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What You Can Learn from Clean Power Finance's $37M Round

Venture capital investors these days favor startups that are involved in the retail side of the solar business. The latest evidence of that trend comes from Clean Power Finance, which said on Monday that it had raised $37 million from investors such as Edison International.

San Francisco-based Clean Power Finance develops sales software and licenses it to installers. It also offers leases and power purchase agreements that installers can market to homeowners who sign long-term contracts to get solar electricity. The leases or power purchase agreements are funded by banks, solar equipment manufacturers and other investors, and Clean Power Finance is managing those financing products financed by investors such as Morgan Stanley and Google.

There are two takeaways with this announcement. One is that traditional energy companies are taking a greater interest in the solar service sector. Edison owns utility Southern California Edison, which does business in a state that runs a large residential rebate program. California is also setting policies that favor smaller solar energy projects including those built to sell power to utilities, which won't require expensive transmission lines and are closer to the cities they serve.

Clean Power Finance, in its press release, hints that there is one or more energy companies that put money in this round, but it's not allowed to publicize it. In fact, there are three power companies in this fund. Unlike other power companies that have invested in solar, Edison is taking a stake in Clean Power Finance. Companies such as Pacific Gas & Electric and NRG Energy have put up money to finance residential solar leases, so they are hoping to make money from long-term contracts rather from the growth and exit of a startup.

Solar leases typically run 15-20 years and require homeowners to pay a monthly fee for the solar electricity from their rooftop systems. The homeowners don't have to fork over the upfront cost of installing solar panels or, because they don't own the solar system, the maintenance of the equipment.

The second takeaway is that investors are particularly fond of software developers. That means companies like SolarCity would find it difficult to raise venture capital these days even though they are still in the retail segment of the solar industry (many investors are avoiding deals involving solar equipment manufacturing because of the sector's poor returns so far). SolarCity is a full-service company that employs people who do the installation work. It also has to spend good money marketing its service to consumers. This business model requires a lot of money to scale. SolarCity started out early enough and excelled at raising money (having Elon Musk as an investor helps) before it went public.

More solar companies that offer leases have foregone the need to have in-house installers. Sungevity hires contractors to do the installation work but spends money on branding and marketing its service directly to consumers. SunRun markets its financing packages to installers and also creates advertising campaigns aimed at consumers.

Clean Power Finance, on the other hand, describes itself as a "white-labeled software and financial services provider." It has a more strictly business-to-business model. The installers are resonsible for their own branding and marketing of the financing options. Customer acquisition, the industry lingo for converting a shopper into a buyer of your product and services, makes up a big chunk of a company's expenses.

Clean Power Finance says it more than tripled its 2012 revenues. It makes money from collecting a transaction fee for every solar lease sold, managing fees from financiers of solar leases and power purchase agreements, and from licensing its sales software.

Aside from Edison, other investors in the $37 million round include Hennessey Capital, Kleiner Perkins Caufield & Byers, Claremont Creek Ventures and Google Ventures. Clean Power Finance has rasied 3 rounds totaling $62 million since its inception.

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