Climate solutions-as-a-Service: hype or real solution for faster asset deployment?

We live in a time where pretty much everything is being offered “as-a-service”, from your clothes to charging your car. This model is becoming increasingly popular in climate tech, where new technologies are most often hardware based and may have large upfront capital costs. But “a-a-S” is no magic fix; you can’t turn steel, concrete, or electrons into recurring revenue streams just because you want to. Instead, you need a thorough understanding of the customer needs, structuring and financing aspects of turning gross margin into recurring revenue.

There are many benefits from the a-a-S model, both to the start-up offering a product, as well as to the customer paying for it. For example, the start-up may retain ownership of its assets, rather than selling them outright. And they can secure long term cash-flows, rather than making one-off sales. The customer, on the other hand, may benefit from the service, such as heat, electricity, mobility or fuel, rather than investing in expensive equipment upfront. And they may also be happier only taking on a smaller set of risks, rather than investing in and owning a new technology they cannot be 100% certain works.

So, if you are a company which is considering offering your climate technology as a service, the first step is to figure out what is the main driver for your customer is to go this route (for example, moving capex to opex, or the difficulty of assessing new technology risks) and to structure your offering around that. Say you offer heat-as-a-service: your customer will then enter into a heating contract with you, rather than buying the heater itself.

“But wait”, you may ask, “isn’t as-a-service just another fancy name for a lease?”. Yes, and no. I am all in favour of calling a spade a spade, but in this case, there are actually some differences between leasing and “a-a-S”. The main difference is the format. First of all, there are two types of leases, an operational lease and a financial one. As a smart, but anonymous, user on Reddit once described it:

“I explain it like buying a house vs renting a house: A financial lease is buying a house and having a mortgage. You own the asset but haven’t fully paid for it yet so are paying interest + principle. You are also liable for repairs. An operating lease is renting: you don’t own the house and can leave for a new one once agreement ends. You are less liable for repairs as the tenant (customer).”

As-a-service models are usually structured as an operational lease, but with all (or mostly all) of the operational risks taken on by the service provider (i.e. the OEM). The customer enters into a contract for the product. Continuing with the house analogy:when you are renting you get some basic price and quality assurances; if those are met you are required to pay rent every month, even when you are on holiday. And if the house burns down (i.e. the equipment malfunctions), the owner is not typically obliged to provide you an alternative house – although in the case of climate tech, you may still want to consider this.

Still awake? Good. Now let’s continue to the fantastic invention that is the modern “as-a-service“ model. Instead of selling expensive equipment (a bike, washing machine, an electric delivery vehicle, or equipment which produces a product like a charging station, heater or PV solar panel), you are now able to sell the service. So, in this case we take the convenience of clean washing, mobility, clean electrons for your EV, call it as a service model and enter into an as-a-service contract. What it comes down to, is that you as the lessor company now structures a cash flow from an asset. Where you would previously sell a product or equipment, you can now sell the product over time (or as some may call it an “experience“). You retain (part) ownership of the asset and trade gross margin today for longer-term monthly, or yearly income. Where you previously may have had to provide a guarantee that the product works as specified, through a warranty, you now take on the responsibility to fix it, or provide an alternative source of production / service, if it breaks down.

So how do you apply this to new technologies? A few very important items need to be taken into account:

First of all, who is your customer, and what do they want? A lot of startups think they have the answer to this straight way. “My product is amazing” they exclaim, “I have made THE product which will solve all my customers’ problems, and they will be queuing up to buy it!” If only it were this easy…

If your customer is B2B, or an industrial, their problems usually amount to one of the following things: solving for shareholder happiness by assessing return on investment, deferring capex, and complexity of the organisation itself (do I need less approvals from corporate HQ to buy heat compared to investing in a heating plant?). Sorry to burst your bubble, but very few large corporates have “reducing my carbon footprint and saving the world” as their number one decision making tool – it can be important, but it’s rarely the primary driver – it’s profitability and it’s simplicity which are.

Secondly, who takes what risks and how is this structured in the contract? The a-a-S model makes it easier for customers to price the service into their own products, since with a service it’s easier to assess the cost of heat, waste or electricity, than it is to assess the cost of owning and operating a plant. Please do not underestimate how difficult it is for a customer to calculate back their investment in your new (and to them, unproven) technology; taking their WACC, assessing expected production units (kWh, GJ, etc) and translating that to a cost per unit, residual value, and so on – where there is a 99.9% chance that you have a more optimistic view than your client… You can make it much easier for them by doing that job yourself and just offering the final product they’re actually after with a simple price.

And last but not least: FINANCE, FINANCE, FINANCE. Who pays for it all? The cost of capital differs widely for both you and customers. Many start-ups believe that they can structure financing of their assets very easily, because energy transition hardware is essentially infrastructure. And although this is true in theory, in practice you will only see this once you are up and running for a few years and have a whole portfolio of assets which have proven they actually work over a meaningful timeframe. If someone invests in both your company (what we call the TopCo) and your assets (often ringfenced into a separate AssetCo), it does not automatically mean that they will do it at a blended, lower, cost of capital. Because at this stage, the technology and business are still intrinsically linked, and therefore have an inherently higher risk profile.

However, given that your assets are infrastructure-like, you are still likely to be able to finance them at a lower cost of capital than your customers can. That may sound weird, but it is true: infra assets have the lowest cost of capital and your clients may have large balance sheets and excess cash and low cost of debt funding, but their equity returns normally offset those advantages. So de-linking the assets from your TopCo through (1) good structuring of risks and (2) a well-thought through financing plan still makes a lot of sense. You just need to be very smart about it and realise it takes time. You also need to be aware of who can provide the best financing option for your assets, a bank, specialist finance provider, lease company, or maybe a dedicated SPV AssetCo which is separately financed.

This may seem like a lot of work – and it is – but as they say in life, nothing worth having comes easy. The advantages that an a-a-S model can bring with it to you and your customers are significant. For your business, it may mean i) more effective use of your growth capital, ii) increased deployment speed and capacity, iii) higher returns to your equity investors, iv) access to a new customer sales channel and additional market segments, and v) long-term stable cash-flows and a predictable path to profitability. For your customers, it could mean i) lower costs and increased margins, ii) long-term price stability and visibility, iii) more attractive balance sheets and financing set-ups, iv) simplified operations, and v) meeting decarbonisation goals & requirements.

As you can see, the a-a-S model has both advantages and challenges. At VIRIDA we believe that the energy transition is built on hardware. Where classic asset-light businesses rely on rapid scaling through high-margin product sales, hardware-based companies require a combination of equity, debt, and infrastructure financing to unlock growth. We are building the platform to enable European hardware companies to outperform and it’s an inherent part of our mission to bridge the gap between venture capital and infrastructure funding. We do this by providing initial equity and then assisting portfolio companies with non-dilutive funding solutions that enable sustained expansion, including joint thinking around how best to structure the financing of the assets themselves.

Our team’s expertise lies in leveraging tangible assets, structuring working capital facilities, and designing own-and-operate models and leasing solutions that strengthen company growth. We’d love to chat, collaborate, and hear more about the challenges and solutions that you have come across as a founder, investor, or ecosystem player in this space – so if this resonates please reach out!