interested in energy broadly.
And coming out of undergrad in kind of the midst of the '08, '09 chaos, I thought I wanted to work at a utility. And so I started interviewing at ... I was in California at the time. So I was interviewing with some of the investor run utilities out there.
I ended up doing an on site interview at, I think it was SDG&E. And it was this kind of sea of cubes that I was walking through and it was just not the sort of environment that I was excited about getting into. One thing led to another and I ended up taking a job at an early stage ... It was actually a Union Square Ventures backed company. It was an early stage technology company in New York.
So that kind of just thrust me out of the world of energy and into the world of technology. I was doing electrical engineering at the time. And started doing some software. Ended up spending a large portion of my early career developing software. One thing led to another and I found myself basically advertising technology for big brand advertisers on Facebook.
And one day, I woke up and realized that that's really no way to spend your life. You can argue about the relative merits of doing that sort of work. But I can certainly say with confidence that I wasn't waking up in the morning with a belief that I ... The work that I was doing was having a dramatic, positive impact on the world.
And so, I kind of took a step back from that. And this is sort of the beginning of my journey, if you will. And started to think about how do I want to allocate my career really from an impact standpoint? And what I came up with was pretty simple.
Ultimately, what I came up with was this observation that I like working on really, really hard problems. And so if you're going to work really hard on really hard problems, it stands to reason that you should work on the most important problems. And so I started to think about well what is the most important problem? And I think that there is some room for debate here. And I can provide my analysis of that.
But fundamentally, I think, at its core, the most important problem is energy. And I ... The reason the most important problem is energy is ... Is, of course, climate. All of these other ... But you can argue about health care, education, these sorts of things. Social justice is very important as well.
But at the end of the day, if we don't have a planet to live on, we're kind of screwed. And so that's kind of the foundation of my journey and sort of where I started off into this.
And so as I looked forward in my career, I recognized that while I had kind of followed the energy space as an outsider, I had a lot of views that I had developed from that outside perspective. And I wanted to try and validate some of those perspectives by basically pressure testing them against insiders.
And so I wanted to put myself in a position to get much better access to insiders who have an in depth understanding of how the energy ecosystem works. And so where better to go than a research lab? So I basically went to Lawrence Berkeley National Lab and I convinced them to hire me as a researcher. I was like the only person who had a graduate degree there.
And it was a fascinating experience. Incredibly smart people working very hard on very technical problems. It was at the lab that I got access to a lot of really, really interesting thinkers in the energy space. And it was a very, very thought provoking time. And it was also at the lab that I started to encounter some of these dynamics that are present within the solar market still today.
And specifically, it was at that time that I ran across this disparity in terms of growth rates across the various segments of the solar market. And when I saw that problem, I recognized that that is exactly the type of problem that software can solve. This is some form of the commercial lending problem, which I wouldn't characterize commercial lending challenge as having been totally solved. But there are folks who have taken pretty significant cracks at it.
On Deck is a good example of a firm that really focused on mobilizing and ... And building software for the purposes of unlocking credit for the underserved middle commercial market.
And so I thought this is really a place where we can play in software and have a huge impact on ... On climate by accelerating the deployment of renewables within the segment of the solar market.
Jason Jacobs: You mentioned outside of this discussion that the mission really hasn't changed over the years. What about from an execution standpoint? Looking back, now that you're many years in, what were the assumptions that stand out to you that maybe didn't turn out to be correct and that was surprising to you with the benefit of hindsight?
Dave Riess: One of the things that has been a really profound lesson that we've learned through our empirical experience building this company is just the adoption rates associated with these types of asset classes within the capital markets.
Ultimately, the reason that this opportunity is a really exciting opportunity and ... And, I guess, you could actually say this much more generally for ... And I think maybe this is a topic to come back to, but the deployment problem. Which is to say that we've got a lot of the technology that we need to solve our climate challenges. We really need to deploy it.
And when I think about that sort of archetype or problem, really what I like to think about is how do you harness the power of capitalism for driving positive social impact? If you can align those two things, you really have a magical recipe for driving dramatic and rapid change. Which is, of course, the goal, given that we have a ticking clock.
When we started this business, we recognized that we had a chicken and egg problem. We recognized specifically that what we were doing at our core is trying to bring to the capital markets a new approach to evaluating transactions within this segment of what, at the time, a relatively esoteric asset class.
And in order to raise significant capital, you need to have a track record of deploying capital. And in order to have a track record of deploying capital, you need to have raised capital. And so there was this sort of conundrum that we had to solve. And I can talk about how we solved that problem.
But it, what's become a lot clearer in the past few years as we've navigated this, is just the importance of how these asset classes weather market cycles. The importance of seasoned portfolios. The importance of literally just having reps at this approach. And it's kind of an interesting dynamic, particularly coming out of the world of pure bred technology development.
If you're familiar with Steve Case and his third wave concept. Like second wave technology businesses where you have this premise that is founded on being able to drive unbridled growth. Right? You really don't have that in this dynamic. You kind of have to put in the elbow grease. You're going to have to run that process. You have to generate the reps in order to build the credibility that you need to establish a foundation upon which you can build dramatic scale.
Jason Jacobs: Pre-Wunder Capital, if a C&I company wanted to explore going down the solar path, what options were available to them?
