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In this episode, Andy Frank, president and co-founder of Sealed, discusses his company’s pay-for-performance model for home electrification.

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Text transcript:

David Roberts

One of the greatest riddles of the decarbonization effort is the residential sector, responsible for about 20 percent of US energy-related carbon emissions. There are about 142 million housing units in the US, around 83 million of which are “owner-occupied.” Substantially changing them involves dealing with 83 million separate owners, each with their own circumstances and preferences.

Residential decarbonization seems incredibly difficult to scale up, and attempts to date have not been particularly successful. At the rate we are going, it will take hundreds of years to decarbonize America’s housing stock.

The crew at New York-based climate tech company Sealed is trying something new, imported from the commercial efficiency market. Rather than trying to persuade homeowners to buy and install things with their own scarce resources, Sealed covers all the upfront costs and coordinates the work with trusted contractors. Homeowners pay the retrofit back out of energy savings, which means Sealed only gets paid if there are, in fact, measurable energy savings.

This kind of pay-for-performance arrangement is called an energy services agreement (ESA). Listeners of my pod with Rob Harmon will recognize the concept: customers are paying for metered energy efficiency, in the same way they would pay for energy.

Sealed started small but is growing quickly, so I’m excited to talk to its president and co-founder Andy Frank about the frustrations and failures of residential energy efficiency to date, what he’s learned about homeowner preferences, and what kind of benefits come along with having a fully electrified home.

Without further ado, Andy Frank of Sealed, welcome to Volts. Thanks for coming.

Andy Frank:  

Thanks for having me.

David Roberts:   

Where do residential emissions and energy use sit in the larger picture? How big of a piece of the climate puzzle are they?

Andy Frank:  

They’re a pretty big piece of the puzzle. Home energy use represents about 20 percent of US carbon emissions. It's a big enough piece where we're really not going to be able to meet our climate goals without nailing residential efficiency and electrification. It is a large opportunity, but also one that has historically been very frustrating to make progress on.

David Roberts:   

The arguments for home energy efficiency stand regardless of climate change; it makes sense to save money and use less energy to do so. We've talked for decades about weatherization and nation-wide retrofits, etc., but nothing ever seems to get off the ground. Why has this been such a tough nut to crack and why have previous efforts not cracked it?

Andy Frank:  

There have been many more ambitious goals than there have been success stories. There's essentially been what I'd call 50 years of failure. The first efforts to really promote energy efficiency – they mostly called it conservation back then – were around 1973, with the first oil embargo, the first big energy crisis. Fast forward to today, we're still not in a great place. At the current pace of retrofits, it's going to take us more than 500 years to retrofit every single home. We don't have 50 years, much less 500, so we definitely need to do something.

David Roberts:   

What have we been trying and why hasn't it been working? 

Andy Frank:  

We've tried a lot of things; not a lot of them have worked. A lot of people associate the early days of energy efficiency with Jimmy Carter asking Americans to wear a sweater. But actually, President Nixon, a Republican, was the first one to push for conservation in the early 70s – to turn down thermostats and take shorter showers and change your behavior. 

Obviously, we're American, we don't like conservation, we don't like having to sacrifice. So the next wave, which was through the late 70s and 80s, was led by legends of this field: Amory Lovins, who was a big inspiration to me, and Art Rosenfeld, and folks saying hey, this isn't about sacrificing; this is about producing more with less, a better quality of life. The old line “people don't want kilowatt hours, they want cold beer and hot showers” – that was the next wave, and that, of course, makes sense and has always made sense. 

One of the original sins of the energy efficiency industry, at least in my mind, is it was created by government for government, and through the utilities and local contractors. What that meant was you were essentially pushing largely home energy audits, very technocratic solutions, on the populace. 

I loved your pod recently talking about the economic style of thinking; that was very en vogue with energy efficiency. The idea was, if only we could educate people and give them exactly the right amount of information about what they're doing with home energy use and how much energy they can save, of course they would spend thousands of dollars to make their home efficient.

David Roberts:   

They are rational interest maximizers, so why wouldn't they?

Andy Frank:  

Exactly. The value prop of residential efficiency essentially evolved to assume that homeowners are all classical PhD economists and have a Masters in building science.

David Roberts:   

And are willing to balance short-term investment with long-term payback and can calculate those things for themselves.

