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Episode
7

Brenden Millstein

Founder & CEO of Carbon Lighthouse

Ep
7

Fighting Climate Change with Capitalism - Brenden Millstein of Carbon Lighthouse

Sep 14, 2018
With
Brenden Millstein
27:57

Fighting Climate Change with Capitalism - Brenden Millstein of Carbon Lighthouse

Brenden Millstein is the Founder & CEO of Carbon Lighthouse, a startup helping to reduce emissions from buildings, which make 40% of all emissions in the US. The company has been backed by Tesla's co-founder JB Straubel and is on a mission to use capitalism to eliminate Climate Channge.

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[0:21] Maiko: In today's episode, I speak to Brenden Millstein founder and CEO of Carbon Lighthouse, a startup that is on a mission to stop climate change, by making buildings more sustainable. 40% of global emissions come from buildings and Carbon Lighthouse is already being used by companies such as Tesla Motors, and Hilton Hotels. Welcome to Impact Hustlers, Brenden. 


[0:42] Brenden: Thanks Maiko. It's a pleasure to be here


[0:44] Maiko: With lots of awareness around the need for renovating buildings and making them energy efficient, what is it that Carbon Lighthouse can do beyond all the solutions, consultants and projects that are already out there?


[0:55] Brenden: Well, I think there's a couple things that Carbon Lighthouse does very differently than the rest of the efficiency industry. And in somewhat of an ironic twist, we actually draw inspiration from oil here. So, you know, Carbon Lighthouse is a company that is solely dedicated to ending climate change and we believe the only way to accomplish this, obviously ambitious goal, is to do things that are very profitable for clients and very profitable for ourselves. Because otherwise, there is no way to grow quickly enough and grow large enough overall to actually matter to the problem. So, when we started the company, we looked around the world for companies that had changed the way energy was used across the world in just a few decades, because that's about the amount of time we have left. And the companies that have been successful and changing how energy is used globally, are not efficiency companies, they are oil and gas. 


[01:49] Brenden: And there's two things oil and gas does extremely well, that we have brought to the efficiency industry, and the two things are completely different than how the rest of the efficiency industry works. So, the first thing oil and gas does, is you only pay for the energy you use. So, you don't pay for the rig, you don't pay for the well, you don't pay for the pipeline, you go to the gas station, and you just buy the gas. And if you need more gas, you buy more, if you need less, you buy less, that's it, it's very simple. And the second thing is, say what you will about oil and gas, there's actually incredible accountability in those industries in a very specific way, which is, if you go to the gas station, and you bring a gallon bucket, and you pump what the machine says is a gallon into that bucket, and it's only half full, you have someone to sue. And that's actually the opposite of how the efficiency industry has worked for the past half century. So, there's a lot of contracts and efficiency that are, buy this piece of equipment, it will save you energy, but the actual contract deliverable as equipment or hire us as consultants we'll save you energy, but the actual contract is for labor hours, not for energy savings. 


[02:55] Brenden: And so, you end up with basically a half century of over promises and under delivery. So, what Carbon Lighthouse does that is very different, actually starts with the contract. So, our contract with clients, we charge a fixed monthly fee, that's it, no out of pocket costs, and we guarantee we'll deliver a dollar amount of savings above a certain threshold. And if savings are higher than that amount, clients get to keep it and if there are less than that amount, we write a check to cover the difference. So, that's difference number one, is this contract structure. And then difference number two, is that rather than replacing equipment, and doing these massive construction projects, we're primarily able to deliver savings without major construction in the building. So, we deploy sensors, we do machine learning and other thermodynamic wizardry with the data, and then we're able to get 20 or 30% savings out of primarily the existing equipment. So, it's these very deep energy savings and huge financial gain. And then the contract structure is very simple, and Carbon Lighthouse takes on the financial risk. And that's unlike anyone else in industry


[4:00] Maiko: When you sign a new client, you physically visit the building, you analyze the energy consumption, the efficiency over a period of time, and put a number of sensors and implement measures to save energy, how does that approach make you different from let's say, an energy consultant or somebody that's, yeah, just helping companies with their energy consumption? And how are you planning to bring this to the scale needed to get closer to your mission of stopping climate change?


