Scaling Profit with Purpose: Clean Energy Meets Capital Strategy with Dave Riess - Episode - 539

If you look at, if you drill into the commercial segment, a lot of activity in the commercial segment of the solar market happens in the multimillion-dollar kind of deal size scale.

And just to kind of put that into perspective in the context of the TAM, the total addressable market, $1 to $2 million system generally requires about 100,000 square feet of roof space.

What happens when an engineering entrepreneurship and environmental commitment collide? In this episode, Scaling Profit with Purpose, Clean Energy Meets Capital Strategy, we unpack how commercial solar is becoming one of the smartest plays for high net worth investors seeking aligned returns. Hello, and I am Dr. Allen Lomax, founder of Steedtalker Capital and your host on Streams to Impact. This podcast is where high income earners become high impact investors using secure passive strategies that turn wealth into freedom and freedom into legacy. We provide access to high-yielding private placements. If you're curious as to how you can participate, schedule a complimentary discovery call today and we'll explore your options. Well, let's dive into today's episode. You are about to meet Dave Reese, a founder who's merged deep engineering with high-tech entrepreneurship. And under his leadership, Wunder has become a major force in solar investing, managing over $1 billion in transactions that drive change and returns for investors. So welcome, Dave. We're so happy to have you with us here today. So if you will just tell us a little bit about what led you into Wunder from its founding to over $1 billion in transactions.

Awesome.

Thanks for having me.

Yeah, so there's a fairly circuitous backstory to Wonder, as I guess tends to be the case, but it really all originates from a quarter-life crisis that I had, realizing that I'm going to spend a lot of time in my career working on really hard problems, and so I may as well work on the most important problems. As you noted, my background's in electrical engineering. And, you know, as I sort of had that realization, I started to think hard about what are the hardest problems, the most important problems to be solving. And at that time, and still today, at the very top of that list is energy.

Mm-hmm.

And so, as I kind of delved deeply into the world of energy, it became very clear to me that there's a massive opportunity in what we refer to domestically as energy transition that's happening within the United States.

And if you look at what's happening within the energy transition, I think it's a, it's pretty easy case to make that solar is the most exciting component of that. You can look at sort of just the growth rates across, or growth rate across that segment broadly.

And you can look at the various different opportunities that exist within that segment.

And that's ultimately, you know, where, where we sort of settled on commercial as one of the most underpenetrated, underserved, and underaddressed segments of that market. It turns out that, you know, the, the reasons why there is so much opportunity are generally, you know, in commercial specifically, are generally driven by the fact that the problems that sort of constrain growth in that market have historically been rather challenging. And so we set out about 11 years to really tackle those things and have evolved the company meaningfully as we've addressed sort of a broader and broader cut of challenges that have historically kept growth within the commercial segment at bay.

Well, thanks for Thank you for giving us that background, Dave. So you had mentioned that there have been a number of different problems that have faced the solar industry and that a lot of that really was related to the commercial aspects of that. So what were some of those core problems that you have been attempting to solve over the last 11 years? And how has the vision evolved over the last 11 years? I know There's been huge changes in technology, and I know that that's affecting not just solar, but everything in our lives. So how has— what were some of the initial problems and how has it evolved?

Yeah, so there's kind of a few categories of headwinds that the commercial market has historically faced. And I think maybe to understand them, it's helpful to think about sort of what the full breadth of the renewable energy or the solar market looks like.

And can, when you take that zoomed out perspective, you see that there's basically 3 segments that we divide things up into. There's on the one end residential, which is what you think it is. There's utility scale, which is, you know, giant installations out in the desert, you know, CapEx of $100 million and up.

And then in between residential, nominal transaction size, maybe $10,000 to $15,000, and these $100 million systems is what we call the commercial segment, which is strictly speaking for a long time has been defined as non-residential and not utility scale. So it's a pretty big cut. And so if you look at what happens within commercial, you see a couple of dynamics that have historically caused friction. So number one is How capital is allocated.

So in residential, it's allocated generally on the basis of FICO. Underwriting is essentially, you know, uses FICO as a risk proxy, as does a lot of consumer finance.

And then at the utility scale, it's project finance.

You know, if you're doing a $100 million transaction or a $400 million transaction, you can afford bespoke underwriting, bespoke legal structuring, and so on and so forth. Mm-hmm.