Andy Frank:  

Perfectly rational.

The sales pitch has historically been horrible. The way that energy efficiency has been sold for pretty much the last 50 years is, “Would you like to save money on your energy bills? Great, get an energy audit!” You have to schedule it, you have to take a half day off of work or at least be in your home and aware of it, and someone who you don't know trucks around your house for three hours, goes into all of the most private parts of your home – I won't even speak to all the stuff that we saw when we were doing energy audits. 

At the end of the day, if you're lucky, they will sit down with you and say, “This is what we found, here's how much energy we think you're wasting, here's what you can do about it, and by the way, that's going to cost you thousands of dollars to do” – to potentially save what you, as a homeowner and consumer, largely see as fake money. 

David Roberts:   

Homeowners are not carrying the one; they're not calculating their energy costs down to the penny. What are their thought processes? When they do go forward with a retrofit or something, what motivates them to do so?

Andy Frank:  

The great news here is there's actually a lot that motivates people to move forward with these efficiency and electrification retrofit projects. But it's not energy, and it's usually not saving money on energy bills. It’s comfort, it’s health, it’s safety, it’s quality of life. 

For anyone who's seen the now classic movie Fight Club, the first rule of fight club is you don't talk about fight club. At Sealed, the first rule of selling energy efficiency is you don't talk about energy or efficiency. These are not things that generally resonate with real people. What you talk about is getting rid of drafty rooms and cold floors and upstairs rooms that feel like a sauna. You solve people's comfort and their quality-of-life issues, and the energy savings are a way to make it affordable to install those solutions.

David Roberts:   

How much of this is anecdotal and how much is nailed down by research? What's the balance? Are any homeowners talking about energy and saving money?

Andy Frank:  

There has obviously been a lot of research over the years, largely through surveys that ask people what motivates them to adopt energy efficiency measures. They're normally set up, though, in a way that doesn't actually give you great information. If I ask you “would you like to save money on your energy bills?” you'd be an idiot to tell me no. But if I then ask you “would you like to spend $10,000 to save $100 a month?” your answer is probably, “Not sure about that. Tell me a little bit more.”

Part of this is around mistaking people's general desire to save money – which, if you watch any number of commercials on TV, is of course a motivation for people – with their desire to not invest money to save money. 

The other big problem is that the industry generally assumes, including in the research that they do, that most people actually believe in the energy savings. If you look at the data – not just in residential, but across sectors – energy efficiency is by far the biggest and most powerful energy and carbon-reduction resource we've had over the last seven years; but at the same time, it's invisible. It's the lack of something. I analogize it to dark matter – the most powerful energy resource we have, but we literally can't see and feel it. 

That's always been the challenge, both at the macro level in all of the fights over the years with measurement and verification, but also at the micro level with a homeowner. Very early on at Sealed we did a survey asking people, “If somebody did an energy audit in your home and projected that you would save $100 a month, how much do you think you would actually save?” The answer across the US was less than $25. In other words, people are discounting 25 cents or less on the dollar from what you tell them. So the money's not real. 

David Roberts:   

Another barrier has always been that even if you sell people on the fact that they could get a lot of energy efficiency, it's still a huge project to do so and to know what to do. Was the original vision for Sealed just to make that project easy? Is that the whole point? If I call Sealed to my house, what are you offering me that overcomes that dread of dealing with things, which I feel so acutely?

Andy Frank:  

Sealed is a climate tech company on a mission to stop home energy waste and electrify all homes. That's what we're trying to do when we approach each home.  

First off, I consider myself a lazy environmentalist. I want to use as little energy as possible and reduce my carbon footprint, but I'm not a do-it-yourselfer. As my wife will probably tell you, I'm not Mr. Fix-it in the home. I need help. 

I actually recently got my own home sealed. After working in this space for a while and building up Sealed, I can finally, as they say in the startup industry, eat my own dog food.

David Roberts:   

So how did you find the experience with yourself?

Andy Frank:  

I'm a very biased source, but it was great. 

Basically, we design, manage, and finance home weatherization and electrification projects, and we aim to make it both easy and affordable for people to be comfortable while using less energy. 

We focused initially on the affordability piece, trying to make it as affordable as possible.