[4:32] Brenden: Ah, that's the question. So, the basic hurdle with buildings here is, every single building is custom. So, a cookie cutter solution simply doesn't work. The first thing you do when you build a new commercial or industrial building is hire an architect to design it from scratch. So, there's a joke in industry, which is, once you've seen one building, you've seen one building. So, it doesn't scale without the ability to massively customize it. So, the software we've built in-house, which we call CLUES, Carbon Lighthouse Unified Engineering System, we're physicists and engineers, we'll come up with a better name later. But CLUES, what CLUES lets us do, is get data, a massive amount of data and data that's never existed before, which is very important for buildings, and then automatically create a custom solution for that specific building. And that custom solution actually contains two things. The first is all the one time changes we should make to the building to save energy. So, this is stuff like lighting retrofits, you know, adding control systems, even solar, when it's cost effective, which actually it is a very large percent of the time right now. 


[05:47] Brenden: And those are the one time changes we make, and you know, maybe half the savings we deliver come from there, depending on the building. And then the other set of ways we cut energy is actually through ongoing optimization. And so, this is the part that doesn't require any new equipment and actually adapts with the building as it changes over time. So, kind of like getting your car tuned up, we actually tune up the building, but every five minutes and automatically, and so we'll make these little tradeoffs, where we'll turn up a fan which has a penalty, but that lets us turn down at pump and net that saves 20%. And then 10 minutes later, as people move around the room and the weather changes, the system makes a new, little tweak and tune up. And so that that ongoing adaptation and optimization lets us keep current with the building, as tenants move in and out, maintenance gets done and equipment gets replaced over the life of the building. And it's actually that active, ongoing work that lets us guarantee the financials to the client over the time. 


[06:47] Maiko: So, is it enough to just install your devices and your sensors and then that's basically it? Or is it important to constantly adapt to the changing circumstances of the building? 


[07:00] Brenden: Exactly. And that ends up being vitally important. So, what we see in study after study, is that energy savings die very quickly, if you just do a "set it and forget it" type of project. And the easiest way to think of this, is let's just say there's two pumps, and you know, some consultant duress comes in and figures out that pump one is more efficient than pump two, so we start using pump one more than pump two. Four months later, some maintenance vendor is going to come in and take the pumps apart and clean them and rewind the motors and put them back together. And now pump two might actually be more efficient than pump one. So, if you don't switch, all of a sudden, you've lost all of your savings from that measure, and buildings change like that all the time. If you have a 10'4 building with a different tenant on each floor, and each of your leases is three years. So, you have three or four tenants moving out every single year and getting replaced. So, three years after you've started, the building is, you know, could be literally completely different than it was when you first got in there. And so, we see that energy savings if you don't continue to deliver them, they don't last, which is why all of these companies have these extreme payback requirements for efficiency like a one-year payback or a three-year payback. Because after that time, if you're not continuously on it, the savings are gone.


 [08:18] Maiko: So, battling climate change is often seen as something that has complete conflict with economic growth, as we've seen with Trump's decision to opt out of the Paris agreement for economic reasons. But even the approach some NGOs and projects take as often to create a conflict between the economic side of things and the impact side of things. You wrote a piece why you believe that assumption is fundamentally flawed, why is that?


[8:42] Brenden: Yeah, that's a great question. I think the central premise of Carbon Lighthouse is that capitalism is going to save the planet. And it's for a very specific reason, which is, we don't need to convince anyone to agree with us or believe what we believe. The only thing we have to do demonstrate rate financial returns for them, and a low risk. And given that scenario, who wouldn't want to make a ton of money without taking on risk while doing something great for the planet? So, it becomes a very easy transaction. And the results we're giving clients financially are extraordinary, we routinely deliver financial results with a far greater than 100% ROI. And many of our projects hit up or above 300% ROI. So and it's big dollars too, I mean, the amount of value we can unlock for say a 10 million square foot portfolio could be 50, or $100 million of new profit. So, it's an incredible return on a huge amount of money overall and there's no upfront cost and we take all the financial risk, because if the financials don't materialize, we write a check to cover the difference, which we have had to do, I think four times now over the past 160 buildings, so it does happen. 