Dave Riess: Most of the transactions that were happening within the early days of Wunder, before Wunder existed in the context of commercial, were largely cash transactions. So to give you kind of simplistic example, it would be like Google seeking to go deploy a bunch of PV assets on, let's say, their data centers or some of their offices or what have you. Where they've got extraordinary access to capital. They have huge amounts of cash on their balance sheet themselves.
And so for them to deploy some of that capital to build this infrastructure is not a crazy decision for them. If you take that to the bulk of the market which is your much smaller commercial enterprise, even if that's a enterprise that's got a 50 million dollar top line or something well below that, you've got a very, very different dynamic even if you have the cash necessary to make that type of investment. It's an investment that's so non-core to those businesses that those investments tend to not get made.
And so there are a very limited and finite number of PPAs and other sorts of structured finance products being deployed within the commercial market. And that's still largely true today. I mean we still are seeing a C&I, if you look at the growth of this market, really over the last five years, it's been quite flat. At least based on SCIA data.
And that's really the dynamic that we are still fighting and we're still setting ourselves up to really solve that problem in a ... In a big way.
Jason Jacobs: Looking at that landscape where there weren't a lot of options, what was the initial hypothesis for the product and value proposition that Wunder could bring to bear to help address this and unlock this market?
Dave Riess: So the very, very first value proposition was actually trying to identify pockets of capital that were oriented around communities where we could enable specific communities to invest in themselves. So we recognized that there was, fundamentally, an access to capital problem for this segment of the market.
And originally, at the very outset of the business, we were interested in seeing if we could build a platform that enabled us to raise funds from some specific county or city for the purposes of deploying commercial and industrial assets into that city.
We ran into a number of challenges there. Some of which were just fundamental challenges related to the nature and constraints associated with crowd funding. And others were just from like a scale standpoint, there was kind of an obvious problem there. Where it's like you don't obviously have an adequate pool of available capital in a given market where there are the most opportunities to deploy those sorts of assets.
That was kind of the first thesis. And then that evolved into our more broad based crowd funding model which was really the first version of Wunder. Where we spent the first, basically, three and a half years of the business building up our crowd funding enterprise. And that was our solution to that chicken and egg problem that I referenced earlier.
So that was the way in which we developed our track record, such that we were able to get access to much, much larger institutional investors. Some people are shocked to find out that we are no longer a crowd funding platform. We still manage a significant number of investments that we raised during that era of the business.
All of our early investors who backed us on that journey, as noble as it is to democratize solar investing, our goal is ... Is climate. Our goal is carbon emissions reduction. And so we recognize that in order to have a huge impact on our domestic carbon emissions curve, you're really talking about mobilizing billions of dollars of capital to deploy infrastructure.
And if you're talking about capital in those quantums, you really have to be talking about the institutional capital markets, because somewhere around 80 plus percent of the world's capital is managed. So in order to get access to those or to check sizes, you got to be talking to institutions.
Jason Jacobs: Well, with the business as it sits today, if I described it as a marketplace that was connecting the big institutional capital with the solar projects in the C&I category that fit the profile that they're looking to invest in, is ... Is that an accurate way to describe it?
Dave Riess: I would say that's relatively faithful. That's pretty close to the mark. I use a slightly different word because I think marketplace is pretty heavily loaded, but I would characterize us as a conduit for capital. Fundamentally, what we're looking to do is we're looking to dramatically increase the velocity of capital flow into the segment.
And ultimately, there are some specific activities that we're undertaking in order to facilitate that. But yeah, at the end of the day, we are looking to connect folks who have an appetite to deploy capital into this sort of massive class with actual assets that they can, in fact, deploy funds into.
Jason Jacobs: And what is the difference between a conduit and a marketplace?
Dave Riess: A marketplace, in my mind anyways, takes two categories of actors and tries to, simply, enable them to transact, right? If you think about whatever ... Use your Craigslist model. You've got a buyer and a seller or something like that. For us, being a conduit means taking a much more active role in the transaction.
One of the reasons that this problem exists is while there is a significant amount of appetite to deploy capital into the commercial segment, there isn't a lot of opportunity to do so.
So there are a lot of assets that are being developed, but they're being developed by a very, very, very large number of highly fragmented developers who in and of themselves are doing a fantastic job of building these portfolios of assets.
But what you end up with when you zoom out on this ecosystem is a flow of assets, of seeking to get into the capital markets, wherein those specific assets ... And when I say asset, I'm really talking about a specific solar system. So I'm ... So I'm talking about like about a rude cop system somewhere. Uh like on some office building or on some manufacturing facility or whatever.
When you're talking about that asset and it's a highly heterogeneous population of assets that's flowing to Wall Street, for lack of a better term. And that's problematic because each one of those investments, that rooftop system on a warehouse, is something in the order of maybe half a million dollars to a couple million dollars.
And if I'm an investor on Wall Street, I think to normal people, this sounds crazy, but 100 million dollars is a small investment. 150 million dollars is a small investment. Like these investors are looking to mobilize hundreds of millions of dollars at a time. There's huge amounts of capital that needs flow.
And if ... If you need to be able to diligence these transactions a million dollars at a time or $500,000 dollars at a time, the unit economics just don't work. You don't have enough horsepower on your team to be able to do that type of work.