David Roberts:   

Did you go in with the conventional assumption that this is mostly about money and saving money? Did you share that misapprehension at first?

Andy Frank:  

Oh, yeah. I went into this believing all of the “best practices” and all of the received wisdom in the space. I was essentially classically trained in neoliberalism in college and took courses from all of the very smart and wonderful professors who believe in things like the preeminence of the Kyoto Protocol. So I came in with a very technocratic view. 

Obviously, being in the field and spending time with our contractors and with homeowners really shaped my view of how we needed to change things. Early on, my co-founders and I would go to train stations to talk to people to find out what they thought about their energy or comfort. I interviewed every single homeowner that I could in my network to really understand how people think about this; shadowed lots of energy audits; did a lot of grounding research to understand what this looks like; and came to the conclusion – which again, is not rocket science – that people are motivated to do things that improve their quality of life and make it easy and affordable to do.

We have a pretty simple framework for creating value that we like to reference sometimes, which is “GAF is greater than LAF.” This is a family podcast so I won't do the full translation of that, but – everyone  is greedy. We want things. We're Americans. We want to live well, but we're also a little bit lazy. Like I said, I consider myself a lazy environmentalist.

David Roberts:   

Some of your research found that people will often say that they're looking to save money, but once the time comes, they don't actually act that way. In some sense, survey results talking about saving money are about people's identity, their image of themselves, which does not always play out in practice.

Andy Frank:  

We focus a lot on finding the pain of people. In my case, we moved into this wonderful house, we love it, but it was not sealed. The floors were cold all the time; my wife had to literally decide when to use different bathrooms depending on what the weather was like outside because it was too cold to go into some. We were wearing slippers all the time, at least two layers at all times, including while in bed; it was just not a comfortable place to be. Of course we want to save money, we want to reduce our bills here and there, but that's not really the primary motivation. 

One of the things that's interesting about the space is that for the past 50 years, the industry has trained people to think about saving money on their energy bills as the equivalent of energy efficiency. A lot of times the challenge that we have with our marketing messages and our sales conversations is that we need to separate that out when we're talking to people. Most people that we talk to, of course they want to save money generally, but they also have very real comfort and quality of life problems. 

David Roberts:   

How many people even know that greater comfort is among the product offerings when they think about energy efficiency and retrofits? 

Andy Frank:  

That's a great question. We spend a lot of our marketing education investments on making that explicit. We focus a lot on explaining – through gifs, live action video, text, articles, whatever it is – the connection between people’s comfort problems and energy efficiency. Because, to your point, a lot of people don't know that. 

I can't tell you the number of conversations we have with customers where they call up and say, “You don't need to talk to me anymore. I know what my problem is. It's my windows.” And 90 percent of the time it's not their windows, because of what’s called in building science the stack effect. You think it's your windows, because that's what feels cold, but it's actually your lack of insulation or lack of balanced heating and cooling in your home.

David Roberts:   

So Sealed comes to me, the homeowner, and what is the value proposition? What are the steps I go through?

Andy Frank:  

You click on an ad on Instagram, YouTube, wherever you find us. The first step is that you give us a bunch of information about yourself, what your comfort problems are, what things you want to solve, as much information about your home as you know and can share, and your energy usage history. Then our team takes that information, pairs it with third-party information and tools, and puts together a proposal for you. Without ever going to your home, without having to roll a truck, without ever having to send a contractor to you, we can say “this is what we think is going to make sense for your home and is going to solve your problem.”

David Roberts:   

You can get pretty close without a site visit?

Andy Frank:  

Yeah. I remember several years ago, I was on an energy audit with one of our contractor partners. We pulled up to the house and he looked at me and said, “Andy, I'm going to crush this house. This is going to be $10,000. We're going to reduce their heating usage by 30 percent, I'm going to do this amount of insulation here, there's probably two knee walls there that I’m going to do, we'll do some rim joists and we're done.” 

I said, “Great, that's awesome. So why are we doing the energy audit?”

And he said, “Well, we have to go through the program. We have to show the customer that we did a whole bunch of work and that we did the blower door test and we did X, Y, and Z.”

I wish I could say the next day we shifted to this remote audit model, but it took us a little while. Credit to Ali Adler, our VP of marketing, and Dan Hochman, who was our head of sales for a long time and is now at SolarEdge; we really found out that you can do most of the work remotely, especially with today's tools. Obviously with Covid that's only accelerated, as people get more and more comfortable with having these kinds of conversations remotely.