And then when you look at the commercial segment, basically, you don't have FICO to lean on for kind of a highly homogenous kind of commoditized form of risk evaluation. But in a lot of cases, you really don't have sort of the scale of traditional project finance to absorb the transaction costs of bespoke underwriting.

And so you kind of end up, at least historically, in a little bit of a no man's land.

So that's sort of, you know, access to capital is one segment. I think the other thing that I would point to is 2 other things I'd point to.

Number one is cost structure. So it's a really similar dynamic, but in general, if you look at, if you drill into the commercial segment, a lot of activity in the commercial segment of the solar market happens in the multimillion-dollar kind of deal size scale. Think like $2, $3, $5, $10 million of CapEx. And just to kind of put that into perspective in the context of the TAM, the total addressable market, A $1 million system or a $1 to $2 million system generally requires about 100,000 square feet of roof space. So you need about a 100,000 square foot floor plate for a building in order to justify about $1 million or, you know, $1 to $2 million of CapEx for, you know, deployment of that system. And overwhelmingly, if you look at sort of the US building stock commercial setting that we operate in, 98% of the commercial building stock has a footprint that's smaller than 100,000 square feet. And the whole market skews kind of, at least by our industry standards, towards the small end of that continuum, which means that overwhelmingly the opportunities in this market are sub-million-dollar CapEx. That's kind of the conclusion. And so when it comes to sort of operational excellence, operational efficiency, cost structure, it's a really, really important in this market if you want to achieve any kind of consequential scale to be able to operate in a way that enables you to profitably serve that sub-million-dollar CapEx sort of kind of segment.

And that's something that historically has been rather tricky. So access to capital, controlling deal costs, and the final piece, which I would actually put at the top of the list in terms of its importance, is really just the quality of the customer experience.

It's like any product. Energy is no different. Rooftop or on-premise energy, solar, no different. Our customer in this context is a commercial real estate owner. And so I think one of the things that our market has done very poorly historically has been sort of constituting these sorts of transactions in a way that commercial real estate owners are excited to say yes to. And so that's one of the things that we're really focused on.

is basically delivering these on-premise energy assets in a way that is low pain, low risk, you know, on time.

We seek to, you know, underpromise and overdeliver. And what we really want to do is create a deployment experience for our commercial real estate owners that enables them to do, you know, 1, 3, 5 initial projects with us and then be excited about saying yes to the next 50, the next 100, because most commercial real estate is owned institutionally. And so those are kind of like the 3 ways that I, I would segment the challenges. There's other things to point to, but broadly speaking, I think, you know, this customer experience is sort of the umbrella that everything sits within. And then the other factors, the cost structure with which you execute and your ability to access capital and flow capital into those opportunities are supporting actors in being able to ultimately deliver.

I want to come back to this, the commercial real estate owners and the dilemma of trying to interest them and to please them. But before we go to that, most of our viewers and listeners are high-income, high-net-worth individuals and looking for investment opportunities. And so I want to come back to this aspect of capital and the challenges you are facing in conjunction with attaining that capital. And how is it that private individuals can can help in that, as well as, of course, what kind of returns could they be expecting by joining in that as private investors?

Yeah, so this is something that has changed really a lot over the years. So when we established the business, we were primarily focused on kind of the capital allocation component of this puzzle. And in fact, when we established that business, you know, we were, it was a very different business.

