The world has paid a lot of attention to electrifying transportation over the last decade. Hell, five EV infrastructure companies have gone public or in the process within the last six months and a total of $6.2B was invested in public and at-home charging during 2020.(Source 1). But compared to vehicles, which represent just 24% of the worlds CO2 emissions (Source 2), buildings represent 39% (Source 3). And they are seldom mentioned. Why is that?
Well, they’re a harder problem to solve.
Cars, unlike buildings, are relatively simple. They are produced in assembly lines - commoditized at scale for the masses, by a list of companies that you can rattle off in under 30 seconds. Swapping out the underlying components may require science, investment, and time, but is achievable within the same market structure.
Buildings by contrast are quite unique. They could not be more inefficiently produced with a more complex and crowded value chain. Each is its own ecosystem – architected with a distinct purpose, and then inhabited and re-inhabited by people who almost certainly had no relationship to that initial purpose. We expect buildings to outlive cars by a factor of 10-20x. Some buildings outlive entire civilizations. We poke holes in them without asking, rip and replace their systems without first reading instruction manuals and treat maintenance as a complete afterthought. By-and-large, we barely understand them even though we spend 93%4 of our time inside of them. I challenge you to walk into the boiler room of your house or office – these are complicated places. It’s not because you’re stupid; it’s simply because your building is complicated.
And now, amidst the complexity, and under the weight of 39% of the world’s emissions and trillions of dollars of operational savings potential, the call for buildings to change has come. I will spare you information that you can easily find elsewhere on the global legislative push and increasing granularity on the economic opportunities of our built environment. The short story is that an explosion of data coming out of buildings over the last decade is leading to transparency and a strong, obvious call to action. Carrying on…
Unlike cars, that were able to change within their existing market structure because auto companies are so large and dominant, this simply isn’t possible for the equipment manufacturers who supply buildings. They don’t have the same chokehold on the market, because the value chain gets so messy in the middle. Customers and service providers are fed up, and have shown strong willingness to find workarounds. Hence, buildings… and the legacy companies that serve them… are… F#%&ED.
Yesterday’s hot mess of a market structure…
Tomorrow’s clean, efficient market structure…
Today, we’re somewhere in the middle. That’s what makes working in this space so exciting.
Some of my favorite parts of where we’re going…
Closed systems that even attempt to protect their own data will become obsolete, along with the companies that sell them. This is why you have seen Honeywell rush to release Forge, Johnson Controls rush to release OpenBlue, etc.
The incentive misalignment between capital markets, real estate owner, real estate operator, service provider, tenant, and regulator is disappearing. Historically, there has been no data to provide transparency as to what the true costs of efficiency are, or its impact on energy use. Now that there is accurate and available data – and everyone’s goals are generally aligned (use less energy, spend less money), it is finally possible to get all swimming in the same direction.
In the building efficiency space, there has always been a disconnect between controls solutions and energy solutions. Energy solutions have largely failed to integrate well with controls and as such, almost all have failed to scale. In the future, they will. We (reaching here in definition: regulators, building operators, the world, etc.) can’t fix that problem until the two sides of this market are aligned. Above, they are.
Many real estate owners don’t care about nor understand their boiler rooms, other than to have gratitude for their uptime. Outsourcing ownership can provide an owner credit stability, cost stability, and operating reliability. As such, HVAC will benefit from becoming a standalone infrastructure asset class. This broad asset class creation might take ten years, but call Keyframe if you want to try to help make it happen in 5!
This is why I am so excited about Keyframe’s recent investments in this space and their alignment with the above market structure. Empowering the right set of leaders to apply pressure in just the right way, and the customer and world might just come out the winner. So far, we believe that we’re working with all of the right leaders in this market.
You can read about them here (each name is linked to an article)…
PassiveLogic: incumbent controls architecture has failed to enable data to get out of, or more importantly, back into, the building. When technologies claim to apply “machine learning” in buildings today, in my opinion, they are lying. In the new market structure, with PassiveLogic and similar cloud-native controls architecture in place, these sorts of solutions will finally have their opportunity to make an impact.
Buildings IOT: there are dozens of building systems that fail to coordinate effectively with one another due to a perpetuation of proprietary data protocols that have benefitted incumbency. Buildings IOT’s Jetstream middleware platform is informed by nearly sixty years of designing, monitoring, and maintaining controls and their underlying systems. This depth of experience has positioned them to give building operators the ability to fully outsource the complexity of this function in turnkey contracts. They are a new breed of highly tech-enabled emerging service provider, a Master Systems Integrator (MSI), and the unequivocal market leader in this category.
Aquicore: getting data out of the building and understanding it in both real-time and on a longitudinal basis gives building managers an opportunity to detect faults (aka actively manage down operating cost) and identify long-term savings. Aquicore provides the tools for various building stakeholders to use their data to initiate project workflows to realize these savings. This became even more important as building operators struggled with low occupancy during COVID, and in a post-COVID world is beginning to pull away from the pack.
Turntide Technologies: motors consume unnecessary amounts of power because they are simply inefficient. And they’re all over buildings. Simple retrofit projects with new, proprietary technologies can rapidly scale if they have strong paybacks and fit with the new world of open data architecture and the controls interfaces required to help a building continue to maintain its core functions.
So are Buildings F#%&ED?
Absolutely. They are a hot mess. It’s going to take a lot of leadership, courage, and technology to fix decades of dysfunction, but above are few of the companies already taking action. And we’d love to hear from you if you want to be a part of the crowd taking action as well…
We are continuing to pursue opportunities to back great management teams in this market. Some examples of what we’re digging into already are listed below – but I’d also love to hear at ben@keyframecapital.com about the ones we’re missing!
Lowering the friction cost of CapEx retrofit
Turnkey services
Point hardware solutions that scale at a portfolio level
Energy services offers that deeply integrate with open controls architecture
We have launched an investor-only forum in partnership with James Dice at Nexus. We’ll be hosting meetups for other leading investors across the various investor types who focus on building operational and energy efficiency.
Join us! https://unlockbuildings.carrd.co/
We are looking for an MBA intern to help administer this forum. You’ll get to meet every investor in this space. Send me an email at ben@keyframecapital.com if this interests you.
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Sources:
BloombergNEF, “EVs Make Ever Larger Mark in Public Markets”
International Energy Agency, https://www.iea.org/reports/tracking-transport-2020
International Energy Agency, https://www.iea.org/reports/global-status-report-for-buildings-and-construction-2019; Note this calculation includes the emissions related to building materials and products such as steel, cement, and glass.
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The above is a comprehensive list Keyframe’s investments in this industry. Each was previously disclosed by the company, and Keyframe is not making any disclosures in this blog post about its portfolio – only highlighting how previously available information relates to its market views.
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