David Roberts:   

So what is the proposal?

Andy Frank:  

We essentially say, here's the project that we think makes sense – this tonnage heat pump, these number of heads, this amount of weatherization, this amount of air sealing. And this is what the market value is if you were to pay cash; if you want to finance with us, we will cover the upfront costs and these are the terms in which you would pay that back to us based on the amount of energy that's actually saved. 

One thing that's very unique about Sealed is that we put up the upfront cost to pay for these projects. You, as a Sealed customer, would not have to pay anything. The only payment to us is based on the actual amount of energy reduced. If we don't cut energy waste, we don't get paid, so we're very accountable for the performance and aligned with the project working.

David Roberts:   

That model – paying for actually produced, measured energy efficiency as though it were energy – has been around in some form or another in commercial buildings for a while. I had Rob Harmon on the pod a few weeks ago talking about his model. Are you, as far as you know, the first to bring this to the residential space?

Andy Frank:  

As far as we know, yes. This has always been the holy grail of the residential space: can you bring this performance financing model, this ESCO model, from commercial and government to residential? That's really what we think we've cracked.

David Roberts:   

You're not doing the work, you're coordinating with local contractors, right? Do you have binders full of good contractors?

Andy Frank:  

Normally it’s spreadsheets, but yes. We get the customer to the point where they know what project they want to do, the pricing comes from the negotiations that we have with contractors in their area, and once they sign an agreement, we say “great, we're now going to connect you with the best local contractors to confirm the project and then install it.”

This is important because, especially with bigger home weatherization and electrification projects like mine, I had three different contractors. Normally, if you want to get your home weatherized and replace your fossil system with a heat pump system, which more and more people want to do, you essentially have to be your own GC and coordinate a bunch of different contractors. 

David Roberts:   

I went through a similar process nine years ago and I used one of these “we'll coordinate it all” type of service companies. As long as I was talking to the coordinate-it-all service company, they were super great and attentive and had all the right answers to my questions. But then I’d get passed off to a contractor, and in my experience, it was not a guarantee that the contractor would know exactly what was going on, or have any good answers, or be as accountable as I was led to believe by the great customer service I got from the coordinating company. I assume you're putting a lot of work into making sure these contractors are as attentive to customer service as you are?

Andy Frank:  

That's a big focus for us. It's not just important for the work itself to be done well – because if the work isn't done well and the customer’s not saving energy, we're losing money – but also, we have a long-term relationship with the customer. When we talk about managing your project, that's from beginning to end. That's from when you first click on a Sealed ad and fill out some information until up to 20 years after your project is complete. So the level of service and the experience that you have is super important for us. 

We spend a lot of time working closely with our contractor partners to make sure that people are going to be on time, and that the right protocols are going to occur with keeping the site clean, and any number of small details. It's residential construction; things don't always go perfectly. But we're motivated to make sure that they go as well as possible, because our relationship is not done with the customer when the project ends.

David Roberts:   

So as a customer, some insulation contractors show up and do their thing and leave. Then a heat pump contractor shows up, does their thing, and they leave. What is Sealed’s ongoing relationship with me?

Andy Frank:  

We only pay the contractors after receiving photo verification as well as written verification from the customer that the project was performed to spec. First, we’re verifying that the project was done well and the customer is happy. 

After that, you're enrolled in Sealed’s platform, where we're literally tracking the performance of your project. We're doing this for two reasons. One, of course, we want you to understand how much energy you’re actually saving. That's also how we bill you – you are only paying Sealed based on the actual energy reduction that you receive. We look at your energy usage before the project, we adjust for weather, and that's your baseline. We measure that against your actual usage after the project and you're only paying Sealed based on that delta. It’s direct-to-consumer metered efficiency.

David Roberts:   

The customer, then, in the years following this project, is seeing on a monthly basis how much energy they saved and how much is going to Sealed out of that. Your business model relies on there being enough energy savings in the house to pay for these projects. Do you ever get contacted by someone and hear their story and say, we can't really squeeze enough juice out of your apple to make it worth it? Or can every house be improved enough to make the numbers work?

