SV Start-up Tip: Valuation isn't Everything

Early stage entrepreneurs raising capital are often fixated on trying to get the highest valuation for their company. However, they fail to see that price isn't everything. An undue focus on valuation can lead to problems down the road.

Valuation should match the stage of a company. Even if an entrepreneur negotiates a "better" valuation, if it doesn't match the growth and risk stage of the company, it is not a good deal. While a high price reduces dilution, it also creates a higher bar for future rounds. If the company is overvalued in an early round it will be difficult to reach the next appropriate valuation by the time capital is needed again. In the worst case, the next round will be a "down round," meaning that the subsequent valuation is lower than the previous valuation. This is extremely destructive for the early investors' and founders' shares in the company. When founders and employees lose a stake in the company, it significantly dampens inertia and negatively affects company morale.

The terms of a capital raise are often given second consideration, but terms and valuation are equally important. For example, a common term that VC's will include is liquidity preference. This means that at a liquidity event (IPO, acquisition, etc.) the VC has a senior claim over all other equity claims. In the best-case scenario, this type of term has little impact on the founder or other early investors because the company will have enough money to pay out all shareholders with a sizable return. However, in the cases when the company is sold for only a modest price, the liquidity preference can be extremely detrimental. The return to equity is used to pay the liquidity preference holders first and then split amongst the remaining equity holders. In the worst cases, some investors are kept whole but the founder is left with nothing.

Maximizing valuation can be a distracting aspect of raising capital so it is important to have an appropriate and realistic valuation and a clear head when negotiating the terms.

2023 yielded one of the most volatile years for our planet’s weather conditions, ranging from extreme heat to extreme cold. With the impact of climate change affecting all Americans, the EPA took steps to limit carbon emissions, one of which is a national 40% reduction in hydrofluorocarbons (HFCs).

HFCs are organic compounds that are used as a coolant in refrigerators, air conditioners, and other HVAC appliances. With the EPA demanding a reduction in HFCs, novel technologies are emerging as an alternative to the current heating and cooling technology. MIMIC Systems is one of the companies designing these technologies, offering users a sustainable, refrigerant-free, and compact heat pump using solid-state technology. Founded by Berardo Matalucci and Theodorian Borca-Tasciuc, MIMIC seeks to address commercial and residential demand for energy-efficient HVAC systems.

The timing for MIMIC’s product development could not be better. With the implementation of the Inflation Reduction Act of 2022, $783 billion dollars will be invested in provisions relating to energy security and climate change, with $663 in tax incentives. Throughout the bill, there is a clear emphasis on reducing greenhouse gas emissions and residential energy costs. With $9 billion in home energy rebate programs, and 10 years of consumer tax credits for the installation of improved technology, MIMIC has the ability to address the HVAC needs of 118 million homes incentivized to purchase its products.

The green-oriented legislation is not just limited to the national level. At the state level, New York plans to reduce economy-wide greenhouse gas emissions by 40% by 2030 and 85% by 2050 from 1990 levels. Earlier in 2023, New York State announced a new law which prohibits the installation of fossil fuel equipment and building systems in any new building 7 stories or less by the end of 2025. With this law, there will be more demand for systems that do not rely on fossil fuels, with MIMIC’s solid-state technology at the forefront.

As the United States continues to recognize and address the harrowing effects of climate change, new HVAC alternatives to current fossil-fuel-based technologies are emerging. MIMIC is poised to take advantage of the increasing market demand for sustainable, efficient, and cost-effective heating and cooling solutions.

Energy Efficient HVAC Systems

This summer, the United States witnessed one of her hottest summers in history - with July setting the hottest month on record. Climate change is an undeniable reality that continues to reshape our planet. The scientific consensus is clear: the Earth's climate is undergoing significant shifts primarily due to human activities. As a result, there will be more frequent and severe weather events, shifting weather patterns, and increasing temperatures. There has never been a need to keep people cool and safe from extreme heat and cool.

Electrification

The United States has played a pivotal role in the global progress towards electrification over the decade – scaling faster due to the ratification of the Inflation Reduction Act of 2022 (IRA). According to DNV, the Electrification of final energy will double and will be the main drive of the North American transition. The energy-industrial policy offers incentives for energy efficiency and security, aiming to shift communities that have historically relied on traditional and poor energy management. About 6% of the US's electricity supply is used by ACs, with traditional systems requiring refrigerants that have a global warming impact 2,000x as carbon dioxide. According to DNV, By 2050, there is a USD 12trn opportunity in the clean energy transition in the U.S., with energy efficiency dominating the sector.

New York State Electrification

New York State is actively transitioning towards electrification, with ambitious plans to increase the use of renewable energy sources for a more sustainable future. Local Law 97 stands as one of the nation's most ambitious initiatives for emissions reduction. It was enshrined within the Climate Mobilization Act, which was ratified by the City Council in April 2019 as a component of the Mayor's New York City Green New Deal. Under this pioneering legislation, most buildings exceeding 25,000 square feet will be obligated to adhere to updated energy efficiency standards and greenhouse gas emissions thresholds by 2024, with even stricter criteria becoming effective by 2030. The ultimate aim is to curtail emissions from the city's largest structures by 40% by 2030 and by a remarkable 80% by 2050.

MIMIC

Over the next three decades, the North American economy is poised for robust growth, with a projected expansion of more than 30%. This growth will necessitate increasingly substantial energy service demands. MIMIC stands alone in the new wave of technology that is making HVAC systems as efficient as possible, while preventing overtaxing the grid. MIMIC Systems, an advanced HVAC startup, designs solid-state heating and cooling systems that use solid material to transfer thermal energy. MIMIC is unique in three ways; 1. It eliminates the need for refrigerants 2. The setup is fully modular 3. Unlike the compressors found in traditional ACs, MIMIC systems require no moving parts.