And so what you need is a much more homogeneous or standard set of assets that flow into your portfolio/ So that you can diligence them, you can evaluate them on kind of a more sort of sampled basis. Or you can otherwise reduce the overhead associated with actually making sure that you're deploying that capital into the type of asset that you think you're deploying it into.
What is the equipment? What is the maintenance contract looks like? What are ... What does your site control look like? What is your revenue construct?
Those are the types of things that you have to evaluate on a one off basis today. And that's the dynamic that Wunder is seeking to change. So we're seeking to be much more of an agent in that process where we're driving higher levels of standardization into the generation of these assets such that we can increase that velocity of capital flow.
Jason Jacobs: And I would imagine it starts out from a Wunder standpoint being very manual, kind of hand to hand combat. And then over time, you find different pockets of processes that you can remove human steps and automate. And then that ... There's kind of a slider that over time, you get more scale because ... Because the machine is doing more and because the humans are doing less. One, is that a right way to think about it? And two, where are you in that journey today?
Dave Riess: When we think about this process, I like to reference the approach that [inaudible 00:19:37] uses to evaluating gigantic data sets. Really that approach is an outgrowth of the PayPal fraud detection model. And that fraud detection model was one of the first very, very, very successful human augmentation approaches where you're looking to build software and infrastructure not to eliminate your humans from the PayPal case, the fraud detection process. In our case in the transaction process. You're simply looking to make them dramatically more efficient.
So you're exactly right. In the first deal we ever did, it was highly manual. It was all Excel. Custom contracts. All this stuff. Over time, we standardized all sorts of aspects of that process. And have brought a high degree of standardization and rigor and consistency into the way that we're evaluating risk.
Now what we provide ... Our internal infrastructure at Wunder provides dramatic support for essentially evaluating transactions within the commercial industrial segment. There's a lot more to be built. So in terms of where we are in that continuum, I think it's still the very, very early innings. We've just begun to scratch the surface. But we've already arrived at a place where we can transact cost effectively in this market.
Jason Jacobs: Can you maybe give an illustrative example of a cradle to grave process for a customer and just touch on the key stakeholders and how Wunder engages and what the steps are to go from maybe that first point of engagement to when a transaction has been completed?
Dave Riess: There's kind of two categories of how this happens. I'll talk about the dominant category today. That's more a reflection of where the market is. And then I'll talk about the second one which is a little bit, a more of a reflection of where we're looking to drive the market.
So in terms of where the market is today, generally speaking, I already spoke about the way in which the actors within this market are highly fragmented. You've got really a lot of developers out there pursuing ... Uh, the development of these transactions. Which generically results in ultimately this wide range of different types of assets with different sorts of contracts and those sorts of things, arriving at the doorstep of the capital market seeking funds.
When the beginning of that transaction starts, you've got a developer market who, generally speaking, starts with some kind of site control or some type of energy customer.
Jason Jacobs: And developers separate than the C&I customer themselves so it's really ... There's the developer. There's the C&I and there's capital? Are those kind of the three key stakeholders?
Dave Riess: That's correct. As you would imagine, if you want to get into the weeds, there's ways in which all of those lines blur. But broadly speaking, that's accurate. I'll keep things simple here. There's a couple ... Well, I'll digress for just a second which is that ... There's sort of like two fundamental revenue contracts.
One is where the developer is signing up some sort of energy customer. Where the reason the energy customer is signing up is because they're buying power from this future system at a rate less than what they're going to pay the utility so there's a savings a proposition.
The other construct is what I call a program driven construct. And so this would encompass things like community solar where the developer is basically selling into some sort of a programmatic market.
And so, in that former case, the developer is going out and obtaining the customer. Maybe it's let's just call it a warehouse where they're saying to that warehouse owner, "You're paying 12 cents a kilowatt hour today. I can sell you power at nine cents a kilowatt hour or whatever that rate is. And if you allow me to site this system on your roof, I can deliver those savings to you." So that's kind of construct one.
And construct two is one where the developer is basically going out. Like in Minnesota, what'll happen is the developer will go out to like a farmer and say, "Hey, farmer, we're going to pay you for your land if you allow us a site an array there." The farmer signs up for that 'cause there's no really downside. They're not using the land. Maybe [inaudible 00:23:08] or something like that.
And then they're selling that power into some type of market. And so in Minnesota, that would be traditionally the community solar market that exists within Minnesota.
And so those are kind of the two rough constructs. And as the developer forms that transaction, gets the various interconnection requirements. So refers to the way in which that system connects up to the grid. The various building permits, electrical permits, designs, et cetera. All that stuff.
If it's a grand mat system, environmental studies to make sure that it won't disrupt the habitat there when they site the system. That's kind of the development process. That's what it takes to get this system to a point where I can actually be built.
And traditionally, that's when financiers starts to come in. So financiers come in all along that path, provide capital at early stages of development, later stages of development. We've brought construction capital, operating capital once the system's built and online. And that's kind of roughly how that ecosystem operates.
Jason Jacobs: Getting comfortable in that process is hunting and pecking and picking up the phone here and faxing information there. And manila folders and it's a lot of kind of blocking and tackling. Whereas if they work with you, the benefit is that it's all kind of teed up in a way that's organized, structured, digitized, easily accessible. And that's both for the project they're evaluating, but also for all the projects so that they can figure out more efficiently which projects to evaluate?