[10:00] Brenden: But when the financials are so strong for clients, it's very easy to get people on our side. And I think at this point, we have some proof of this. So, the company is eight and a half years old, we've doubled revenue, and impact. So co2 savings, every 14 months for the past eight and a half years. And at this point, we've eliminated the emissions of six power plants, and we have another nine under contract. So, that leaves us with about 50,000 left to go, but we're taking progress. And if we keep doubling every year, we'll get there before it's too late.


[10:35] Maiko: So, battling climate change is often seen as something that is in complete conflict with economic growth that we need to, kind of, stop the economy from growing to fight climate change, or that we need to stop fighting climate change to keep the economic economy growing. You've seen it with Trump's decision on the Paris Agreement, you see it with the approach that many NGOs take. But you actually wrote a piece on why you believe that this assumption is fundamentally flawed, and actually capitalism kind of help with fighting climate change. Why is that? You recently closed 27 million growth rounds. You close to 27 million growth round earlier this year and have managed to attract investors such as Tesla co-founder and CTO, JB Straubel. And you're saying that you have proven that profit driven carbon eliminating is a thing, how much money is there to make with stopping climate change? 


[11:40] Brenden: When we first set up the company, we wanted to make sure that the financial incentives were aligned with the environmental impact. And so, the way we charge, if we can deliver large financial benefits to clients through energy savings, we can charge more. And if we can't deliver those financial benefits, we don't get to charge a fee at all. And so that way, you know, the more environmental good we do, the more money we make, the more money clients make. And the less environmental good we do, the less profit there is for everyone. So, that was very purposeful in the setup to make sure that we could truly harness all of the capitalistic motivations of our clients and ourselves to be able to have great impact.


[12:20] Maiko: So, how big can this be? How much money can Carbon Lighthouse make?


[12:24] Brenden: So, the market size just in the US, just for the services we offer now, which is not remotely the total number of services the company intends to offer. It's about $50 billion per year. So, if we captured 100% of that opportunity, we would very quickly become one of the largest companies in the world, although that would just be from US operations. That's insufficient, only about 20% of global emissions come from the United States, so, we need to expand internationally. The ratios are roughly the same, so if we're successful, then international expansion with just the services we offer, now, we could do around a quarter of a trillion dollars in revenue. So, I think that would make us the largest company, that also is actually not good enough. So, there are 5 to $10 trillion a year spent on fossil fuels, and we need to convert every single penny of that into clean energy or stop it from being used at all. So, there's actually no way Carbon Lighthouse will accomplish this alone. So, one of our main corporate goals is to have at least two very large competitors in every single country in the world. So, we're not quite there yet but we eventually we'll get there and that's how we'll convert the entire 5 or $10 trillion spent on fossil fuels into clean energy.


[13:49] Maiko: If you personally wouldn't work on reducing carbon emissions, what would be the big global problem you would be trying to solve? The


[13:59] Brenden: The reason I love trying to stop climate change is that it is so doable, that it's not, we don't need massive policy changes, we don't need massive regulation changes, obviously, those would help. And for example, I would welcome a carbon tax or a carbon tax and dividend. But climate change is very appealing to me, because we just need to give people money to do the right thing and we can do that right now with no new technology and no new regulation. And it's a very simple transaction, our client and us, we say, hey, here's the financials, do you want to do this, we can take a quarter of a million dollars a year from the power plant, the power plant is not present at the transaction, so we take their money, we stop using fossil fuels, it's very simple, it's very fast.


[14:49] Brenden: And climate change has these massive human implications, right, there's all of these studies on temperature and mosquito breeding seasons. And so, we know as temperatures increase, mosquito surveillance actually increases as well. And you have these spreads, actually, with El Nino and La Nina cycles on the west coast of the US and throughout Latin America, where you can watch diseases like Malaria, and Zika, expand with temperatures. And then as the cycle changes, those diseases shrink back. And so, there's, you know, huge impacts for human health as a result of climate change, you know, cities like Houston, and any cities in Florida are starting to get devastated by hurricanes that's starting to reach farther north into New York, we have fires all over the West in the US, I mean, there's these massive human challenges from climate change. So, the fact that you can do something that's profitable for your clients and will improve the lives of 2 billion people makes climate change very appealing to me. 


