The Exchanges

Q bunch of time, you learn about this market. I guess I want to talk about how it is structured today, and that'll segue into how it could be better, but maybe let's step back at the high level. Like, can you walk me through the value chain of the heat pump market? As it exists today, like who are the big players, and how do they interact in the ecosystem?

A Yeah, so I'll also focus on residential heat pumps because for, for heating and cooling, because I think most people in the pod know that heat pumps are technically just everywhere, right? They're in cars, they're in fridges, they're, um, in tons of commercial applications. So for residential heat pumps, um, they, There, there's sort of the central AC and there's kind of the large American brands people will know there that, that they've been producing them for a while, you know, carrier and train and companies like that. Um, with the mini split market, it tends to be pretty dominated by Asian brands. So a lot of Japanese companies, Mitsubishi, Daikin, Fujitsu are all quite popular. LG, Samsung all make them as well. So there's also some Chinese companies, GRI and Medea. Those are, those are sort of the, the, the big players. And yeah, the way it works is they have factories in Asia that produce these products at very, very high volume for a global market. And then they're sold to, uh, distributors in, in each country, uh, very large ones in the US. And so there's, there's kind of a markup there that happens. And then the distributor will go on and sell it to end contractors who will hold the inventory. And then the contractors will go and, uh, sell that on to the end homeowner. And at each stage of that chain, of course, there's, there's a markup on the pricing. And the final,…

AI assessment note: “sold to distributors in each country... sell it to end contractors... on to the end homeowner”

Q it turns out it's not. In fact, in the U.S. in particular, solar, residential solar is still ridiculously expensive, Despite the fact that panels have gotten very cheap because most of the cost is outside the panel. It's either other hardware or more importantly, it's the soft costs, the permitting, the installation, labor, all that kind of stuff. So how does that, is that a similar dynamic in heat pumps?

A It is. It's a very similar dynamic and, uh, it's not quite as dramatic because the costs are not dropping at the same pace they were on the panels. But when I look at the three big cost drivers to our final costs, so labor materials, like non-hardware materials and our hardware. They're actually in that order in terms of size. So we spend the most on labor, the second most on material. So I'm talking about like line sets and mounting brackets and things, and then the third on our actual hardware, the thing that says quilt on it, the stuff that says quilt on it, the dial, the indoor unit, the outdoor unit. And that was really surprising for me as well. Um, so that, yeah, that's the same structure in the industry. The relative cost of the heat pump itself is Is, it's small. It's probably 20% or so of the overall cost. And, and there's, there's actually a mistake I think some people make where they Google mini-split, and they'll find, ah, they'll go to HVAC Direct or something online, and they're like, oh, I can buy this Mitsubishi for 1500 bucks for, um, indoor and the outdoor unit. Like, why is this guy trying to sell it to me for seven K? Well, in terms of seven K is actually a fair price, because that's actually those, you know, you have to add the materials and labor and then everything else associated with it, so.

AI assessment note: “It is. It's a very similar dynamic”

Q to ultimately have mini splits replace central units? Like, you may be, these are customers who do have a central HVAC system that provides heating. You are the Trojan horse with cooling, with mini splits, and then, but then ultimately they just say, okay, like, I'm not going to replace my boiler whatsoever. I'm going to, I'm just add a bunch more window units, or I mean, sorry, room units?

A Yes. Well, I should, I should, I should say that I think 60%, we actually just pulled the stat, it's about 60% of our customers are Uh, coming from a central ducted system. So it's over half of all our customers are abandoning, ah, a central heating and cooling system. And by abandoning, I should say upgrading to, um, to a ductless system. But, um, a lot of the rebates are predicated on removing the fossil system, and so we actually have to take photos of it, you know, the furnace is there, and then the furnace not being there, and the nameplate, and, ah, in order to get the rebates. So, what often happens is someone comes to us for cooling, and they're like, oh, well, actually, yeah, I guess my furnace is, like, Nine years old, 12 years old, whatever. It's gonna go pretty soon. You're saying, I get an extra two, two grand off the price if we just pull it out. Let's do that. And that's usually what happens. And so one of our top company metrics that we literally report every Tuesday and we report to the board is dead furnaces. We have a furnace graveyard, and we are very proud of every time that we pull a fossil system out of, uh, out of a home. It's one of our key metrics.

AI assessment note: “about 60% of our customers are Uh, coming from a central ducted system.”

Q is the point. Is it, A barrier to price of electricity at this point? Or are we still in the kind of early adopter-ish segment of customers where, look, like, maybe it's, it's hard to tell over the long term, am I going to save money on this or not? But I care about this because of X, Y, Z. It's a better customer experience, no fossil fuels, et cetera.

