Upgrading Energy Equipment for 500+ Million Square Feet of Office Buildings with New Software Solution — Tom Arnold, CEO of Gridium
Led by CEO Tom Arnold, Gridium aims to reduce the carbon intensity of the built environment with energy efficiency solutions ranging from software optimization to deep retrofits for commercial and industrial real estate providers.
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What does Gridium do and what makes you unique?
Gridium is the leading partner for companies looking to navigate the energy transition. We provide useful software that enables companies to manage energy more effectively with the equipment they already have. In the last year, we have expanded our offerings to help companies upgrade their existing equipment to increase operational efficiency while reducing carbon impact. We service about 3,000 commercial buildings and about a half billion square feet of office space.
It sounds as if you have made the transition from being a pureplay software provider to now also being a financing partner for equipment upgrades. Is that right?
That is correct. We have always had an interest in energy efficiency financing, but there had not been the policy mechanisms to make it a viable business model. That has changed recently with some developments in the utility landscape that enable financing for non-credit entities, such as commercial office buildings. This is what our new product called Gridium Alpha is all about.
It sounds like there may be some similarities between the work that Gridium does and the solar sector, where residential and utility scale projects are pretty easily financeable, but commercial and industrial projects have been a little tougher to fund. How have you gotten your financial partners comfortable with this risk?
If you look at any city in America and see the high-rise apartment or office buildings, you are looking at billion-dollar assets. However, none of these assets, as incredible as it may seem, are credit rated. If the asset is not credit rated, you cannot do the typical ESCO model which is needed to finance a retrofit at this scale. We were able to figure out a financial solution that has enabled us to do ten million dollars of deep energy retrofits in the last year or so. I am not talking about 5% energy savings that you might get from our software solution; I am talking about 30%, 40%, or 50% energy savings from a fundamental transformation of the building.
What was the transition from serving customers with the software solution that provided the 5-10% savings to the more aggressive retrofit approach that enables the 40-50% savings? Am I right to assume that many of these customers, whose trust you had won, were beating down your door to get access to this kind of deep retrofit solution?
It made a lot of sense, but as with most things in business, there was certainly some luck as well. We started with the foundational premise that software was the starting point for measuring the savings on a 15-minute basis, thereby allowing a company like Gridium to prove the value to the building and grid operators, which enabled the transaction to occur. We were working with a team at another company that had the engineering but didn’t have the software solution, and whose company was undergoing an executive transition. As such, we ended up consummating a deal that brought this team in house, and then we launched Gridium Alpha to bring the entire package to market. I think the broader lesson may be that it takes a long time to earn the trust of commercial partners, but once this trust has been earned, it provides a lot of operational leeway to address other problems that these customers may be facing.
From my experience in energy efficiency in private equity, there seem to be numerous potential roadblocks that often hold up these types of large energy efficiency transactions, but it sounds as if Gridium is starting to gradually reduce these where the velocity of project finance can be accelerated.
Yes, absolutely. One of the largest remaining roadblocks is the “split incentive,” where the entity putting the capital into the project (i.e., the landlord) does not get the payback from the actual energy savings (which often goes to the tenants). This is because most real estate holding firms are pass-through organizations. But policy innovation has begun to address these by cleverly allowing the right parties to capture some of these savings. In this sector, many transactions end up getting whittled down, where you’ll go to a prospect with the “three-piece sofa and the fancy lighting,” and you end up with a “used lazy boy” (chuckling). However, when you get the financing and technology right, that is not the case, and most of our projects actually increase in size, scope, and depth of savings as we progress. Once you have the model right, it just works.
That seems to be a trend I’ve noticed in investment banking transactions and in my experience talking to entrepreneurs through this TORCH climate CEO interview series, where a company starts by solving a very specific headache for a client, but after an initial demonstration period where trust is earned, that client quickly begins to ask if they can solve other problems that they face and be more of a turn-key provider. Is that something that you have noticed as well?
Yeah, exactly. It takes time, but the long term rewards are worth that initial investment in the relationship and doing things right.
What is your personal backstory more broadly prior to Gridium?
I really got my start working on both climate change and project management at Terrapass, an early leader in the carbon offset industry. Many people may be familiar with the bumper sticker aspect of the business, which we largely used to fund our projects, but we really had to get our feet dirty, often traveling to dairy farms to convince farmers to do a better job of managing manure and using carbon offsets as the activation mechanism to get this done. So, in that way our energy efficiency work with Gridium Alpha is very familiar but less smelly (chuckling). I was trained as an economist, and then went immediately into the tech industry working on the broadband buildout. While I was in graduate school, I fell in love with the idea of using my career to drive the change I wanted to see in the world, and here we are.
How do you measure and communicate your contribution to tackling climate change?
