SFV’s Investment in Gradient
We are delighted to announce that we have co-led Gradient’s Series A financing round. Gradient’s novel technology allows users to access the efficient heating and cooling of a heat pump in a beautiful, affordable, and easy-to-install product.
By Matthew Chagan and Reid Carroll
Heating and cooling are responsible for as many as 5 GT of CO₂e emissions. As bad as this sounds, the larger issue is that it is getting worse:
- Rising temps, populations, and income levels will lead to many more air conditioners - and another 1GT in CO₂e emissions by 2050.
- Fossil-fuel heating systems continue to be installed faster than heat pumps. This is increasing global heating emissions and expanding the pool of buildings that will eventually need to be retrofitted.
A big reason that heating and cooling emissions are trending in the wrong direction is that there are a lack of climate-friendly and easy-to-deploy solutions on the market. Enter Gradient.
Gradient’s Product
Gradient is focused on making it easier to install a heat pump, and we think that the timing for their solution couldn’t be better.
The company has taken the two parts of a heat pump — the outdoor condenser and indoor evaporator — and combined them into a single piece of equipment that sits in a window (without blocking views).
Gradient’s heat pumps have a broad range of use cases, including:
- Single family homes: for smaller homes, a few Gradient units can be a cheap and efficient solution for heating and cooling. This is particularly needed in LMI (low-to-moderate income) communities.
- Europe and Asia: Gradient is targeting the US (their domestic market) to start, but heat pump subsidies/regulations in Europe and a rising middle class in Asia ensure that Gradient’s market will be global.
There was one use case, however, that got us particularly excited: Gradient’s window heat pump enables a paradigm shift in multifamily heat pump retrofit feasibility.
By eliminating the refrigerant lines that connect indoor and outdoor components, Gradient has designed out the need for professional installation. They have also simplified the purchasing journey — with Gradient, upgrading to a heat pump is as simple as buying an appliance.
This allows the company to deliver heat pump retrofits that are fast, non-disruptive, and more affordable than today’s options.
Retrofitting Multifamily Buildings is a Major Hurdle
As the table above shows, adding heat pumps to existing buildings is usually prohibitively expensive and disruptive. This is especially problematic for:
- Multifamily building owners: Local Law 97 in New York, the city’s carbon tax, is going to hit multifamily buildings much harder than office buildings. Cities like Boston have enacted legislation similar to Local Law 97, and others are following suit.
- Public housing authorities: Many buildings are equipped with dated heating & cooling infrastructure that is failing occupants, especially in formerly temperate climates that now require cooling.
- Hotels: Old heating equipment can’t be replaced, nor can cooling be added, without major disruption to business operations.
How big is the hurdle? As of 2020, zero large occupied multifamily buildings in the greater New York region had completed a heat pump retrofit. This is astonishing when you consider that New York is adopting the most stringent building carbon tax in the country.
This is starting to change, and startups like Blocpower have filled a critical heat pump market void by helping with equipment selection, labour management, and claiming incentives.
Ultimately, though, the industry is currently limited by the equipment on the market. Blocpower currently focuses on retrofitting small to mid-sized buildings because there are no feasible solutions for large multifamily buildings.
There are 25 million apartment and hotel dwelling units in the United States alone. At SFV we have spent a lot of time thinking about the global heat pump rollout and are convinced that solving multifamily heat pump retrofits is among the biggest opportunities in the sector. That’s why we are thrilled to be backing Gradient.
Why else are we so excited about the deal?
The market is ready
Our thesis about the need for better multifamily heat pump retrofit options was validated in a big way this summer when New York City Housing Authority (NYCHA) announced that they would be purchasing 30,000 window heat pumps in 2024. Gradient was one of two winners, amounting to a $24M purchase award for the company.
The RFP also included expression of interest from other cities including Boston, Toronto, and Seattle. Climate change and rising temperatures are putting a major squeeze on such municipalities. NYCHA alone estimates a need for an additional 160,000 units in the next 5–10 years.
Gradient has attracted Silicon Valley talent to an industry that is ripe for disruption
CEO Vince Romain’s executive team is made up of high-growth hardware veterans, including alums of companies like Tesla and Tonal. As talent continues to flow towards climate tech startups, we think Gradient is primed to build the strongest team in the industry.
Gradient is building a unique and defensible position
Not only is Gradient the first mover in the window heat pump space, but they are developing a fundamentally different business than existing HVAC OEMs:
- OEMs rely on installers as their main distribution channels. Gradient, which disintermediates these installers, will be employing a direct sales model. The company is building brand equity with businesses and consumers that other OEMs are not equipped to serve directly.
- Gradient’s focus is on blending hardware, software, and services into a visually appealing design. Legacy OEMs often struggle to integrate services and software into their offerings.
We are joined in the round by Safar Partners, Ajax Strategies, and At One Ventures. We look forward to working closely with the company to achieve their ambitious goals in 2023 and beyond.