A Yeah, I think this is something where that, uh, consumer bias to look at the CapEx or the OpEx is actually in our favor because people see the rebates available. And they're like, yeah, I want, I want that money. I want that 5000 dollars, 2000 dollars, whatever it is. That comes off the purchase price. And that is usually tied to removing a fossil system, and in some cases, it's capping the gas of the home overall. And so that is driving people on the economic side. Um, and, and just speaking from my personal experience, yeah, we are still in the early adopter segment, right? So at some point, we'll be doing millions and millions of homes. We're not there yet, so we get to, you know, sell to people who Already at some level bought into a heat pump, and they want a product that, they want to feel like they're getting the best product possible.

AI assessment note: “yeah, we are still in the early adopter segment, right?”

Q And in the markets that you're going after, in the markets that are higher penetration heat pump markets, is it predominantly cooling or heating? I guess I hadn't thought about the purchase behavior as being different for heating versus cooling, because these units do both.

A Yeah, they are, and in fact, the cooling is a really great, um, Kind of Trojan horse in for the heating side, so a lot of people, especially on the West Coast, maybe not so much Southern California, but really Northern California all the way up to Seattle, um, are adding cooling. The world is getting warmer, and, uh, there's a lot of people out there shopping for cooling, and when they learn that these systems can then also do heating, they'll either turn off their central system, or just when they get, you know, whenever the furnace dies, they'll just stop using it, but for us, it's, um, Yeah, it's actually primarily cooling right where we are right now, which is the Bay Area.

AI assessment note: “it's actually primarily cooling right where we are right now, which is the Bay Area”

Q you're still relatively Fresh eyes on this three years in now, more or less, to thinking about this sector. I guess I'm interested, as you started digging in, going down that rabbit hole in the first place, like, what were your observations at that time around the heat pump market? Either the products that you were seeing out there, or, like, how they were getting installed and sold and adopted?

A Yeah, it did start with the product. So I started Googling heat pumps, probably the same thing as everyone else, and I found, um, these, you know, mini splits. I didn't know what that was. I had to look it up. That's a new concept for people who haven't Either had it as an AC before or new to heat pumps, because you can't make a fossil fuel mini split. It just doesn't make sense. And, um, it kind of struck me right away that these things could potentially be really cool, but they were really ugly. And, and being really cool, like you could, could control each temperature in every room, and that was something I was struggling with. Um, we had, we had a newborn at home, and we were honestly stressing about the temperature in, in that room. You know, you're not allowed to put blankets in the, in the room, or in the crib with the, the, the baby. So you're always really Controlling temperature of that room, the whole rest of the house will suffer. And, um, and, you know, I spent most of my career making consumer technology, and it just kind of jumped out at me as something that had kind of been Not really looked at in a couple decades. It kind of felt like a relic of the late-twentieth century product design. Um, so that's what first jumped out at me, and then I actually did go to try to get one installed, and then the whole, you know, classic story around heat pump adoption on that…

AI assessment note: “these things could potentially be really cool, but they were really ugly”

Q Right. What about the, so that's like, how do you reduce the number of truck rolls before you install the thing? Um, what is their, where is their headroom in the installation labor itself? Like, what can you do to drive that down?

A Yeah, I think that there is going to be, um, so we've actually already done some in that we made the unit quite light, so you can, one, one person can do it as opposed to two, and that's, that's a huge deal. Uh, we have also, um, if you look at, like, where a lot of the cost is, it's, um, uh, when it comes to kind of, like, in-wall installations, that's a very complicated one, so meaning, like, you have to run the line set through the wall versus on the outside of the building, and, um, there might just be smarter, Design things we can do there, like, um, either create a line hide that doesn't bother people in any way and is actually pretty invisible, so more people are willing to do the outside wall, or we just talk to the homeowner at a time where they're already going to be doing some renovation or have their walls open. Um, I don't see any silver bullet there, to be honest. I think it is a series of iterations of, like, looking at the pain points, where are the hotspots, solving them. It's almost like optimizing software in a way, right? You just kind of look at the whole process and Figure out where you can make the biggest impact. And luckily we're early enough in our journey that I think there's still a lot of headroom on the table. Um, so we, I am expecting to see improvements there, but it will start to plateau eventually. Unless there's some radical technology change …

AI assessment note: “we made the unit quite light, so you can, one, one person can do it”

Q mean, I guess I, I can see why we're not there yet on a totally virtual quote that is trustworthy on heat pumps. It's not good to me whether we can ever get there. Do you think there's a way we get there ultimately, or is this just like a folly of a thing? Because there are a lot of people trying to Do it or talking about it anyway.