Dave Riess: That is exactly right. So Wunder does all of that work in the context of the financings that we do. So we do all of the underwriting. When we talk about underwriting, for those who aren't familiar, that's like a fancy word that investors use to talk about risk evaluation. We are going out to ... Basically most of our interfacing happens with the developer traditionally. We're talking to that developer. We're acquiring all the information. We're asking them a bunch of questions. Asking for more information.
And the first step in our process is about codification of that. So we are ingesting that information to our system. We have a process that we use to do what we call establishing the veracity of that information. So making sure that everything we have is correct and substantiated by underlying evidence.
And then that information passes through a data pipeline where it's transformed basically into a form factor that our credit and underwriting team uses to evaluate risk. And we pass that information into a ... Basically a risk evaluation template. We render our assessment.
And then this whole thing gets bundled up, packaged in a way that gets delivered to the capital markets in a really, really consistent manner. So we've delivered a relatively high degree of consistency there. Going back to this point about velocity being the name of the game. Velocity is how we actually crack this market.
There's a huge amount of friction in that diligence process. It's quite challenging. And we have some partners who we've worked with extensively, know exactly what information we need and we can get a transaction done in the space of a few hours or a few days.
But a lot of times what happens is there's a bunch of back and forth. Maybe we find that there's a missing signature there or that there's a mis-drafted documented there. Or that there's a missing document. And those are things that need to go back and remediate.
And those places of friction are fundamentally, at their core, the things that have inhibited dramatic growth within this space. And so those are ultimately the things that we're looking for solutions to and we're trying to drive higher levels of standardization throughout the entirety of that contracting process.
Jason Jacobs: And then what is the business model?
Dave Riess: The business model is to sit on top of a gigantic volume of transactions. If you look at the business model in the context of our lending business, what we do is we generate revenue on the basis of fees that we charge our borrowers to originate their transactions.
So we get ... Charge basically ... You can think of it as like a success fee on every single loan that we place. We have other aspects of our business where we're looking to take a more active role in these transactions. And that model is a little bit different and it kind of depends on what the long term owner of this asset ultimately ends up being. But generally speaking, there tends to be a number of different models through which we can extract the economics that we need in order to function as a business from those transactions that we facilitate.
Jason Jacobs: The projects that you represent, is there exclusivity or can they go out and try to find, uh, capital to fund those projects through other means as well?
Dave Riess: Generally speaking, our borrowers are able to go pursue whatever capital they want to. The reason that people work with Wunder is because we can provide a much higher level of execution certainty and a much a higher level of speed than any other provider in the space. And there's a lot of transaction archetypes that there are very, very few firms that can service and we are ... One of the reasons that we can service transactions that banks or other types of financial institutions can't service is because all we do is commercial solar.
And so we are domain experts in these markets. And that allows us to do underwriting that is at a level of sophistication that is well in excess of what a commercial lending group could reasonably be able to achieve if they don't understand the intricacies of a given program in a specific state or something like that.
Jason Jacobs: From a capital outlay standpoint, it's contingency or success based so that there's no fee that's paid to Wunder unless there's a project that is funded successfully, correct?
Dave Riess: That is generally correct. There's a couple of archetypes of lending that we do that require a lot of ... Pretty outsized amount of upfront work. So something that we've done increasingly through 2020 is provide capital at the very, very early stages of project development.
And those types of financings tend to be a little bit more tailored to the needs of a given developer which necessitates us doing a significant amount of upfront work before we actually get to the point at which the loan can be funded. And in those cases, we generally require an upfront fee to make sure that people are committed to the transaction so that we're not spending several weeks putting together an offer that ultimately doesn't see the light of day.
Jason Jacobs: Give us a sense of what kind of traction the business has seen to date?
Dave Riess: So we've facilitated over 400 megawatts of asset development at this point. And so that ranges from transactions where we're providing the permanent capital, so the capital that funds a transaction through its operational phase. Uh, transactions where we've provide the construction capital. And then, increasingly, as I mentioned in 2020, we've been providing capital at much earlier stages through the development portion of the life cycle.
And so we've been growing pretty consistently at minimum of about 2X annually. Been a couple of years where we've outpaced that. It is the type of thing where we're seeing dramatically increasing traction as we continue to expand our capabilities and expand the number of segments within the commercial segment that we can service.
Jason Jacobs: In terms of sources of capital, so I mean it seems like you guys have raised hundreds of millions of dollars, but one thing I wanted to just get clarity on is it seems like there's kind of an equity portion of that which is probably a much smaller amount. And then the rest of that capital, including maybe some of the more recent announcements, is that actually capital that's coming into the business? Or is that essentially Wall Street capital that's looking to be deployed in projects that's committing that they'll deploy up to that amount if they find projects they like? Or how should we think about the capital, or the funding history of Wunder and how to think about the those dollar amounts?
Dave Riess: Generally speaking, you hit the nail on the head. There's traditional ... Our pseudo traditional venture style funding that provides funding to our operating company for us to be able to build the software that we need to build in order to facilitate these transactions.
For us to build and grow our team, that sort of thing. We completed our series B in April of 2018. To have gone through a number of rounds of funding there. The consistent capital formation activity exists on the asset side of the equation.
