Solstice Power (the trouble with community solar)

So I’m gonna be honest. Today I’m gonna be kinda negative.

The startup we’re looking at today is not a bad company. For one, they’re still in business. And let’s not take for granted that not going out of business should be the single most important goal of any founder.

But despite positive growth (and the fact the business still exists), I want to explain why I think Solstice Power Technologies is a bad venture investment

And then I’m going to explain why I (might) be wrong.

The Power of the Sun (coming soon to a community near you)

So, an introduction. 

Solstice is what’s called a “community solar” company. This is slightly complicated to explain, but bear with me. At the most basic level, it’s a business model based on getting consumers to “subscribe” to a partial stake in some solar energy assets (which aren’t necessarily anywhere near where those consumers live). Because of US regulatory structures, those paying subscribers can then indirectly receive the tax benefits of solar electricity production. As a result, community solar can lower annual utility bills for users by as much as 5-20%. It also theoretically spurs more solar development. So that’s awesome too. 

You can read more about “virtual net metering” and how it all works if you’re interested. But that’s the gist.

Which brings us to an interesting fact about Solstice. It’s also one of the big reasons I don’t like the company:

They don’t own their own solar assets.

Huh? 

As (Capital) Light as a Sunbeam

That’s right, I know what you’re thinking:

 “Luke, didn’t you just say this whole community solar business model is based on Solstice giving tax benefits to consumers for solar energy they produce somewhere else?” And the answer is…not really. I didn’t say that. You just imagined it.

Because the truth is, there’s nothing about the community solar business model that requires a company to actually own their own solar assets.

There are community solar businesses that build, develop, and own their own solar farms. These companies then market community solar to consumers. And distribute electricity savings that way. 

But Solstice doesn’t work like that. They’re just a middle man. 

They connect consumers to existing solar assets built by external developers, owned and operated by third parties. And it might not sound like there’s anything wrong with that. But let me explain…everything that’s wrong with that.

The Problem with Owning Nothing (why I’m right)

Right now I’m sure all of my Saas-head fans out there will be screaming at their monitors that “Not owning the assets is the whole point!” And sure, maybe. There is an argument that it’s better for a business not to own their own assets. Because then they don’t have to raise as much money. Their costs are lower. And their return on capital is higher overall.

Fine.

But that calculus only works if the capital light business is actually comparable to its more capital intensive counterpart. What happens if by taking the physical assets out of your business model, you also remove the only parts of the business that could give you any competitive advantage?

The problem with Solstice’s business model is that they have absolutely zero barrier to entry. All they have is a platform that connects consumers to assets that other people own. There’s no reason another player can’t come in (with a small capital investment!), build a better product, or compete on price, and destroy everything Solstice has built. 

There’s not even a high switching cost for consumers, because ultimately their monthly electric bill still gets paid to the existing utility company. Not too hard for consumers to switch if a better deal shows up in town. 

That’s why there have been several big community solar players duking it out for market share over the last decade. And you probably haven’t heard of any of them. 

Solstice does not have a sustainable competitive advantage. And in the long term they are doomed to fail.

The Sun also Rises (why I’m wrong)

So this is where you probably expected me to say the company is about to go bankrupt. Or at least that they’re hemorrhaging cash and surrounded by hostile competition on all sides.

The truth is…a bit different.

Solstice was founded in 2014. Since then they have enrolled more than 12,000 people into their system. They’ve received 8 rounds of funding totalling ~4.7MM. Most importantly, in 2022 they were also acquired by MyPower, the North American investment arm of Japanese energy infrastructure giant Mitsui.

I couldn’t find anything online about the acquisition price. And I spent far too long looking through Mitsui’s 2022 financial statements to see if I could deduce something about the size of the deal. But in my experience (yes, sadly, I’ve done this before) it’s very difficult to tell how big an acquisition is if neither company wants to disclose it. Particularly when the acquirer is a subsidiary of a Japanese company (which doesn’t use terminology like “goodwill” in its statements) and doesn’t even publish its own disaggregated metrics.

But anyway. 

Those Mitsui statements show MyPower has revenues of 6.4 billion yen (~$43MM USD). With a 6.4X multiple that would make Solstice’s acquirer roughly a 275 million dollar company. From this and their total funding prior to the acquisition, I’d say Solstice was probably acquired for between $20MM and $80MM.

A broad range I know.

But the point is this:  

If you got in early on Solstice, or even if you were one of the later stage investors, you probably made money on this deal. It might not have “returned the fund”, but the partners can notch this as a successful exit. And most importantly, the Founders are both probably sitting on a beach somewhere.

All this goes to show, you don’t have to have a perfect business to be successful.

You just need to find something that works well enough. Grow to a reasonable size. And…get out?

Or maybe all that Solstice shows is I have no idea what I’m talking about. In which case, you should probably unsubscribe. 

But don’t. I’m really starting to like you guys ;)

Until next time. This has been,

The Weekly One Pager