In March 2016, one of the fastest-growing companies in Boston, a potential rival to Elon Musk’s SolarCity, shut its doors abruptly, putting about 200 people out of work.
Next Step Living had raised a reported $80 million in venture capital and reached $100 million in revenue on founder Geoff Chapin’s mission to change the world by becoming the Amazon of home energy efficiency installations. And yet, the company leaned sideways and fell apart, seemingly overnight.
This is the story of how venture capitalists’ overreach, a huge fiscal blind spot and New England’s worst winter ever brought Next Step Living to its knees. Even as it tightened its belt, cash flowed freely inside Next Step’s South Boston headquarters, employees said. A venture capital power move provided the coup de grace that swiftly ended it all. Now, its owners are plotting a new company out of the ashes.
The story begins in 2012. Next Step was doing home energy audits, sending consultants into residences to advise on how their homes could use less energy and frequently coming back to install everything from compact fluorescent light bulbs to solar panels to better insulation in old New England houses.
Once an option only for the rich, home energy retrofits were now more widely accessible, subsidized by state incentive programs. In Massachusetts, a program called Mass Save drew funds from a utility surcharge to pay for the audits and installations.
In 2012, Next Step raised its largest VC round yet, an $18.2 million Series C led by VantagePoint, a West Coast firm noted for clean energy investing. The new investors wanted the same thing every VC does: top-line growth.
“The message was pretty clear from the new investors and from others: Go grab every dollar of revenue,” said one investor.
BostInno talked to several Next Step employees and investors, as well as others close to the company, for this story. Some asked for anonymity, due to a variety of factors. The world of cleantech investing is small and some said they feared ill will from other people involved with the company.
They all described how, after it raised a larger round of venture capital, Next Step started selling its home energy customers every installation it could think of: heat pumps, solar panels, windows, insulated siding, and heating and air conditioning - anything to boost revenue. A short-lived commercial arm developed a heat energy recycling device for restaurant dishwashers, according to one manager.
Next Step Living was spread thin, investors and managers said, entering categories where it had little expertise. In many of those categories, it was losing money on each sale. News reports around the time of its shutdown blamed sluggish government policy or noted a rash of customer complaints. But Next Step wasn’t fleecing its customers. It was fleecing itself, as it continued to push the accelerator down on money-losing propositions.
Still, more venture capital money followed: In 2014, Next Step raised a $25 million Series D, bringing on Braemar Energy Ventures as a new investor. At the time, it had approximately 500 employees.
Next Step’s backers thought it could do for home energy efficiency what SolarCity was doing for home solar: harness a patchwork of state government incentive programs and become a well-known provider across the US. Now, SolarCity and its competitors in home solar are facing headwinds.
“There's a reason we haven't seen a national home performance contractor emerge,” said Peter Shattuck, clean energy director at the Acadia Center, an environmental research and advocacy nonprofit based in Boston. “My thoughts are that's because it's a local market in many ways. It's the same reason we don't have a national roofing installer or a national cement steps builder.”
There was another key difference between Next Step and SolarCity. Like SolarCity, Next Step’s revenue was a cat’s cradle of accounting challenges. In Next Step’s case, there were subsidies, deposits, leases and payment plans. But unlike SolarCity, Next Step muddled through most of its existence without a chief financial officer.
In 2013, shortly after its big Series C, Next Step hired its first CFO, tech veteran Larry Mihalchick. In a matter of months, Mihalchick had departed and it took the company nearly a year to identify a successor in Chris Catalano, who would eventually assume the chief executive’s office, months before the company’s eventual shutdown.
Mihalchick and founder Geoff Chapin could not be reached for comment, despite repeated attempts. Catalano did not respond to multiple requests for comment.
Soon after Catalano came on, Next Step received a crushing blow--from the environment its founders had hoped to help save. Boston got 110.6 inches of snow that winter in a six-week blitz of blizzard conditions that effectively shut down the city and Next Step’s revenue.
“You can't understate how damaging that horrible winter was we had, to the company,” said the same Next Step investor, who asked not to be named. “It dramatically impacted their ability to do the home visits, to install solar on rooftops. It was a couple months of dramatic cash burn, right when the company could least afford it.”
The company was trying right the ship. The various units were firewalled off for accounting purposes. Only the original, core unit doing home energy assessments and insulation was anywhere near profitability. Employees described staff reductions, changes in compensation structure, entire departments wiped out as executives lowered the boom on cash-intensive units. The company quietly sold its solar business to a competitor.
Through it all, employees from management down described a palpable sense of fiscal irresponsibility.
“My boss would come in with $100 bills and say, OK, if you hit these targets, this is what you're going to get,” one sales employee recalled.
Still, by the end of 2015, Next Step’s fiscal belt-tightening was taking effect. “It had changed emphasis from pure revenue growth to profitable growth,” said Dennis Costello, managing partner at Braemar Energy Ventures, who led the New York firm’s investment in Next Step. “Their effort to do this, to use the internet more, to decrease the cost of customer service, was under way.”
The company was attempting to make a transition from a service provider to a software-based company, light on assets, managing customer relationships for a host of other companies that would do the various installation work.
Next Step pulled together its investors for a bridge financing that would allow it to continue on its path toward profitability. That funding was all but completed, when, multiple investors and sources close to the deal confirmed, VantagePoint pulled out.
“The investor came in and really at the last minute pulled their check,” said one person close to the deal. “The other investors were just kind of like, ‘What the fuck?’”
What investors described sounded something like what Elon Musk has said happened in 2008: VantagePoint pulled out of a $20 million financing at the last minute, Musk said in an interview published in 2015, leaving him scrambling to raise cash for Tesla.
A VantagePoint spokesman responded with a statement, in which it characterized the shut down as a shared decision and pointed to factors that led up to it.
"From its initial investment in 2012, VantagePoint supported Next Step Living through several rounds of financing, years of unprofitable operations and a number of ambitious growth initiatives. Unfortunately, it became clear to the Board and the investors that a sustainable path to profitability, a stabilized work environment for employees and the ability to continue delivering outstanding service to customers was not achievable with the resources available to the Company. After carefully evaluating numerous options for Next Step Living, VantagePoint made the difficult decision to support the Board's vote to discontinue operations.”
VantagePoint’s lead-investor status gave it effective veto power over the bridge round. Other investors said they respected VantagePoint’s decision not to re-up in Next Step, but wish they had known about it earlier. When VantagePoint backed out at the last minute, the company was out of options and out of time.
Shut down followed swiftly as the company moved to cease operations with enough cash in the bank to make its final payroll. An involuntary bankruptcy lawsuit came next, with a handful of contractors as creditors seeking a little over $300,000 in unpaid bills. That case is still pending.
Next Step’s lenders wound up in custody of the company’s assets--largely intellectual property, including the digital form of the company’s process for home energy audits and marketing of its installation services. With help from Braemar, said multiple sources familiar with the deal, venture bank Western Technology Investment (WTI) and other owners are spinning up a new company out of the remnants.
WTI’s David Wanek, who led the venture bank’s investment in Next Step, did not respond to multiple requests for comment. Costello, the Braemar managing director, declined to comment on plans for the new venture.
But Costello did talk about the impact Next Step had during its foreshortened existence. Its home energy audit customers likely numbered over 100,000; tens of thousands of them had made energy-focused capital improvements to their homes.
“One of the outstanding features of Next Step was the passion of the founders to actually do something to help climate change,” Costello said. “They were trying to have an impact and they were trying to grow the business until it could be a significant impact.”
Whether that vision can be realized in whatever comes out of Next Step Living’s remains, is yet to be seen.
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