[inaudible 00:30:29] We need to have at all times, as a financier, we need to have capital at all times to be able to apply into the space. And broadly speaking, the shape of those transactions has historically been what we would refer to in the capital markets as a forward flow arrangement.
And so that is a capital partner coming to the table and forward committing to purchase some amount of volume. And generally, those transactions have what we call a credit box that defines the types of assets and the types of risk that that party is interested in taking. And then our origination team goes out and seeks to originate to that credit archetype.
Jason Jacobs: When you think about the competitive landscape, so you ... You mentioned that the C&I growth has still been relatively flat. I don't know if you think about it this way, but do you think about the percentage of those transactions that are occurring. Like what percentage of them Wunder is powering and what I'm trying to get at is when these transactions happen, where are you guys from a penetration standpoint and is your competition other providers that are doing similar or is DIY still the most prevalent way that these transactions are getting done?
Dave Riess: I would start by saying that the commercial market that we know today is not the commercial market that can or should exist at least within the United States. Which is to say that the opportunity within C&I is truly staggering. It's really, really a vast opportunity, both to deploy infrastructure, but also to have a really profound impact on our domestic carbon emissions posture.
If you look at, going back to kind of my commentary on ... On the types of transactions that are happening today, if you look at a large part of what's happening in this domain between residential and utility scale, it's really dominated on a capacity basis by what some might refer to as municipal scale or very small utility scale.
So those are like seven, eight, 10, maybe 15 megawatts style systems. And then also what I would refer to as program driven markets. So program driven markets, to give, uh, you examples, I mentioned the Minnesota community solar program. A very successful program. Hundreds of megawatts in scale.
Massachusetts Smart program, also hundreds of megawatts in scale. New York VDER program is another community solar program in New York, also hundreds of megawatts in scale. Maine has a successful program. And the list goes on.
And there are these kind of regions that have these programs that have been instated to support the development of renewable assets in those markets. And I think the thing that a lot of people miss is that all of those sorts of programs are really very, very small drops in the bucket in terms of the broader market opportunity.
So they're good. It's a ... I'm glad they're happening. People are making money building those systems and we're getting solar deployed. And it's helping us come down the cost curve and come up the experience curve and it's really a positive thing.
But I do think it causes people to lose sight of the fact that there are 5.6 million commercial rooftops, most of which are addressable from a solar standpoint. Very, very, very few, like a fraction of one percent of those, have actually been addressed.
And so that's the opportunity that we're going after. And really at the end of the day, that focus on that opportunity is the thing that sets us apart because we're just very uninterested in building a healthy business doing a 100 megawatts or 200 megawatts a year or 300 megawatts a year.
We are in this to build gigawatts of capacity because that's what the opportunity is. That's what the world needs. And that's really the hard problem to solve. So a lot of times, I think the about the fact that we are doing the thing that needs to be done, not the thing that's easy today. And ultimately the future that we build, if we're trying to build an exciting future, is a byproduct of people doing just that. Doing the hard thing instead of the easy thing.
Jason Jacobs: So it sounds like the opportunity is to go from that kind of one percent penetration of these projects in C&I to the other 99% to get to a 100% of course. And my question for you is you mention friction as a big barrier, is that the whole story? Or are there other things that are holding back that widespread adoption? And if there are other things, what are they and how big a role do they play?
Dave Riess: You could call this friction, right? But there is one other headline item that is really challenging within the commercial space. There's basically two big categories. We talked a lot about transactional friction. And that's all the diligence stuff that I mentioned. It's all the getting contracts dialed in and really consistent. And making sure that you've got durable site control and locked up permitting and all of these sorts of things.
The other major challenge is a customer acquisition challenge. Within C&I, what a lot of people refer to as the stakeholder challenge. And the stakeholder challenge is that in the context of like a home, generally speaking, your homeowner will pay for their power. Makes sense.
In the context of a commercial property, that's often not the case. It's often the case that power is actually rolled into the lease payment. And so you've got an entity that is consuming power, which is actually different from the entity that is paying for that power. That is the stakeholder challenge and it represents a relatively meaningful challenge as it pertains to getting broad based penetration into this market.
And I think that's still one of the major outstanding items that's unsolved in this market. We have some hypotheses about how to go about solving that. I think given where the market is from a scale standpoint, we've got, uh, just a huge amount of headroom to grow before we really bump up against that in a really, really meaningful way. There's a lot of opportunity to deploy systems within context where that problem is less acute.
But in order to get to that full penetration, or at least a very, very large percentage of that market, this is a problem that's going to need to be solved. And I think we definitely need more smart people thinking about it.
Jason Jacobs: I'm going to go out on a limb and say that your biggest priority as a business is probably, and correct me if I'm wrong, driving more transaction volume through the system?
Dave Riess: Yeah. The way that I think about it is kind of like a trifecta. The end goal is unequivocal scale within C&I. In order to achieve scale, we need to be able to achieve transactional velocity. So it means we need to increase the volume that we're able to process on a given day or a given week.
And in order to be able to drive that velocity, our premise is that we need to be able to deliver a much higher level of standardization than the market has been able to deliver historically. So standardization begets velocity. Velocity begets scale.
Jason Jacobs: So now ... And so given that those are the levers that you want to push on over the longer term, what does that mean tactically if you look at, say, the next 12 months? What are the key milestones as a company that you're driving towards? And then where are you prioritizing the team's time and attention?
