Let’s face it most People are not early adopters, especially when it comes to their homes. Take, for example, a kitchen where many people still buy gas cooktops even though induction is dominant. It’s not because everyone is busy peppering open flames – it’s because they’re slow to embrace change.
When it comes to heating and cooling, this is a climate problem. Together, they account for nearly half of the energy used in American homes. Heating is a particular challenge as 40% of homes use electricity. The rest burns natural gas, propane or other fossil fuels. When the old furnace dies, the replacement is usually the same. Switching to electric heat pumps will be key to reducing dependence on fossil fuels.
“If your trusted contractor — the one you call to come to your home to find out what’s going on with your system — doesn’t offer a heat pump, you’re not going to buy it, right?” Anuj Khanna, Founder and CEO of Service 1 Financial.
That gap between what contractors offer and what households need to power it is part of the reason why Kanna Services founded 1st Financial, which it calls “home comfort as a service.” The company is announcing today a $5.85 million bond that includes a $15 million subordinated debt facility, TechCrunch has learned exclusively. Khanna said he expects 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 a lease that allows homeowners to pay for their HVAC system over time, combining maintenance plans with the life of the contract for 10 years.
“The home comfort industry is still this old-school, slow-to-change industry that sells products,” Khanna said. That, he said, is at odds with broader market trends that show people are now more comfortable buying services than products.
HVAC contractors offer annual service plans, but they typically only cover basic maintenance, which Cana is trying to market to increase customer retention.
“They hope to stay on that plan for a long time and eventually get the next replacement sale,” he said. “The problem was that it didn’t really serve its intended purpose. And it’s not a good customer experience because every time a contractor is in that house, they’re trying to sell the customer something else. And that’s not what customers want — they want their systems protected so they don’t break.
Khanna was inspired to found Service 1 Financial after leaving his last job at a private equity firm. There he invested in a large home service company owned by Lennox, a manufacturer of HVAC systems. At the time of that investment, he said, “there was no discussion about sustainability at the contractor and consumer level.”
After the company moved, the PE firm sold it to Canadian company Enercare. The leasing model is very common in Canada, Khanna said, and Enercare used the acquisition to bring that business model to the United States.
“I was sitting on the sidelines doing other things in my career, and I said, ‘You know, there’s a big opportunity here.’ Consumer buying behavior is changing,” Khanna said. In 2019, he founded Service 1 Financial with his own funds and an investment from Thayer Street Partners.
Today, the company has customers in 25 states. Khanna said 32% of the company’s portfolio is heat pumps, which is about double the national average of 15% of homes, according to the US Energy Information Administration.
Inflation legislation that provides tax credits for heat pumps is expected to boost the market. According to Khanna, lease originations are up 80% year-on-year, and growth could reach 400% next year. In addition to expanding geographically, the funding also includes HVAC. He said it will help build a learning management system to help train contractors. More partnerships may be on the table. This summer, the company announced a partnership with HVAC manufacturer Fujitsu, and it has another in the wings.
Service 1 holds its lease in a special purpose vehicle, Khanna said, which is also the receiver of a subordinated debt facility. The SPV also has a debt facility with Forbright Bank, a lender focused on carbonization. The debt-backed facility allows the startup to “use our equity for higher ROI initiatives by the parent to grow and scale the business,” Khanna said. S2G expressed interest in the subordinated debt facility due to the Service 1 Financial tenant’s “extremely low default rates and very strong credit quality.”
According to Khanna, his company has provided facilities to those who are interested in getting service 1St Financially, they run their energy efficiency programs, moving away from selling discounted items and making them a service-based model.
Their focus is on electric heat pumps. Can we encourage homeowners to buy electric heat pumps with a service-based model that allows them to replace those systems every 10 years or so? he said.
It’s a very different model than what U.S. utilities are used to, but they’re finally willing to try something new. “I think this deflationary law has caused some firms to take a long time to make the decision to move quickly,” Khanna said.