[15:53] Brenden: Failing that, I think the next issue I would love to see solved, would be education. And I actually got into climate change after giving up, more or less on low income education. But the high school I went to, it was actually a very good High School, so we sent seven people from my class to Harvard, I was one of them. My co-founder here is my physics lab partner from Harvard, although we grew up five blocks apart and have been best friends for 30 years now since kindergarten. But my high school had some problems and despite our excellent admission rates to Ivy League schools, we had six principles in my four years and more than 20 fires, one of which burnt down the B building. And I spent all of high school really failing to help anyone around me, I was in low income tutoring programs that didn't work. And after school programs where I felt I couldn't move the needle. But my senior year of high school, I took a nuclear engineering class at UC, Berkeley. And you know, as one does, and nuclear engineering just fell in love. And here is this way to use math to improve the lives of billions of people. And totally unlike education, the financials were aligned, we could just hand people money to stop climate change. So that's been my cause ever since. But for a second issue, I would love to see someone figure out how to align the financial incentives so that low income education could really be unlocked. Because I think that's the other area that you could really improve the lives of billions of people with, you know, just a few actions. 


[17:26] Maiko: How did it all start out with Carbon Lighthouse? Did you set out and said, we want to solve climate change? Or was it more practical problem of energy efficiency that you saw and had a solution to?


[17:38] Brenden: So, we initially set Carbon Lighthouse up, the goal was to stop climate change. And we focused on that goal, because it was the most doable goal that could improve the lives of the most people, so that's why we went there. And we started work with commercial buildings, because they are the largest individual source of emissions. So, and I think you mentioned this earlier, that commercial and industrial buildings create 40% of emissions. So, it's the biggest single wedge to go after and we started the company, we actually didn't start with any technical solution, but we realized there was a problem with the market where contracts weren't aligned, where people weren't selling energy savings, they were selling equipment, or selling labor hours and promising savings and those weren't being delivered. So, we said, okay, we're going to straighten out the contract and actually sell the savings. And that's what we're going to guarantee and we're not going to charge up front and so we started trying to sell. 


[18:39] Brenden: And I think between my co-founder Rafael and I, in the first couple of months, we made more than 1000 phone calls. So, this is a totally foreseeable problem, we did not foresee it at all whatsoever. But no one wants to work with you when you are two guys with the world's worst website and no track record, and no case studies and no references. So, it took forever to sign a contract. You know, we had to call a friend of a friend of a friend of a friend of a friend, and every single person we could possibly talk to in that network until we finally had someone signed with us. And then we had, you know, we have this contract where we're on the hook to deliver savings and we show up at the building, and it's perfect. And all the low hanging fruit is gone, the medium hanging fruit is gone, you know, this orchard has been harvested, the equipment's brand new. And we realized what happened is the type of person who will sign with two guys with no track record and the world's worst website, is someone who is not risk averse, and who really cares about the mission. And that same person had already worked with every other efficiency company they could find. 


[19:50] Brenden: So, we had talked to everyone we could possibly talk to, we had $10,000 to our name and we were two nerdy, panicked physicists. And so, we said, let's get $2,000 worth of sensors and measure everything and pray someone missed something in the data. And so, we did. And sure enough, the building thought it was turning off, like a very large central fan when it in fact was not. And we could correct this, and it saved about 3% of the whole building energy use. So, we eke out a little win. And the next time going through the sales process was very slightly easier. And the same exact thing happened, you know, low hanging fruit gone, medium hanging fruit gone, equipment, brand new. But now we had $20,000 to our name and we got $4,000 worth of sensors, and it worked again. And so we were able to eke out this 4% savings. And every time we signed a new building, the same thing happened. And so, we just kept getting more and more sensors. 


[20:52] Brenden: Eventually, we had to, you know, start building real software, because we had these 300-megabyte Excel workbooks, just to analyze the data. We moved everything to the cloud, you know, and then we started having enough data to do machine learning, so we could start automating large things that had been done by hand before. And the whole technical system built up, out of luck and panic and necessity, just because we had, you know, tried to align the contract incentives with the environmental good. And where that left us was now we have the ability to deliver energy savings, literally 10 times more cost effectively than traditional efficiency firms. And we can take all the financial risk and have no upfront costs for clients. But none of that was planned, that was all panic and luck and really digging into the data.