Dave Riess: This kind of speaks to the various modes of transacting that we cover internally. So 2020 has been a tumultuous year for the C&I market. It's been really, really positive in some respects. It's been really, really challenging in other respects. And one of the things that we've seen is really protracted delays within the entirety of the market.
And so we've seen ... Have huge reverberations for the types of capital that we can deploy and when we can deploy into projects. And it's put a lot of developers under a lot of strain because they get paid when these projects get completed generally speaking.
And so they've got huge deferrals on when they're actually going to see revenue. And so that's, you know, changed these dynamics and kind of scrambled the eggs a little bit.
But as we look into the next 12 to 18 months, really we're focused on kind of ramping up our lending volume over that time period. We're looking at bringing some new capital into market that's going to allow us to access some new opportunities and provide us some opportunities to work with some new actors that we haven't historically been able to work with because of various capital structure points.
And then the other thing that we're doing is we're increasingly taking a much, much, much more active role in the development of these assets. And so we're starting to work with our partners in less of an arm's length fashion, and more of kind of a tighter partnership arrangement so that we can provide insight to those actors about what types of features of these transactions really need to be standardized from the get go in order to be able to facilitate high velocity and capital flow.
And so that's a big shift. To synthesize it, it's really a shift from being a taker of transactions to being sort of a facilitator of transactions or being an actor in market that's able to influence the shape of the ultimate asset that reaches the capital markets downstream.
Jason Jacobs: One of the things I've heard Brian, your co-founder, talk about before is in the early days of Wunder, fundraising was difficult. And I'm just curious why you think that was? And whether that difficulty, was it warranted? Was it that you were going after one source of capital when there's another source that's a better fit for this kind of business? Maybe do some self reflection and some, um, enlightening on how me and a listener should think about the lessons learned from that experience?
Dave Riess: The first thing I'll say is that I think we're seeing the environment change quite a bit. I think there is a lot of equity capital, venture and otherwise, that's really interested in being deployed into this space.
So I definitely think that the environment has improved since we started the company. In terms of why it was difficult early on, I would attribute a large portion of that to the hangover from the oughts. So Solyndra is kind of the poster child for this. But there was a lot of money, a lot of venture money, that was lost during this boom of investment within clean technology in the ... In the mid to late oughts.
And I have actually a pretty strongly held position on why that happened. And I think my view on this is that the reason venture was quite unsuccessful in that endeavor, in investing in green technology during the oughts was specifically because they were trying to model energy using disruption patterns that had been learned within software.
So if you are a subscriber to the innovator's dilemma, which one of my favorite Clay Christensen books. Basically, Clay Christensen provides an academic explanation for how disruption patterns occur.
And basically what he describes in the dilemma is that the way a new entrance into a market that has very, very limited resources is able to dislodge a large incumbent that has gigantic resources is by, essentially, cherry picking a really small niche within a given market with a new, innovative technology.
And by penetrating that small niche with a technology that, generally speaking, is inferior to the incumbent technology on every single dimension, except for maybe one or two differentiators, they thereby penetrate that niche. They come generally down the cost curve, up the technology performance curve and pretty quickly arrive at a place where they have a technology that has reached parity with the incumbent. And all of a sudden, they can start to compete with that large incumbent for their core market share.
And at the early innings of that, the incumbent is un-phased by ceding this small niche market to the new entrant. That is a pattern that has, in literal textbook examples, are hard drives, this is happened. In [inaudible 00:41:18] solid state storage. In telecom this has happened. Steel mills is a literal textbook example of context within which this has happened. This happened all throughout technology.
It doesn't apply to energy. And the reason that it doesn't apply to energy is because first of all, there are no niche markets. There is only the energy market. The niche market within energy is like off grid cell phone towers and there's just very few of those.
So even if you penetrate the entirety of the off grid cell phone tower market, you haven't taken any type of a meaningful bite out of the broader market. And because energy is a entirely feature-less commodity.
So the only feature of energy that matter is price. That's the only thing that matters. And so, I think when you look at this from a venture standpoint, yes, you can deploy capital into the development of innovative technology, but really it's a deployment challenge.
And it goes back to that prompt at the beginning which is how do you harness the power of capitalism for driving the deployment of these sorts of assets? That's kind of the question that we're working with.
So anyway, I think in long winded version of the answer here, but I think that it was that sort of understandable intuition to apply disruption patterns from outside of energy to energy that essentially failed in the oughts that led to a bit of a hangover within at least the Valley, but kind of pretty broadly within the venture investment community to investing in renewable and green technology that kind of like swept up everything. It was this sort of like storm cloud that hung over the space for a while.
Now I think that's starting to clear, but what I hope happens this time is that venture investors realize this dynamic and recognize the risk that you take in investing in hard technology development. It's very, very different developing core technology and within energy than it is with like a database.
You can invest in core technology. Developing an E-database technology can be more expensive as long as it performs better. It's got faster queries and certain contexts that are ... Can penetrate some type of niche market. Graph architectures or whatever it is, there's a lot of ways in which you can compete in that market.
Within energy, you've got it ... Really from the jump be looking at unit cost of power. And if you're not able to undercut coal. If you're not under ... Able to undercut these really, really, really cost effective mechanisms for generating power, you don't have a market. And that's just the hard truth of the matter. It's really, really brutal economics.