It was, is in a lot of ways much more narrowly scoped. We were focused on essentially underwriting and financing projects, third-party projects in the space. You know, fast forward to today, you know, we are now kind of a front-to-back, essentially a developer where, you know, we transact with a commercial real estate owner and we do everything from manage the commercial real estate owner relationship and that sale all the way through. design, construction, permitting, operations, and so on. But anyway, if you rewind the clock to where we started, when really access to capital was a very acute problem and it was a meaningful constraint on the market, one of the things that we very quickly realized, kind of going again sort of to this observation of where is the TAM, where is the market today, how do we close the gap between those 2 things? Because you realize that essentially, for all intents and purposes, the majority of projects that were getting done in the commercial space were getting done on the basis of investment-grade credit. So when I opened by saying that there's no sort of FICO equivalent in the commercial segment, it's sort of— there's an exception to that, which is investment-grade offtake. And so if you have a project that you are deploying capital into and the revenue stream So, you know, in our market, revenue comes from the sale of electrons in some way, shape, or form. And so if that revenue stream is backed up by an investment-grade credit, think like a corporate, like a Walmart or a Target or something, Home Depot, something along those lines, then, you know, generically, you know, there was financing available for those, for those sorts of credits. However, you know, those investment-grade credits represent a perishingly small proportion of the total opportunity set that exists within commercial. And so that's, that was really the initial innovation that established the business was what we call internally our solar-first underwriting strategy. And our solar-first underwriting strategy is ultimately, there's some nuance to it, but it's fundamentally fairly simple. What we really focus on doing is deploying high-quality energy assets on top of buildings that are likely to remain occupied for long periods of time in markets where the capital costs of deploying that energy asset enables us to undercut the utility. So that's kind of the tenets of a successful investment from our standpoint is that certainty of a customer for the energy, the certainty of energy production, which is a function of the quality of the underlying system, and then the certainty of a sort of relatively competitive value proposition relative specifically to the next best option, which is in basically all cases is the utility. And so if we have those kind of tenants satisfied, we generally see really high payment performance. And over, you know, half a billion dollars of financing, you know, that really proved to be the case. And that's really where we kind of cut our teeth scaling that up.

You know, so to get to your question, you know, I think there are, when, I mean, I guess kind of going back to the establishment of the business, that was very novel, right, at that time.

And I should say that underwriting methodology, the idea that we were not exclusively financing projects based on investment-grade kind of energy purchaser credit ratings.

And so we had a chicken and egg problem, right?

We had a novel underwriting methodology, and you can't really prove a novel underwriting methodology until you have capital. And of course, you can't really form capital from certainly at least Wall Street until you've got a track record.

So the way that we solve that is we actually built a crowdfunding platform.

So if you'd asked me this question back in 2016 through kind of 2019 or '20, I would've said, well, you go to wondercapital.com and you can invest there.

We no longer do that.

And just, I guess, maybe to connect those dots, that was essentially our, maybe it's obvious, but that was the solution to our chicken and egg problem because individual accredited investors have an ability in a sort of agency to think in a way that's different from professional investors, where a professional investor is very much generically indexed on where precedent is in the market. And if something goes sideways, are they going to lose their job? That kind of thing, whether it's explicit or implicit, that's part of the calculus. With an individual credit investor, I think there's a much better-formed ability to think from first principles, think from fundamentals. And then also, a lot of cases in the early days, Our accredited investors were highly impact motivated, where you know they're like okay well these returns look attractive, but you know I'm fundamentally investing here because I believe in you know the the returns, but also the the the use of proceeds.

So in any case, you know if you fast forward to today, the I think the landscape looks a little bit different.

You know our capital now comes from Blackstone; it's now institutional. It's it's you know we we form capital at significant scale, and you know it's. relatively very competitively priced relative to where we were a decade ago. And so the yields have kind of compressed. There's still a little bit of a premium that's commanded in the commercial segment.

And so, you know, I think the opportunities to—

there are absolutely still opportunities to invest in this space. I think they're a little bit more tricky to source. I think that there are a lot of sort of local actors who are forming capital at scale that's conducive to sort of relatively smaller, single-digit million-dollar check sizes, that sort of thing. But again, I can't make any promises about how other actors in the space underwrite. I think our underwriting, no ego about this, but I think our underwriting is unparalleled in this market. And not for nothing, because we've done half a billion dollars of this underwriting, so we've got a lot of repetitions in the space. We've got a lot of experience doing this stuff.

Yeah, well, thank you for clarifying that. Let's move back to the commercial real estate investors and bringing the product to them. The thing that I have always seen standing in the way of commercial property owners going with alternative forms of energy is because oftentimes it is the tenants who are paying the utilities, and there just is no incentive incentive from that perspective for owners to put forth any capital in shifting that situation. Is, have you found that to be the case or?

So I think you're, I would just modify one thing there, which is that I certainly agree that there's in most cases not a lot of incentive for commercial real estate owners to deploy the capital. However, There is an incentive for them to undertake these transactions.

There's actually a few incentives.

So number one is that there's a few different sort of forms that our transactions take.

There's a few different sort of structures we use, but overwhelmingly what we're doing is we're approaching a commercial real estate owner with a roof lease proposition where the value proposition to the commercial real estate owner is property-level NOI. So we say, hey, commercial real estate owner, we can help you generate additional NOI for your property. And we do that by paying you a roof lease payment for the rights to locate energy equipment on your rooftop. And then we take full responsibility for monetizing the electricity that comes from that array. So it is accurate to say that most tenants are responsible for energy costs. But I also think that, you know, we've, we've arrived at a scenario where There very much is a real incentive.

I think the ancillary incentive here, which is, I think, present today in 2025, but is absolutely going to become much more of a factor over the next 5 to 10 years, is the tenant motivation, the tenant benefit. So the presence of an energy asset on a rooftop provides what you can think of functionally as a physical hedge against rising electricity rates. And so there's a lot of businesses, you know, that comprise, you know, the domestic economy where electricity isn't something that operators are thinking a whole lot about.

But I think it's important to recognize that, you know, over the last 20-plus years in the United States, energy demand, and in particular electricity demand, has been rather flat.

And that's changed over the last couple, you know, 3 or 4 years. We're starting to see electricity demand increase again at a pretty astonishing clip.

And that's driven by, you know, everybody wants to point to data centers, and that's a big factor that's sort of in the zip code of maybe a quarter of that upward pressure on demand.

But it, but the rest of that, the 75% remaining, you know, is a function of fleet electrification.

It's a function of building system electrification. It's a function of reshoring. And so the, in general, you know, we really divested of manufacturing in kind of starting in the late '90s. And I think that trend is reversing in a big way. And our energy infrastructure is just not set up to build at a meaningful pace, more generation.

So all that is to say, from a commercial real estate owner's standpoint, tenants are going to start to feel that.

I mean, we're going to see in markets unprecedented levels of electricity rate escalation. We're talking, you know, there's going to be cases where we're going to see north of 30% annual increases.

That's not going to be across the board.

It's going hit the market in an inconsistent way. And, you know, but, but in any case, I think the, the reality is that there are going to be a large number of markets, especially markets that already have elevated electricity costs, where tenants are going to start to make property selection decisions, at least in part informed by what the energy reality looks like on the ground in those specific locations. And so we find that our commercial real estate owners are very interested in staying competitive, um, in, you know, a landscape, you know, lease-up is very important to all of these guys. And so, um, anyway, I, I think that there's, there's sort of ancillary benefits there. And, um, and, and our objective, you know, as much as we are a mission-driven business that is focused on scaling and accelerating the pace at which we're deploying renewable energy domestically, um, you know, we realize full well that the most potent way for us to do that is by harnessing the free market and really by You know, building sort of a, a capitalism-driven engine. And what that means is delivering a value proposition to the commercial real estate owner where, you know, items 1, 2, 3, and 4 are economic and maybe item 5 is, is, is environmental. But, you know, it's, it's sort of a supporting actor, if anything.

Well, you mentioned environmental, and of course, one of the driving forces for solar has always been that aspect of, of the environmental issues. And yet The solar industry, wind industry, and so on and so forth are really falling really short in terms of really making that environmental impact that was envisioned because the components building those components is anything but environmentally friendly, and of course they always have to be continuously replaced. And in conjunction with that, they also they. The oil and gas consumption, as solar has started coming on, is not really decreasing. So it's not really making the environmental impact that was envisioned. So being in the industry there, what are you as industry leaders— how are you looking at that issue? What kind of mitigations are you looking towards to make this fulfill the dream that was there when we started down this road?

Yeah. So I mean, I would go back to kind of what I was— the thread I was just pulling on, which is that my fundamental belief is that the way that we get to the promised land here is by harnessing the power of capitalism and by harnessing the power of free markets and through high-quality execution and operational excellence. That's how we get costs down and that's how we get to scale. I would challenge the premise that we haven't made a lot of progress on this. I think You know, this is, this is a big market.

I think one of the things that, you know, as an investor, I think it's oftentimes a little bit difficult to appreciate the sheer scale of the energy market. And there's very few markets that comprise, you know, the proportion of GDP that energy consumption does.

And so, you know, I think that, that's, that's both sort of a justification for why it's something that's not happening overnight, but it's also maybe more importantly a justification for why it's so important to have the tenets be rooted in capitalism rather than federal handouts or state incentives or that sort of thing.

We, you know, I really want this technology to perform and compete on its own merits. You know, as far as, you know, the kind of full lifecycle impact goes, you know, I think it unassailably, the new generation that is coming onto the grid, despite, you know, all of the headwinds that we face, is overwhelmingly renewable. 90% of all new generation in 2024 was wind and solar and dominated by solar.