[21:41] Maiko: What would your advice be to founders that are at a similar point at the beginning of the journey, and want to combine having an impact and profitability? What should they be doing?


[21:52] Brenden: A thing that has been enormously important and valuable from an impact and financial perspective for Carbon Lighthouse has been, us digging really deep to make sure that our contracts with clients were aligned with the environmental good we were trying to produce. So, in other words, that we only made money when we reduced emissions, and that we didn't make any money when we didn't reduce emissions. And that concept has been a guiding light for the company for eight and a half years and has worked out for us very well. So, the whole technical system was a result of that. We didn't even talk about how challenging sales are to commercial real estate. But to my knowledge, we are the only company that has figured that out and figured out how to work in multi-tenant leases, and triple net leases, and all sorts of complicated basic problems that usually completely mess up the financials for landlords. But that having that insistence that the environmental impact be aligned with the financial motive, let us cut through all of that. 


[22:57] Brenden: So, I think the advice I would give to other social entrepreneurs, is make sure you only make money when you are solving the social problem you are trying to solve and make sure you don't make money when you aren't solving that problem. And if you can align that in your contracts with how you're doing things, then the only thing you have to focus on is making the business work really well. And at that point, investment becomes much easier, scaling the company becomes much easier because you have revenue and profit. And all sorts of things become easier. Now I do want to qualify easier, because, easier doesn't mean easy, easier means, very slightly less impossible. And the Carbon Lighthouse, I had no idea how hard this was going to be at the beginning. I am very optimistic, Raphael is much more insightful than I am. So, I think he had much more of an idea how hard it was going to be. But I think both of us were surprised at how challenging it was. But that, I think it is very hard to start a company and I don't think that matters if it's trying to save the world or not. And I think it is very slightly more, hard to try and save the world than not as long as you're starting a company. 


[24:16] Brenden: So, from my perspective, may as well go for it. Why not save the world? You know, you already have to run a marathon like five times, running an extra few miles just aren’t going to make much of a difference. So, I think my advice would be, don't worry that it's harder to start a social company than a regular company. They're both near impossibly challenging. So, that incremental difference doesn't matter and make sure you align the financial incentives with whatever social good you're trying to resolve. And then just focus on building the best company you possibly can and that's how you solve that problem.


 [24:50] Maiko: If you're looking at Carbon Lighthouse's, long-term ambition, what is it that you think you will have accomplished within the next 10 or 20 years?


[25:00] Brenden: Well, I would love to have stopped climate change but there's actually another element of Carbon Lighthouse that I am extremely proud of, which I don't think either Raphael or I foresaw at the beginning. But Carbon Lighthouse has become what I believe is a really good work environment and that's not to say, it's easy, it's very challenging, people work hard. But we haven't faced any burnout and it's been eight and a half years now, there's 80 of us, we've had one voluntary departure and one termination. So, our annual turnover rate is under 1% and I think we have created an environment where we have a unique blend of incredibly hard-working smart, like, very diligent people, but people who are also incredibly nice and warm to each other and are willing to drop anything and everything to help each other out. And they are honest and forthright with customers and direct and forthright with each other. And just coming into work every day and seeing that and getting to be part of that and getting to get the heck out of everyone's way, so they can get done what they need to get done has been just incredibly fulfilling for me. And I think part of the legacy I would want to see, in addition to stopping climate change, is a real demonstration that not only is that work environment possible, but that it's very effective. And ideally, we could get a lot of other firms trying to work towards that same thing.


[26:37] Maiko: Thanks, Brenden, for joining me today. It was a pleasure to have you on the show and get all these insights from you. I wish you all the best for your journey and thank you for joining me.


[26:47] Brenden: Yeah, thank you so much, Maiko. It's a pleasure to be here. And it's, a, so we have a, I'll say slightly inferior to Impact Hustlers podcast called Climate Solved, which you can find on iTunes or Spotify, but it's been very fun to be on the other side of the fence. So, thank you so much and a real pleasure and a real honor. Have a wonderful rest of the day.


[27:08] Maiko: Thank you. 

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