Our guiding North Star is carbon. It is the crisis that we all really care about. Even if you are not motivated by the climate crisis, it is the gravity well that guides policy creation, so it’s the right measure for our business on both fronts. Beyond carbon, we also care about our customer’s financials. For most of our customers that own and operate real estate, we are primarily concerned with net asset value.
What does Gridium look like in 5 to 10 years?
I do not think anybody would dispute that we are undergoing a massive energy transition. Gridium’s mission is to be the partner for organizations trying to navigate and benefit from that energy transition. Right now, this partnership primarily takes the form of software and consequent insights regarding how to best capture energy savings. Everybody gets excited by solar and storage, but demand response resources and their potential are absolutely massive and are starting to fundamentally transform utility economics and everybody in the electricity supply chain. Our goal is to be the turnkey partner, capable of providing the software, complexity management, financing, and implementation of an organization’s energy needs.
To what degree is your financial success tied to a customer’s realized savings. In other words, is incentive alignment built into your contracts?
On the retrofit side, our payment is directly tied to a customer’s savings. If we can’t save you energy, we make less money. Our incentive is to go as deep as possible and save a customer as much as possible. On the software side, it is roughly similar. For commercial real estate contracts, fundamentally we have to deliver value on day 1, because most of these contracts are easier to cancel than Comcast.
How have you funded your company for growth? Do you have any tips for listeners looking for the right kind of capital?
We took a round early on from Navitas Capital and Travis Putnam, a partner there. Navitas is the leader in investing in the built environment. They have been fantastic and patient partners. We purposely did not raise a lot of money, with this first round being $3.4m, and a couple of extensions on that for a total of about $5M. We have a much higher penetration and growth perspectives than our competitors that have raised $20-25M. It is important to recognize that the amount of capital raised is not everything. We have always been cognizant of where the business is in its growth cycle and consequently how to best use available capital to grow and progress. The best capital is non-dilutive capital that comes from customers, in other words, sales.
I think the notion that significant market penetration can be achieved with a relatively small amount of capital may be counterintuitive. Can you expand on your approach?
We have been patient. One corollary of an industry in which it takes a significant amount of time to acquire customers is that you cannot spend your way to growth. It takes patience and demonstration of value to achieve the customer base that Gridium has achieved, and frankly raising more money is not helpful in this process.
Do you have any insights regarding entrepreneurship and perhaps the hidden struggles that are often masked by the perceived overnight successes?
I do not think entrepreneurship is right for everybody. It is a very difficult journey. I will say that picking something you are passionate about is absolutely critical because you are going to get knocked sideways time and time again. I think one of the things that makes climate entrepreneurship a little easier is the fact that you are getting knocked sideways while progressing towards something that is personally meaningful. The knowledge that your work is contributing to a positive outcome is something that is personally very important and also something that motivates many of the people that do the hard work of making Gridium successful.
Do you have a book, a quote, or a podcast that you’d recommend to others?
I am just finishing a book called the Overstory by Richard Powers. It is kind of interesting that as my career has progressed, I have started to read more and more fiction. Powers is a masterful storyteller and cuts to the core of some of the emotional issues involved in our relationship to nature. I really can’t recommend it enough.
As far as a quote, I would recommend the Teddy Roosevelt quote regarding the Man in the Arena. I think as an entrepreneur and for anybody that may be considering entrepreneurship or be in the midst of it, it is very difficult but important to avoid the tendency to anchor yourself on the rejections and negative feedback that you will inevitably receive. This speech by Roosevelt does a good job of explaining the value of those who strive to try something different.
For a podcast, I am going to plug one that is produced by a team member at Gridium, called Finely Tuned. The podcast has many different guests and focuses on the built environment, from scientists discussing their latest research to the recent trends in commercial real estate. Whenever a new episode comes out, I look forward to listening to it on the bike trainer.
Do you have a final message for other entrepreneurs in closing?
I think the central struggle of entrepreneurship is one of perseverance, to get back up when you get knocked down. Most entrepreneurs are fatally early because they see something when others don’t, and they believe that they will make it happen. So really the struggle is to stay alive and be alive by the time the market transforms. Gridium is a lesson in that. We are seeing really strong growth post-Covid, though that is something that was not apparent to me early on. Many commercial real estate owners are anxious to capture operating cost savings, and also improve their buildings as there has been a flight to quality in the commercial real estate market. Nonetheless, we have only been able to capture this tailwind because we were able to persevere long enough to see it come to fruition.
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THE TORCH is an interview series from Entrepreneurs for Impact. We profile CEOs and investors mitigating climate change. Our goal is to highlight their work and inspire others. As we deal with multiple crisis, from Covid and racial injustice to climate change and economic recession, we need some of this positive light in what seem like dark times. Onward and upward.