A Yeah, I mean, I wouldn't be a good Silicon Valley tech entrepreneur if I could say that it's impossible, right? Like there's got to be some tech that could be invented, but the way we're thinking about it is, you know, you get, you get a classification of sort of difficulty of jobs. So, um, if it's a, a home that maybe, maybe it was built, um, as part of development housing, we've actually already installed on that house. So we can, um, the, the same sort of plan, but it's just a different version of that plan. Um, and maybe it was an easy install and it's just, All external walls. And we have these sort of confidence drivers that could make it kind of a class one. And then we're going to, we feel like there's a class there that we will be able to get to virtual installs pretty quickly. Um, another single room, uh, or yeah, single, single zone, one, one heat pump, exterior wall, those are usually pretty easy. Um, but the difficulty level can get really, really high. Like we've seen some crazy installs with San Francisco, you know, Victorians, row houses that you're going through a hundred year old structure, multiple levels, neighbors on both sides. There, I do not see how you're ever going to do that virtually, at least, at least not with some pretty good robots and, and, you know, x-ray vision.

AI assessment note: “There, I do not see how you're ever going to do that virtually”

Q Okay, so that's maybe why it's sort of still hard, a little hard for a lot of people to get a unit sold to them, surprisingly enough. Um, but what's your, what was your, what's been your thesis on, like, what is a, what's an ideal customer experience, sales experience look like for a heat pump?

A Yeah, well, and I'll also say that, um, The whole industry here is, feels kind of stuck in the 20th century to me. And what I mean by that is that it hasn't had the internet be a fundamental building block in how it thinks about you, the sales process and distribution system. So, the reason that everything is, has so many steps, the, the value chain described before, is that it wasn't possible for a consumer to just talk to a manufacturer and order a product. And you saw the same thing happen in cars, of course, right? With, um, really Tesla being the major first brand to skip the dealership because they could build that direct-to-consumer relationship. And, Because the internet allows you to do that. It also allows you to skip travel agents, and lots of other examples, right, where, uh, once you bake it in, you can, you can simplify the, the, the value chain. Um, so I think the ideal customer experience, probably, for a lot of people, does start on the internet, where you do some research, you're probably Googling it anyways, to figure out what a heat pump is, and what, what, what's a good product to buy, what's good for my house. Uh, you can get a, a fair quote, you can actually see what it's going to cost for your home, or at least get a pretty good sense, something that a company will stand behind. You get a sense of the products. You actually know what it might look like i…

AI assessment note: “ideal customer experience, probably, for a lot of people, does start on the internet”

Q app and so on. Which of these do you think, I mean, do you have a sense yet as to what is really, because the goal here is ultimately to dramatically expand the heat pump market. So like, what is going to drive, if you have to rank order, what's going to drive sales through the roof? Which of those things do you think is, is what really drives behavior?

A Yeah, so I, I like to go back to just, what are the problems? Like, what are the problems that people are struggling with, and then how do we solve those problems? And then, uh, at the top, what kind of drives into the funnel, then once they're in the funnel, what are the other problems they're encountering? So, the things that driving people in are, they want to be comfortable in their home, which is obvious to say, this is why people are going out and buying cooling, right? And if their furnace goes out or whatever, or they have the baby coming, they need to get, um, heating. And, um, and then a cost, of course, as well, right? So, when, that's kind of the next step in it, but if they're, if they need to buy something, they, Generally don't want to spend as, they want to spend as little money as possible to get as much value as possible. Um, and, and of course that, that does vary a fair bit by, um, market segments and people are more cost conscious than others. Uh, and what we have focused on is trying to drive those two, those two value drivers as, as much as we can. So, and the way we do that is, um, less on the CapEx side, but more on the OpEx side. So, um, really focusing on efficiency and trying to build an extremely efficient system. Um, Um, and, and I'm very, you know, proud to say that I think we've done that. And then, um, on the comfort side, uh, that's where a lot…

AI assessment note: “So, the things that driving people in are, they want to be comfortable in their home”

Q why do traditional HVAC technicians not want to sell heat pumps often? And then second, just generally speaking, what has been your thesis on like, how do you deliver a really good customer experience? Or maybe the other way to put it in, in more financial terms, like how do you reduce the pipeline fallout rate? How do you make sure that people who start the process finish the process?

A Yeah. So we'll start, start with the beginning one, which is like, where, why is it the way it is today? And I have a bunch of theories. I don't know if anyone knows exactly why, but I'm going to start with the assumption that contractors are good people who want to do right by their customers, and they want to grow their business, but there's no sort of, like, Malicious intent out there. Um, people, uh, okay, so contractors are generally representing a few brands, and some brands have made more investments in certain product categories than others. For example, the, the sort of more American brands, like the carriers of the world have been very into the, the central systems, and those, um, do work a little bit better with, uh, um, I think the, the furnaces are, are more inherent to the central system, because you can't get a, a ductless, uh, Furnace, as I said earlier, when if you're carrying a Mitsubishi or Fujitsu brand, you might be more willing to sort of say you should go that way if you're doing the ductless. That's one thing. Um, there is, the cost is a real thing. So, like, essential heat pumps, if we're going to say, compared with the furnace, um, are still generally more expensive up front, and we haven't done a good job of capturing or, or, um, communicating energy-saving introductions, and the reality is it's a super complex story, especially in somewhere like Cali…

AI assessment note: “So we'll start, start with the beginning one, which is like, where, why”