Jason Jacobs: Well, given that, if you could wave your magic wand and change one thing anywhere that is external and outside of the scope of control of Wunder Capital that would help unlock the C&I solar market so that you could go from that one percent to 100% which more than one percent pushing towards 100% which would help companies like Wunder and the market overall in the process, what would that be?
Dave Riess: I think the very, very easy and maybe not that exciting answer potentially depending on who you ask is you got to price carbon. If you're pricing an externality, it is a no brainer. And that's the world that we're headed towards where when we ... So when we underwrite systems today, we underwrite to savings. So we don't finance systems that don't make economic sense.
So if somebody wants to put solar up for a vanity project because they want to feel good about their environmental impact but they're going to pay more for that power, we actually can't finance that.
Jason Jacobs: What percentage of the ones that want to do it, just ball park, does it actually make sense? Is that a small percentage or it most?
Dave Riess: It's most.
Jason Jacobs: Well if that's true, then why does carbon matter if you're already at a point where most makes sense today?
Dave Riess: That brings me to my next point which is that it makes sense, but the savings are like 10 to 20%, something in that neighborhood generally.
Jason Jacobs: So it makes sense, but it's like not enough sense that it's worth dealing with all the BS as it relates to the friction?
Dave Riess: Yeah, there's at least a case to be made that it's like well, 20%, that's nice. And if you're ... If energy, if you're like a cold storage facility and energy is a huge cost for you, it's like okay, that makes a lot of sense.
But if you're a warehouse and energy is like not something you really think about month over month, it's like yeah, we could save 20%. But I could also like put the phone down and take an early lunch. It depends on who you ask. And that's where I think we're going ultimately is we're ... I mean, the ... One of the most exciting things that continues to be prevalent within solar is the precipitously declining costs.
Those are gonna to continue to come down. And we're gonna get to a point, regardless of whether or not carbon gets priced, where the value proposition gets to the point where it's like what the hell are you doing if you haven't deployed solar? Right? If you're saving 60, 70, 80%, at that point, it's like come on, you know, you're ... You're having management teams and boards of directors saying, "Why are we spending so much on energy? We're throwing away money. We really need to be making this investment to get access to this lower cost power."
And so that's the world that we're getting to. But we get there a lot ... So I would say, it's kind of one of two things. What'd be nice is just to eliminate subsidies on hydrocarbons. If we could just do that, that would have a huge impact. Better would be to actually price in the externalities. And if we could do that, then it would just be like absolute slam duck and we would have a trillion dollars of infrastructure, and I mean this literally, deployed in the space of like three to five years, I think.
Jason Jacobs: Is it fair to say that most of the Wunder road map and focus is around reducing friction? And that your bet is that the cost and the savings side of equation will be taken care of through some combination of continued innovation in things like storage as well as future policy?
Dave Riess: I would restate it slightly. I think that's right. But I would say that our view is that the value proposition is good and getting better. The primary inhibitor to dramatically increasing growth rates is friction and so that's really why we're focused on reducing that friction.
And if you think about it, reducing that friction actually does reduce, essentially, the capital cost of these systems. It just strips cost out of actually building these things. And by stripping costs out of building these things, you actually improve the value proposition to the end customer.
Jason Jacobs: It sounds like you live, eat, sleep and breathe C&I solar which makes sense given that there's only one percent penetration. And so there's a lot of future upside there. If you were not focused on C&I solar, do you see any other markets that have similar characteristics that you think a company like Wunder could go and slay if Wunder wasn't already booked doing C&I solar?
Dave Riess: You mean outside of energy?
Jason Jacobs: Or adjacent areas of energy. You might say wind or you might say something crazy. I don't know. So I'll ... I'll leave that up to interpretation. If C&I solar were either a solved problem or took Wunder public because you already made it so. Or someone just said, "You're out of here, Dave, and you need to got ... Go find something else to do." And you were going to take what you learned here and apply it somewhere else, what are the markets that would be most exciting for you on the surface?
Dave Riess: The lessons learned here really apply to places where there is what I would characterize as a deployment problem. Where we have the technology that we need and we just need to accelerate deployment. One of those places is storage.
And there's a lot of flavors of storage. We're looking at doing ... Doing some work on storage. I would love for us to do more storage financing. It's also a fundamentally more complex asset than is a PB asset. A solar asset is pretty passive. It kind of sits there. It generates power in a pretty predictable way.
But storage is lots of ways in which to monetize those systems. Lots of different control systems. Lots of different value propositions associated with those. And so I think the same type of dynamic is present there as well where we have most of the technology. It's still a little pricey.
But I think with the proliferation of EVs in the next two to three, four years, we're going to see those prices come down dramatically. And it's going to very quickly arrive at a point where this is going to be just a fundamental deployment problem where the technology is ready and needs to deployed. And what you need to be able to do is mobilize 10s or 100s of billions of dollars in order to get stuff out to market.
So I think that's definitely a place to focus. To answer your question maybe a little bit differently. I think that there is a topic that's near and dear to my heart. I'm always like really, really excited when I get to talk to somebody about this particular topic. And it has to do with the architecture of our energy infrastructure.
