Over the past two quarters, Sunnyvale, California-based Serious Energy has bled talent and taken on a lot of water. Now, recent news suggests circumstances have become dire as the company has shed all non-core business activities to focus solely on its efficient window and soundproof drywall business.
In recent years, the company had broadened its spectrum of offerings to include building energy management software and capital financing for energy efficiency projects. While its expansion drew key talent from across the industry and led to a handful of strategic acquisitions, it also quickly sapped the $140 million of venture capital (VC) cash raised since the company’s inception. Since the third quarter of last year, Serious Energy has seen its CFO and co-founder, CTO, and a slew of other senior executives jump ship to join other companies in the space.
In December, 2011, we interviewed Kevin Surace, then-CEO at Serious Energy. He told us the company would need to raise an additional round of equity funding to finance its initiatives before going public to finance further growth. A month earlier, the company had managed to raise $3 million of a targeted $33 million investment round, and it was continuing to press for growth across all of its business areas, despite lackluster revenues. At the time, we advised that if Serious Energy wanted to avoid becoming another cleantech investment gone wild, it needed to scale back its initiatives to provide a quicker, less dilute exit for investors. But the company pursued business as usual into 2012, until its CEO was replaced in February by the company’s remaining co-founder, Marc Porat.
The final blow that spurred Serious Energy to abandon its software and financing offerings may have come last month, when incumbent player SCIenergy (Client registration required) received a favorable settlement in a lawsuit it had filed against Serious Energy for misappropriation of trade secrets relating to its energy management software tools. Lacking cash to redevelop its software, it makes sense for Serious Energy to abandon this offering and revert to its core materials products. The question now is, just how successful are Serious Energy’s drywall and window businesses?
In answer, consider the company’s February announcement that planned to close its Chicago-based manufacturing facility and lay off around 50 workers. A day later, it announced that it had reached an agreement with the United Electrical Workers Union Local 1110 to keep the facility open while looking for a new owner and exploring “all other options.” In addition, the company recently yanked its EcoRock drywall products from the lineup. It touts the products as “green” because they are manufactured unconventionally without the use of natural gas – since natural gas prices have fallen by about 50% since July 2008. Lastly, Serious Energy had been in an exceptional position to profit from Obama’s energy efficiency incentives (Client registration required). But attracted political flak in 2010 for potential conflicts of interest arising from the marriage of a Serious Energy executive to a key U.S. Department of Energy advisor.
It would be wise for investors to steer clear of Serious Energy as we expect the company to be imminently acquired or else liquidate its assets in 2012. After spending $140 million in VC cash over ten years only to revert to its lackluster window business (which relies significantly on government support) and its soundproofing drywall business (which is a niche market) we think the company will find it a challenge to raise any additional funds from VC investors. The challenge has already been alluded to by incomplete investment rounds in June 2010 and November 2011. SCIenergy is likely to benefit the most from Serious’ imminent demise. As we discussed in a recent analyst insight (Client registration required), SCIenergy has recently acquired Transcend Equity and aims to ramp up its energy-efficiency-as-a-service offering with capital financing for the initiative provided by Mitsui & Co. This offering had SCIenergy and Serious Energy vying head-to-head for the commercial building market, but Serious’ departure has rolled out the red carpet for its incumbent at an optimal time. Expect SCIenergy to see increased demand in 2012, with the serious reduction of competition on the horizon.