Andy Frank:  

I would say most houses. We will sometimes get overzealous energy nerds who have done everything – have insulated their halls, have heat pumps, and want to see what they can do. We tell them, “Looks like you've done a good job, I don't want you spending money that you don't need to spend to marginally improve your home.” 

For most homeowners, this makes a lot of sense. But we do one thing differently compared to most of the rest of the industry, which has generally had a Maginot Line of bill neutrality – God forbid that I improve my comfort and quality of life if it's going to mean that I spent one penny more.

David Roberts:   

In theory, the customer’s total energy bill going forward could be lower; they could be saving enough energy to pay Sealed and take a cut. But Sealed is not guaranteeing that the customer’s total costs will decline.

Andy Frank:  

Frankly, in most cases, their total energy budget including what they're paying to Sealed goes up. We've found this is more honest and very powerful with the customer, because we're telling them that they are going to pay a certain amount of money to live in a better home. Just like you would pay for remodeling your bathroom or retiling your floors, you're paying to have a more comfortable and healthier home. 

Now, you're only paying if the project actually performs, unlike most home improvements, where you're paying for the sight unseen. That's a big difference. But we're not trying to pretend like you're only going to pay for things that are going to lower your overall energy budget, because that creates a lot of weirdness in how you scope projects and ultimately ___.

David Roberts:   

Let’s say my house was built in 1954, a normal suburban house. I've got a natural gas furnace, I've got half-ass insulation like most houses do. What is the merit order of improvements? Is there a baseline thing that you do first for almost every house? How bespoke is it from house to house?

Andy Frank:  

Right now we offer two plans. The first is our comfort plan, which is focused on weatherization. For your house, that would likely be looking in the attic; in any knee walls; see if you have any exposed rim joists in your basement; trying to essentially keep the outside out, seal all the places, and put in the right amount of insulation. We’ll give you a smart thermostat as well to make sure that you're modulating everything in the right way. 

Typically we'll do the attic, and the basement if it's unfinished. Usually homes have something else that we're doing too. In my case, it was what we call a FROG, or “freezing room over the garage.” My bedroom is right above the garage and the garage ceiling was not insulated, so the company that came in and did the weatherization for my home, Dr. Energy Saver, basically drilled some holes in the ceiling of my garage, blew insulation in there, and now my bedroom is a lot more comfortable.

Other people have overhangs; sometimes people get their walls insulated as well. It depends on the home.

David Roberts:   

The comfort proposition of insulation is very clear. What are people's motivations on heat pumps? How do you sell heat pumps?

Andy Frank:  

Heat pumps are part of what we call our climate control plan. Typically, if someone's home is not weatherized, we will include a weatherization component of that plan. We will not install heat pumps into an un-weatherized home because they're not going to perform and we won’t make money.

The motivation for heat pumps is really strong. It depends a little bit on circumstances, but you're essentially getting a new modern heating and cooling system that is more comfortable, healthier, quieter, safer, just better. 

When we were doing research and putting together the plan, we did a survey around the things that people were most excited about when it came to heat pumps. Ali, our VP of marketing, was insistent that we put in a question around the fact that it does both heating and cooling, that it's a two-for-one deal. I thought, “Who cares about whether it's two for one? This is going to be a wasted question, we should ask something else.” But she was very dogged, and put it in. 

Of course, out the other side, the number one thing that people were attracted to with heat pumps was the fact that they did both heating and cooling together. People just love the idea that it's two for one, you can save space, it's this modern type thing. So that was interesting. And of course Ali has not let me forget that I was against including the question.

David Roberts:   

From your experience, how big of a deal is indoor air health related to natural gas? I'm curious whether that knowledge has started penetrating the wider public yet.

Andy Frank:  

It’s definitely started. The talking point here – and this is mostly with gas stoves, but it's even worse if you have other appliances – is that from an indoor air quality perspective, the health effects of having a gas stove are basically the same as having a smoker inside the home. There are more articles coming out and we're hearing that more and more from our customers. 

There are also a lot of other health implications of heat pumps that people think less about. When we were doing our research to put together this plan, we talked to a lot of people who had considered or gotten heat pumps for health reasons because of the need to have constant temperatures at all times. There are a lot of people with health conditions where you can't have temperatures that get too hot or too cold; you need to stay at a certain rate. Heat pumps give a constant temperature at all times, vs. traditional fossil systems that turn on and off.

