VWB #5: Coral 🏡: The Startup Leading the Residential Climate Revolution + The Geo-Arbitrage Opportunity

Happy Tuesday! ☀️

In this week’s edition of VWB, we shine a spotlight on Coral, a groundbreaking US startup making waves in sustainable energy solutions for homes. Building on our previous feature on Solfacil's efforts in solar panel adoption in Brazil, this edition continues to explore VWB’s focus on geo-arbitrage, introducing you to Coral’s innovative approach in empowering US residents to embrace eco-friendly energy systems within their homes.

In the second part of our edition, we decode the concept of geo-arbitrage itself, and explore its impact on cross-border investment. Learn how this unique venture capital strategy involves replicating successful business models from Silicon Valley and adapting them to emerging markets. Understand the challenges and advantages of this approach, from tapping into international markets ripe for innovation and disruption, to navigating diverse regulatory environments and cultural nuances.

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Startup spotlight: Coral ❄️

In our previous edition, we spotlighted Solfacil's commendable efforts in facilitating loans for Brazilian residents seeking to adopt solar panels. Keeping in line with VWB’s focus on geo-arbitrage (more about this concept later in this issue!), this week we direct our attention to Coral, an innovative US startup with a parallel mission of empowering residents to embrace sustainable energy systems within their homes.

Founded in early 2023 by Samir Pendse and Nizar Dhamani, Coral’s model is exemplary of a sustainability-focused business that adeptly responds to its specific geographic location and regulatory environment. This is particularly evident in their go-to-market strategy on two fronts: firstly, their selection of a green energy solution tailored to American households’ reliance on A/C systems; and secondly, their alignment with US government legal and financial incentives that facilitate their adoption.

Sustainability, Glocalized

While Solfacil leverages Brazil’s sunny climate to promote solar panel adoption, Coral instead focuses on helping homes use energy more efficiently. Coral helps finance electrification upgrades that optimize power consumption, and is entering the market by financing heat pumps–a technology that is better suited to meet the year-round weather conditions in the United States. 

For those not familiar with the concept, heat pumps provide heating and cooling to a building through electricity. With this technology, residents can regulate temperatures in their homes with lower costs and energy consumption compared to traditional methods such as natural gas. Today, around 61% of US households still rely on fossil fuels for space and water heating. 

Heat pumps bring clear environmental benefits. About 20% of the world's carbon emissions come from heating and cooling buildings. Yet, by embracing all-electric HVAC systems like heat pumps, along with a wider use of renewable energy sources, we have the potential to eliminate these emissions entirely. This straightforward yet impactful approach makes buildings more eco-friendly and contributes significantly to the fight against climate change.

In recent years, the US has implemented financial incentives to actively advance the nationwide energy transition. Currently, there are billions of dollars in existing state-level rebate programs, as well as an additional $100 billion in federal tax credits and rebates available to popularize sustainable energy systems in the US. Most prominently, the Inflation Reduction Act (IRA), enacted in 2022, provides financial incentives aimed at shifting the U.S. economy towards a more sustainable system.

These government incentives render heat pumps more financially attractive for both homeowners and contractors alike. On the customer side, tax incentives and rebates make heat pumps significantly cheaper than traditional A/C systems; for contractors, heat pump installations are approximately 25% more profitable than their legacy counterparts. 

Executing the Energy Transition

Despite the clear environmental advantages and attractive tax incentives for adopting heat pumps, their current adoption rate in the US stands at a mere 15%. This can be attributed to the delayed payment of the tax credits and rebates, which are usually not received months after the installation of heat pumps. Thus, notwithstanding government efforts, the upfront costs of adopting these residential upgrades remain a major barrier for the average American resident.

Until Coral. Through its innovative financing model, Coral is able to identify eligible rebates funds, and advance their value right at the point of sale. This way, instead of waiting months to receive a rebate, Coral steps in immediately after installation, providing funds equivalent to the rebate value. This approach significantly reduces upfront costs and increases adoption. Coral then retrieves the rebates directly from the government months later. On the contractor side, Coral’s model serves as a catalyst for business growth, creating a win-win scenario for all parties.

The future of home electrification looks bright: The current valuation of the US residential heat pump market stands at $15 billion, with projections indicating a doubling by 2030. At the same time, government incentives continue to grow:, starting in 2024, the US Department of Energy will inject an additional $9 billion USD in tax rebates and credits to further incentivize heat pump adoption.

Our Translation 🕵️

Coral’s case exemplifies the successful alignment of incentives between startups and governments for substantial social impact. Through this innovative model, Coral stands as the sole financing solution in the US that leverages government incentives for home electrification, addressing existing bottlenecks in the system and exponentially increasing heat pump adoption. 

Coral’s strategic alignment with the US regulatory landscape positions them as pioneers in enabling the widespread adoption of eco-friendly solutions within the US residential sector. By tailoring its go-to-market strategy to homeowner needs and existing legislation, Coral ensures both higher adoption rates and greater efficacy in energy utilization. 

Moreover, in discussions with founders Samir and Nizar, we learned that Coral aims to expand its financing solution to encompass other forms of home electrification, such as water heaters and EV chargers. Their future plans also include utilizing their model to facilitate the energy transition in multifamily and commercial buildings, a market projected to reach nearly $100 billion in value by 2030.

Decoding Geographic Arbitrage: De-risking Cross-Border Investment

So what is geo-arbitrage, anyway?

Geographic arbitrage, or geo-arbitrage, is a very unique investment strategy under the broader venture capital umbrella that has received much attention (and capital infusion) in the years following the 2008 US financial crisis. Essentially, geo-arbitrage can be viewed as cloning successful business models from Silicon Valley and translating them to emerging markets with slight alterations to account for local customs, regulations, and customer preferences. As Sebastian Mallaby noted in his work The Power Law, 

Investor and educator Bob Rice of Rice Partners explains the impetus for this investment strategy, saying “the game has become so much harder here at home, both in terms of competition among VC firms for dollars and for investible (sic) idea. And partly, it just makes a lot of sense to invest in local variations of a proven idea.”

How Does This Impact VC Investing?

As deals in the US have become more competitive, traditional VC shops such as Benchmark Capital and General Atlantic have expanded their sights beyond the Valley. As Groupon IPO’d in 2011, these two firms identified Peixe Urbano, the “Groupon of Brazil,” as their next unicorn-chasing investment target. Just six years later in 2018, 48 percent of the world's $245 billion venture capital dollars were invested outside of the United States.

Peixe Urbano is not a one-off success story, though. Latin America has seen an explosion in geo-arbitrage style investing, so much so that geo-arbitrage specific to LATAM has its own moniker: Tropicalisation. This strategy has proven quite successful, with several companies,  MercadoLibre — the “eBay,” OLX — the “Craigslist,” and Despegar — the “Expedia,” all having multi-billion dollar market caps. TechCrunch reporter Francisco Coronel notes that “the risk-averse nature of investors in Latin America has a lot to do with why so many VCs have felt much more confident investing in ideas that mimic successful companies in the U.S. or Europe.” 

Founding companies with familiar, and proven, business models also has key advantages for local founders. Namely, founders can easily explain their concept to risk-averse local investors, using the well-known “Uber for X” phrasing, which in turn allows the investors to quickly identify the problem, understand the value proposition, and feel more confident in the market size and potential. 

Global Opportunity, Global Challenges

There’s an adage in venture to “invest in what you know.” But with more competition and an ever-more saturated investment market in the US, venture capital investors are expanding their vertical and geographic foci. