Let’s face it, most people are not early adopters, especially when it comes to their homes. Take the kitchen, for example, where many people still buy gas hobs despite the superiority of induction. Not because everyone is busy charring peppers over an open flame — but because they are slow to embrace change.
As for heating and cooling, it’s a climate issue. Together they represent approx half of all energy consumption in US homes. Heating is a particular challenge, as only 40% of homes use electricity; the rest burn natural gas, propane or some other fossil fuel. When the old furnace dies, its replacement is usually the same. To reduce dependence on fossil fuels, switching to electric heat pumps will be key.
“If your trusted contractor—the one you call to come to your home to help you figure out what to do with your system—doesn’t offer a heat pump, you’re just not going to buy one, right?” Anuj Khanna, Founder and CEO director of Service 1st Financial.
This gap between what contractors offer and what is needed to electrify households is part of the reason Khanna founded Service 1st Financial, which offers what he calls “home comfort as a service.” The company is announcing a $5.85 million Series B round today, which includes $15 million in subordinated debt, TechCrunch has learned exclusively. Hanna said he expects the Series B to close “before the end of the year.” The equity investment was co-led by S2G Ventures, which also led the subordinated debt facility. Other investors were not disclosed.
The company offers leases that allow homeowners to pay for their HVAC systems over time while tying them to maintenance plans for the term of the contract, which typically lasts 10 years, at which point homeowners can choose new system.
“The home comfort industry is this old-school, slow-to-change industry that’s still just selling products,” Hanna said. He said this was at odds with wider market trends which suggested people were now comfortable buying services instead of products.
HVAC contractors offer annual service plans, but typically only cover basic maintenance, which Hanna says is the market’s attempt to drive customer retention.
“They’re hoping you’ll stay on that plan long enough to eventually get the next trade-in sale,” he said. “The problem is that it doesn’t really serve its intended purpose. And it’s not a great customer experience because every time a contractor is usually in that home, they’re trying to sell something else to the customer. And that’s not what customers want – they want their system to be maintained so that it never fails.”
Khanna was inspired to found Service 1st Financial after leaving his last job at a private equity firm. There he led an investment in a large home services company owned at the time by HVAC manufacturer Lennox. He said that at the time of this investment there was “no discussion at the contractor and consumer level about sustainability”.
After the company was turned around, the PE firm sold it to Enercare, a Canadian company. In Canada, the leasing model is more common, Kana said, and Enercare is using the purchase to bring that business model to the U.S.
“I was sitting on the sidelines doing some other things in my career, and I was like, ‘You know, there’s a huge opportunity here.’ Consumer buying behavior is changing,” Khanna said. He founded Service 1st Financial in 2019 with his own money and an investment from Thayer Street Partners.
Today, the company has customers in 25 states. Khanna said his company’s portfolio is about 32 percent heat pumps, which is about twice the national average of about 15 percent of all homes. According to to the US Energy Information Administration.
The Inflation Reduction Act, which offers tax credits for heat pumps, is expected to weigh on the market. Khanna said leases are already up 80% year-on-year, and growth could reach 400% next year. In addition to geographic expansion, he said the funding round will also go toward building a learning management system to help train HVAC contractors. More partnerships may also be on the table. This summer, the company announced a partnership with HVAC manufacturer Fujitsu and has another partnership in the works.
Service 1st holds its leases in a special purpose vehicle, Khanna said, which is also the recipient of the subordinated debt. The SPV also has a debt facility with Forbright Bank, a lender that focuses on decarbonisation. The subordinated debt facility allows the startup to “leverage our equity capital for initiatives with extremely high return on investment in the parent company to continue to grow and scale the business,” Hanna said. He added that S2G was interested in the subordinated debt facility because of Service 1st Financial’s lessee’s “extremely low default rates and very strong credit quality.”
Hanna said his company has been approached by utilities interested in Service 1St Finance is driving its energy efficiency programs by moving away from selling discounted items to a service-based model.
“Their focus is on electrified heat pumps. Can we incentivize the purchase of electrified heat pumps through a service-based model that can allow homeowners to replace these systems every 10 years?” he said.
It’s a very different model than what American utilities are used to, but they’re finally interested in trying something new. “I think that’s where the Inflation Reduction Act is causing some organizations that normally take a long time to make decisions to act very quickly,” Hanna said.