David Roberts:   

People are paying Sealed back out of their energy savings. How long are people typically taking to pay you fully back?

Andy Frank:  

We have a standard term of 20 years, which is very similar to a solar lease or a PPA. We like to do it as long as we can, given the conservative view of the life of the measures, because we want to keep the monthly payments as low as possible for the customers and make it as affordable as possible.

David Roberts:   

What happens when the house is sold? Is your arrangement somehow tied to the house, or does it go with the homeowner? 

Andy Frank:  

We don't have a lien on the house. Unlike something like PACE or home refinancing, we can't take your home if you don't repay us. It's ultimately an unsecured product. We still have some leverage over you; knock on wood, we have not had any defaults to date. But it's not something where we can take your home. 

The options that you have when you move are to transfer your agreement to the next homeowner (who needs to qualify and accept the Sealed terms); or to exercise an early payment option. In everyone's contract there's a schedule that goes down over time in terms of how much money they can pay us to buy out of the agreement. So you can leverage that. 

One thing that's really great about the investments that we're making in the home is that it's increasing the home value. There's more great data around this coming out all the time, but these types of energy efficiency and electrification improvements are increasingly things that people are looking for when they buy their home. So you can essentially pay us back for whatever is remaining in the agreement out of your increase in home value.

David Roberts:   

This is about making a market for home comfort or home sealing, but there are social benefits too; you’re reducing greenhouse gas emissions, and there are ways in which it helps utilities that aren't necessarily captured in a private transaction. Is your vision and hope that the market will take over and mainly drive this, or do you think even given a market, there still is an argument for some form of public subsidy and public policy to help?

Andy Frank:  

We think policy is very important. I'm a recovering political junkie and policy nerd, and we think there's a huge role to play for policy, in particular around appliance performance standards, which have been neglected. A lot of the big gains we've made in energy efficiency are because of appliance standards, not fancy programs. It was simply saying “now your refrigerators need to be this more efficient, go do it.” 

There are ways to be more aggressive than even what the Biden administration is doing today when it comes to performance standards; being able to go beyond 100 percent efficiency, because heat pumps and other electrification devices are more than 100 percent efficient. I'm not in the policy world full time, so may be a little naive, but you talk to a lot of folks in the space and they'll say some version of “well, we don't want to go that far because we could get sued.”

David Roberts:   

Well, you're always going to get sued. It's just part of the process now. When's the last time one of these things was not sued over?

Andy Frank:  

I'm preaching to the choir here. 

So we're very pro-policy levers, in particular performance standards, but we also see a huge value driver from the utility and societal value of energy efficiency. You can either meet your energy needs by increasing supply or by reducing demand or some combination thereof, and historically, despite a lot of efforts, energy efficiency has not been valued in the way that it should by the utilities, by the grid operators, from a carbon perspective, etc. 

What we believe needs to be done is that the utilities and government and the policy space need to provide a simple and performance-based market incentive to companies like Sealed and many others.

David Roberts:   

I hear critiques all the time about traditional weatherization programs as they’re run now through utilities. Do you think it would be better to scrap those and move over to something like a market incentive to try to bring private capital in, or do you think there's still a role for those old weatherization programs?

Andy Frank:  

I very much think that the shift needs to happen. We've talked to folks in a number of states that I won't name, and private capital is not always welcomed in a lot of places in this market. It's, let's just throw ratepayer or taxpayer money at it. That's great, but eventually you run out, and the private capital markets are so much bigger than what we've historically thrown at the problem.

David Roberts:   

This seems like a classic case where a small-c conservative critique can apply, in that you create these government programs and they become, at a certain point, partially dedicated to their own ongoing survival. You get interests on the policy side, on the utility side, that are very accustomed to this way of doing things and have their hands on big pots of money and don't necessarily want the apple cart upended.

Andy Frank:  

My co-founder, Lauren, is both a small-c and big-C conservative, and whenever we run into this dynamic we joke that I'm moving a little bit to the right today.

David Roberts:   

Regulatory capture is a real thing. There's no sense pretending it's not. 