So everything that's exciting, that's happening within energy, as far as I'm concerned anyways, is distributed. It's about putting new types of energy assets very very close to the load. So in homes, in various buildings. Even on the grid, but located within the distribution network rather than in the transmission network.
If you think about this from like the perspective of a network engineer, and you look at the architecture of our energy infrastructure, it's really important to zoom out and recognize that this infrastructure is over 120 years old. And it's fundamentally based on a centralized command and control system.
You can kind of assert otherwise, but the presence of the independent system operators or a [inaudible 00:50:21] or what have you are proof positive that, at the end of the day, this is really a centralized system. And centralized systems have a fundamentally finite ability to scale. Right?
That sort of an architecture of an infrastructure is really incompatible with dramatically expanding complexity. And so I think when people think about this problem, most people immediately start to think about micro grids.
Micro grids are also centralized command and control where you've got a centralized brain that basically orchestrates the coordination of a bunch of energy assets. I think something that's really, really interesting and that I'd love to see more people working on. Basically, nobody is working on this. At least not that I know of. If anybody out there is working on this, please let me know, I'd love to talk about it, is the concept of energy networks.
If you look at, for example, the internet architecture. The fundamental reason that the internet is, theoretically anyways, infinitely scalable is because the intelligence is pushed out to the grid edge or the edge of that network. So the intelligence resides at that nodes.
And I think that there's an opportunity to build something similar within energy. I think it's incredibly audacious. I think it's incredibly hard. But if you want to talk about building an energy infrastructure on Mars, what does it look like? Probably a network. Probably not a grid.
And I think that is a reason to believe that there are ways to dramatically cost reduce the actual poles and wires that connect all of these energy assets together within the United States. And even if you just constrain it to Earth more generally. And I think there's a huge opportunity to explore some of that domain. I think it's a very, very unchartered territory.
Jason Jacobs: My last question to bring it back around to a Wunder standpoint is, is there ever a day when we should not think of Wunder as a C&I solar company? And if so, how many years away is that? And what will you look like at that time?
Dave Riess: When I think about the, the end game for Wunder. When I think about what it is that we're seeking to do, I really think about our role in this market as being one that is characterized as a catalyst. We're here to catalyze dramatic growth. And a lot of people talk about, ask me about exit strategies. And I'm really not that focused on ... I'm focused on the problem. I'm focused on building Wunder to a place where I can get on a plane and fly into LaGuardia or fly into Oakland or fly into LAX and I can look out the window and I can see the hundreds and hundreds of acres of commercial rooftops plastered with solar.
In those markets, the reason solar does not exist on those rooftops today is specifically because the financing and transactional infrastructure is not there to be able to support those systems. It's important to recognize that when you fly into LAX and you look out the window and you see very, very, very few solar systems on those rooftops, the energy in those buildings is expensive enough to justify solar. I.e., those building owners would save money if there were an array on their ... On their roof.
And so you ask yourself the question, why is there not an array on that roof, and it's generally speaking related to financing and transaction cost. And so that's really what we're here to do. And I think that there's a number of directions that ... That can lead the company. But in our role as catalyst, I could see us emerging as very, very large scale asset owner.
But ultimately, where we're focused today is on getting that conduit and dramatically increasing that velocity of capital flow. And so right now, that suggests that we should occupy a slightly different position, but I do imagine that that position will evolve over time.
Jason Jacobs: Is there anything I didn't ask you that I should have or any parting words for listeners?
Dave Riess: If I have any parting words, I think it's that, in particular in the context of energy. And I think energy is really at the core of our climate challenge, but in the context of energy, the energy market is very, very simple. And that people are really very, very quick to assume that the energy market is a complicated market. All these stakeholders, all this regulation. All this interplay between various different types of entities.
At the end of the day, it boils down to a very simple economic value proposition. And so I would encourage people to really go after this space very, very aggressively with that simplistic mindset and look for opportunities in that space. The reason that we're going to see dramatic change within the energy landscape is because people are going to ask the why don't you just questions which are my favorite questions.
And I think within those questions resides really a lot of truth. So I think that there's a huge amount of value in the beginner's mind. I.e., people from outside this space coming into energy and asking those why don't you just questions. Understanding the way the system works today, but not accepting those status quos. Right?
So it's about rejecting best practices and perceiving them instead as common practices. And challenging a lot of the assumptions upon which our energy infrastructure operates today.
Jason Jacobs: Awesome. Well, I learned so much in this discussion. And it was a lot of fun as well. So Dave, thanks so much for coming on and being so generous with your time. And the information that you shared and wishing you and the Wunder team every success. What you're doing is awesome. And hopefully that one percent can grow aggressively in the years to come. And I'll certainly be watching and cheering you guys on. [Music playing].
Dave Riess: [Music playing] Awesome. Thank you, Jason, I appreciate the team. It was fun talking to you.
Jason Jacobs: [Music playing] Hey, everyone. Jason here. Thanks again for joining me on My Climate Journey. If you'd like to learn more about the journey, you can visit us at myclimatejourney.co. Note that is .co not .com. Someday we'll get the .com, but right now .co. You can also find me on Twitter at jjacobs22 where I would encourage you to share your feedback on the episode. Or suggestions for future guests you'd like to hear.
And before I let you go, if you enjoyed the show, please share an episode with a friend or consider leaving a review on iTunes. The lawyers made me say that. Thank you.
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