Mar 23, 2023

Scaling heat pumps ─ and why it’s about design and workflow software

One of our super exciting young bets of the last year had been Lun, who today announced a new €10M round with Norrsken, Lowercarbon and Partech, which they raised ultra quickly on the back of assembling one of the best management teams in the space in Europe and executing a super unique product (more on that below). We are proud to have led Lun’s pre-seed just 12 months ago.

This financing coincides with market shifts across Europe. For example, the German Green Party is driving a policy through which installing fossil heating shall be banned. While it might not happen in its most radical form (who knows), chances are it will pass at least in some partially modified form.

For a bunch of folks out there the above Venn diagram might not make sense at first. What do design and workflows have to do with heat pumps. It‘s all about buying small shops, training some people, isn’t it?

No, it isn’t.

A lot of companies approach the thermal renovation opportunity across Europe from an Enpal-like angle (basically super-heavy asset-financing model). There’s Thermondo, 1KOMMA5 and many others with slightly different but fundamentally similar takes across Europe etc.

If you really break it down to first principles, these models resemble asset-financing businesses where they take some workforce constraints out. The workforce aspect is secondary though – when you read the P&L and Cash Flow Statements, you see that these models are asset-financing with some bolt-ons left and right.

The not so attractive part with that approach imo is (1) this is a model born out of a low interest environment, and the cash economics of such models are just not what I look for in firms (2) you cannot be a credible arbitrator of a merit order of renovation measures, cause you know, it has to be always eg. solar first (even if the building would benefit from another thermal upgrade first) because that’s where I need to put my OWN workforce into constant work and (3) if you look at reducing our CO2 footprint on the grandest of scales – we are talking 100M+ homes in Europe as fast as possible – these asset-heavy models just cannot move the needle. Only a software play that enables hundreds of thousands of installers can reach that scale and reach it quickly.

Therefore, my thesis is different:

  1. 100M+ European homes need thermal upgrades as fast as possible.
  2. Not every building has the same merit order of upgrades. Some have the biggest initial impact from insulation first, some from heat pumps first, some from solar first, some from windows first, and so on.
  3. One of the fastest growing upgrades will be heat pumps (the other will be insulation, by the way, but more on that in another post soon).
  4. Heat pump upgrades suffer from a massive, massive demand-overhang / under-supply.
  5. Material supply will get fixed more quickly than labor supply. Labor supply will remain the largest constraint.
  6. Spec’ing heat pumps is more complex than rooftop solar or fossil boilers. Lots and lots of variables go into spec’ing it right, and the consequences of being wrong are much more economically and thermally significant than for other upgrade measures.
  7. Installing heat pumps is also much more complex, and information is harder to come by than for rooftop solar.
  8. Fortunately, we have a large pool of skilled craftspeople who know how to spec and install heat pumps.
  9. But: they are severely capacity-constrained. 50% of their time is spent on admin tasks that software can help fix: on-site visits, writing quotes, writing invoices, chasing customers to convert and chasing them to pay, and procurement – and collating the various data points required to spec the heat pump, some from open sources and some from the building owner directly.
  10. And: only 25-35% of quotes written by heat pump installers convert into orders. Software can help with this, too.
  11. Bonus: If you build the industry-standard software, a new generation of installers that gets groomed in the coming years can be powered by this software without being locked in to any single employer, and be their own employers. The term “business-in-a-box” applies.

Therefore, my thesis is that a B2B installer-centric design and workflow software for heat pumps which helps with spec’ing and all the tedious overhead work and customer-centric and supplier-centric workflows in itself can free up 50% of installer capacity (i.e. double the current capacity) across Europe. And do this fast and at scale.

In other words: Scaling heat pumps to mega-scale is a design and workflow problem (because it requires skill and is highly varied).

There is precedent and a playbook to get inspired by from the US in rooftop solar – Aurora. And for heat pumps, this formula is even more relevant due to their complexity.

And that’s what Lun does for European heat pumps. No marketplace, no asset-heavy workforce – just amazing design + workflow software to enable installers.

Lun has assembled one of the very best climate-tech and software management teams in Europe. The next year could be fun, now that we stocked up with cash 🙂

P.S. some resources for my readers who love physics and who’d like to become heat pump geeks:

Applications of Thermodynamics- Heat Pumps and Refrigerators | How heat pumps work | What is a Heat Pump? | Why Proper Heat Pump Sizing is Important | How to Find the Right Size Heat Pump For Your Home | When It Comes To Heat Pumps, Does Size Really Matter?