Andy Frank:  

It’s a real thing. Though the good news is that we're seeing more progressive points of view on this in the last few years. We work with a number of utility partners, in New York in particular and a few other states, and one thing we've been talking with a lot of them about is moving from this very command-and-control program structure – it's as close to Soviet-style planning as we have in the US – toward what we call a performance playbook, or basically a market-aligned model for doing things.

There are essentially three steps to make that happen. The first is access. To even participate in most of these programs, you largely need to be one kind of company; in normal times, you need to be a contractor. Sealed a lot of times doesn’t qualify for programs, even though we are spending lots of money in customer acquisition, financing, coordination, and all these different things, because we don't actually install the project. 

You're asking contractors to basically do all this coordination in addition to being great at construction management and scoping and all this stuff; it's not really fair to them. These are hard businesses to run, especially at scale, so you need to expand who can qualify for these incentives. You can create a much greater innovation ecosystem. A lot of times, the thing that's not captured in all of the models is the innovation tax that you have by putting out a hundred-page RFP. I've been in the trenches filling those out; those will kill innovation really quickly. You need to make it accessible, easy for lots of different kinds of real market actors. 

The way I define “real market actors” is if you make money based on a customer, like a homeowner or business paying you money. That's important a lot of times to distinguish in this space, and we need to have more of those that are able to participate at scale in these incentive programs. 

The second thing is around sustainability. A lot of states and utilities will jack up downstream rebates or customer-facing rebates to get people to say yes. Denver just put out some crazy rebate program that's probably going to run out in a couple of weeks if it hasn't already. It’s basically giving a sugar crash to the market, telling all the people “do this when it's really cheap, when there's huge rebates.” They’re not going to do it any more after that, because they’re expecting the next round, which may or may not happen. You create bad incentives for the market and you're ultimately making it not sustainable. 

Even with large incentives, which are great, we want as much ratepayer money invested in these projects as possible. You do those through midstream incentives: you have the money go through the actual market actors, and then those market actors can figure out the best way to use those dollars to increase adoption, whether it's through customer-facing incentives, investing more in (God forbid) sales and marketing, which is how markets actually grow, or building the infrastructure to grow even further. 

The third thing is performance-based. A lot of these programs give incentives or rebates based on how much the project costs, which obviously creates horrible incentives. You get what you pay for. So you really need to have a performance mindset in terms of pay for performance.

David Roberts:   

I talked about this with Rob Harmon, too, that measuring energy efficiency with enough precision to make it into a saleable market product is relatively new. A lot of market and policy structures that were built before that was possible are lumbering to move to take account of it, but it's a new and exciting thing that you can now commodify energy efficiency like this.

Andy Frank:  

You hit the nail on the head. That's something that's really changed in the market, and it’s certainly made a business like Sealed possible. We're not the first one to think about or try to do something like performance financing for residential, but what we did that was different was, instead of trying to solve essentially an engineering problem and try to calculate the energy savings based on any number of crazy DOE energy models, we threw that out and said “I don’t know if that's an impossible problem, but it's a stupid problem to solve. Let's solve a very possible problem, which is actually measuring this from a statistical basis.”

We leverage machine learning, specifically predictive analytics, to look at how actual homes use and save energy based on different home characteristics and different project types. So we can be very confident in a portfolio of homes that a certain amount of energy is going to be saved, to the extent that we can go to an insurance company, Hartford Steam Boiler, which we have a reinsurance policy with, and say “here's the math, here's what we're investing in” and they’re actually going to lend us money, or reinsure this portfolio of homes based on the accuracy of our predictions.

David Roberts:   

Where is Sealed currently operating? You just got some new funding; where are you looking to expand next? And long term, more speculatively, I'd love to hear blue-sky dreaming about what could be the next step in making things even easier for customers, being even more thorough in what you do in a house. Where's the next frontier in the residential space?

Andy Frank:  

To give you context, Sealed has raised more than $60 million, including $29.5 million in our last round, which was a Series B extension with Fifth Wall, Keyframe Capital, and Footprint Capital, which has Robert Downey, Jr. as an investor. So we’ve got some great investors.

My co-founder, Lauren, who's our CEO, led that round and did a great job; as far as I know, it's one of the largest venture investments in home energy retrofits in many years. We're in a great position to be able to expand our model and be able to grow. As you can imagine, with that kind of funding, we've been growing fast and plan to continue to grow fast in the future. 