YouSolar is a renewable energy company that aims to address the problem of unreliable power supply and high energy costs. They offer innovative solar energy solutions that combine solar panels, battery storage, and an intelligent energy management system into a solar micro-grid. By harnessing solar power and efficiently storing excess energy, YouSolar seeks to provide homeowners and businesses with a reliable and cost-effective alternative to traditional power sources, reducing their dependence on the grid and promoting sustainable energy usage.

• YouSolar’s most recent sale to the DOE-funded flow battery startup Quino Energy establishes YouSolar’s nanogrid as a platform technology in the rapidly growing energy storage ecosystem.

• YouSolar showcased their PowerBloc system at the RE+ renewable event with 40,000 visitors in Las Vegas

• YouSolar’s survey shows that The PowerBloc uses a power architecture that is completely different from mainstream home battery systems. The result is that they can solve energy and power challenges that no other vendor can meet with the simplicity and cost-effectiveness of the PowerBloc

For further information on YouSolar or to arrange a call with the CEO, Arnold Leitner, please contact Mitchell Hauser.

WAVE continues to build momentum heading into 4Q 2023:

• Installations at 6 additional YMCA facilities: Montgomery County, IA; Nishna Valley, IA; two systems at the Mattoon Area Family YMCA, IL; Glen Falls, NY; and Ross County, OH

• A new system deployed for City of Vancouver WA’s Parks, Recreation & Cultural Service. This large system has received significant regional attention and is opening up several follow-on opportunities for expanding WAVE into the Pacific Northwest

• The sales team booked WAVE’s first international sale, a high-end fitness center in Lithuania, presenting the team’s first opportunity to develop experience in overseas customer support

• Two new members joined the team: Brandon Burton as a Sales Consultant and Tom Burdett as Production Support.

• Product updates include the addition of customer-requested features and capabilities for the WAVE Management App, the user interface running on tablets, phones and computers to manage WAVE systems.

• Additional important advancements include an improved design for the Lifeguard Entry Alert (LEA) Lifeguard Tags, the small wireless tags attached to lifeguards’ clothing or equipment. LEA has been a key driver of WAVE’s growing recurring revenue stream and a starting point for follow-on sales of the full WAVE drowning detection system.

WAVE is also about to launch its first VC outreach; now that we have demonstrated the market demand for WAVE, this new funding will enable the company to meet the growing demand for its drowning detection systems. Please contact Mitchell Hauser for more information or to arrange a meeting with Mark Caron, WAVE’s CEO.

The Fairmont Royal York published a late stage progress report in the Toronto Globe and Mail in October detailing major aspects of its deep retrofit to become a Net Zero building. Planning and engineering for the project began two years ago, based on detailed energy use data provided by CircuitMeter. The CircuitMeter program began as an effort to vault the Royal York into the upper echelons of the Fairmont Hotel chain in terms of energy efficiency and identified greater than 30% energy savings with an attractive ROI. Later, as industry pressure during the covid downturn continued, the hotel’s owner, KingSett Capital, took a deeper dive into the data and developed this inspirational project.

Town of Whitby

CircuitMeter continued its program to supply the Town of Whitby with its state-of-the-art real-time energy metering and analytics platform this month, with the shipping of CircuitMeter equipment for its Iroquois Park Sport Centre. Over 50 pieces of equipment will be metered in real time, plus six different gas supply lines, as Whitby continues its aggressive energy management plans to outfit all municipal buildings with state-of-the-art technology to maximize energy efficiency and minimize its energy cost and carbon footprint. This project follows Whitby’s installation in its City Hall and a Community Centre, with new construction projects also underway with plans to utilize CircuitMeter.

For further information on CircuitMeter or to arrange a call with the CEO, Paul Mertes, please contact Mitchell Hauser.

This month we welcome Sadokat Raupova to our team as an Analyst Intern. Sadokat comes to us from Hunter College, where she is finishing up her Honors BA/MA in Economics and Business Studies Certificate. She is a student of Thomas Hunter Honors Program and is a Leon Cooperman Fellow. Sadokat has also been a Financial Economics and Machine Learning Science Researcher at Google, and has a strong background in financial modeling, market research, and data analysis. She will be working with our team on investment research, analytics, and client outreach.

SV Managing Director Tony Coretto spent some time traveling with family and friends in Bologna, Italy recently. Bologna, the capital of the Emilia-Romagna region in the north of Italy, has a rich and varied history. Founded as Felsina by Etruscans about 500 bce, Bologna became a center of trade and commerce in the Middle Ages due to its sophisticated system of canals, and became known as a center of learning with the founding of the University of Bologna in 1088, the oldest university in the world. Today Bologna is a bustling city of students, tourists, and foodies who affectionately refer to Bologna as “La Grassa” or “the Fat One” because of its delicious gourmet delights, including the renowned Tortellini in Brodo.

SV Managing Partner Mitchell Hauser spent some time traveling across Norway. The country's natural beauty is truly awe-inspiring, with snow-capped mountains and pristine lakes that create a picturesque landscape. One of the most unique aspects of Norway is its "never-dark" summer nights, where the sun never truly sets, allowing you to explore and enjoy the beauty of the land 24/7. What's more, the commitment to sustainability is evident as you'll notice electric cars silently gliding through the scenic routes, making the journey eco-friendly and peaceful. Norway's captivating vistas and eco-conscious lifestyle make it a must-visit destination for nature enthusiasts and those seeking a glimpse into a greener future