Mm-hmm.

And especially, you know, in the wake of One Big Beautiful Bill, I think we're gonna continue to see solar take even more market share of that renewable generation. And I think that we're gonna continue to see the share of new generation being deployed on the grid annually be just absolutely dominated by renewables.

It just, and, you know, this really boils down to the fact that it makes more economic sense.

It's really powerful to not have input costs into your generation. You know, we don't pay for photons. We get those photons, you know, from the sun for free.

Mm-hmm.

And we convert them into, we magically convert them into value, right?

And so, you know, I think, I think we're still— I don't wanna say we're early days.

I think we're getting— the market's getting to a place of higher levels of maturity. But the world, whether you're talking about the Energy Information Administration or you're talking about the kind of international agencies, has always wildly underestimated the rate at which the deployment of these technologies will grow. And I think we have really yet to see kind of like the main act, if you will. I think that the rate at which we're gonna start to see this equipment being deployed over the next couple decades is gonna be pretty phenomenal. And that's ultimately going to be driven by the supply and demand dynamics. We've got increasing demand, we don't have expanding supply, and so that's going to put upward pressure on price, and that's gonna be all the tailwind we need from a kind of free market standpoint to really drive adoption. And then as far as the cradle-to-grave perspective, I think it's some form of the argument that EVs are not clean because they consume energy that's generated at centralized generation facilities. And I just fully reject that argument because we can't have progress to a better tomorrow without some stepwise changes. There's just no feasible way for us to kind of overturn all of our incumbent infrastructure in one fell swoop. And so maybe we have a different opportunity when we colonize Mars. We can build these systems from the ground up to be sustainable from the jump, but that's just not the sort of Reality of where we exist, and so fundamentally I think fleet electrification is very important.

And again, it's the same thing where I don't know.

I'm sure you have people listeners who own EVs. They're objectively better vehicles.

Like there's just there's no two ways about it.

They're higher performance on every single dimension, with one exception being range, which is you know quickly becoming a thing of the past. But I mean, if you just look at the maintenance on these things, if you look at the performance, if you look at the number of moving parts, there's just so many ways in which electric vehicles are just. objectively superior technology. And the same is true for distributed and renewable generation. Historically, the caveat has been cost, and that's really no longer the case in a lot of markets.

Well, in our closing question here, Dave, looking ahead, what do you see the trends in terms of clean and renewable infrastructure? What do you find most exciting about looking ahead?

I think most exciting to me is really just the scale of the opportunity that remains before us.

I mean, part of it, I think to your point, is it's, we sort of, I think a lot of people in this space wish we could have gotten to greater levels of scale more quickly, but I think it's also important to take stock of the fact that the growth within the market has been pretty consistently pretty remarkable.

And so for me specifically, if you look at those growth trends, What I'm specifically most excited about is very much the commercial market, and that's because that has actually been an exception to the growth story that exists within solar.

You know, over the last 2 decades, we've seen very high levels of sustained growth within the utility-scale segment, and we've seen very high levels of sustained growth within the residential segment. And the CAGR, you know, like the 5 or 10-year CAGR on commercial generally hovers inside of 1 point. You know, it's a very, very slow We see something in the zone of $2 to $3 billion a year of new infrastructure being deployed in the commercial segment annually. And the reason that I don't think we've seen major sort of year-on-year deployment escalation has been because of the confluence of some of these challenges that really keep that growth at bay. And that's really what I'm excited about solving because of the extent to which deploying technology in this segment can actually move the needle for the cost of power that's delivered to the plug in a commercial setting. And so that's, you know, there's a lot of work left to be done and there's gonna be a lot of strong returns generated in this market. And it's very much not as though the train has left the station. There's still plenty of opportunities to find ways to deploy capital against those themes and against those trends.

Well, Dave, wonderful having you here today. Thank you for sharing your wisdom and knowledge in regards to the prospects of alternative energies, and glad to hear that it is progressing to the degree that it is. I look forward to that becoming even accelerated, as I know that you do as well. So, enlightened investors, thank you so much for being with us today. We're always honored and privileged to have you with us. Thank you for taking time out of your day to be with us. If you've enjoyed today's conversation, please take a moment to like, share, and subscribe. And until we meet again, live abundantly. We'll see you in the next episode.

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