To give you some perspective, over the last year or so we have seen revenue growth of about 4.5x year over year, we grew headcount about 2.5x, and we grew from one state, New York, where we've been based and built our business for many years, to now five states: New York, New Jersey, Connecticut (where I live now), Pennsylvania, and we recently launched in Illinois (which is where I'm from originally, so it was very heartening for me to be able to see that). We dramatically grew our heat pump sales as part of that as well. 

David Roberts:   

Still mostly Northeast, then. Which way are you marching? South, or are you going to come west?

Andy Frank:  

Our wonderful market expansion team is taking a look at different markets that we're going to go to. We do want to start to experiment with markets that are warmer than what we've seen so far.

David Roberts:   

Intuitively, my guess is that the colder the place, the easier it is for you to make business.

Andy Frank:  

Well, we're not sure about that. We're a very sick business – we like pain. We want it really hot or really cold, ideally both in the same year. I know in your climate, and in other climates, unfortunately due to global warming it's getting warmer and warmer in the summer. So we're taking a look at the different market dynamics in different places. We have not made a decision on some of the next markets we're going to go to yet, but you should be seeing us in many more states over the next year or so.

David Roberts:   

Are there competitors yet? Anyone else doing what you're doing? Do you expect other people to start doing what you're doing soon?

Andy Frank:  

We'll see. I will say, the things you have to put together to create a business like Sealed are varied and a little bit weird, so it's definitely a natural competitive advantage there. But the space of home electrification is generally starting to explode on a few different fronts, so we certainly expect competition. 

This is a model that's working, we're expanding, and part of the reason why what we're doing is possible now is because of the proliferation of digital tools. We don't have to open up a physical office, where we're storing insulation and trucks. When companies in the past, like Next Step Living or Mark Group, wanted to expand, they had to make big capital bets and move from one place to another. We can be a lot more agile in terms of how we do that, and that makes a big difference. 

As we grow and invest in the future, I'm excited about what we're going to be able to do in terms of creating a digital experience for buying home weatherization and electrification and other clean home improvements. We recently hired a new VP of product, Paul Zeckser, who came to us from HomeAdvisor. We're really excited about what he and his team are going to be able to build. 

We've recently also brought on a new chief revenue officer, Sarah Pierce, who comes from Better.com, from the mortgage industry. Seeing high-volume sales, being able to create digital experiences that allow people to buy in a way that is a great experience for the customer, also makes it easier for our team to be able to service them. So that's a big part of what we're investing in. 

At the end of the day, our North Star is making it easier and more valuable for people to buy clean home improvements – to buy a heat pump instead of a new boiler furnace.

David Roberts:   

You could imagine getting into stoves, into water heaters and all kinds of appliances; getting into smart home load coordination; getting into EVs, even, because they are a piece of the electrified home. How comprehensive a take on the electrified home do you want to do?

Andy Frank:  

Well, I'm not going to commit my product team to anything specific on the podcast, but I can tell you from going through my own home weatherization and electrification journey that there's a lot of great technology out there. Another reason why this kind of business is growing so fast right now is because the hardware is there, the technology is there. We've got smart everything. I recently bought a smart washer (and my smart dryer is backlogged a little but should get here soon). It's much more efficient than my old washer. I just put in a canister of laundry detergent, and then I never have to think about pouring out laundry detergent. I throw the clothes in the washer and press go, and it's done. 

This is one of the great things about the technology that's out there now, but also why we need companies like Sealed spreading the message and talking about this. 

David Roberts:   

The average homeowner can't possibly be keeping track of all these technology loans in all these different areas. They need someone to paint a big picture for them.

Andy Frank:  

Exactly. We're excited to help, and ultimately our goal is to take homes off of fossil fuel. When we are able to weatherize and electrify a home and pair that with renewable energy, we're taking homes fully off of fossil fuel. We're hitting the big stuff first, heating and cooling and your water heater – we do offer heat pump water heaters, I've got one myself now, works great. That's where you want to start. But to your point, where we want to be able to get people to is taking them off of fossil fuel and having a completely clean home.

David Roberts:   

That sounds like a great place to conclude, with a nation full of fossil-free homes. Thanks so much for coming on and sharing. 

Andy Frank:

Thank you for having me.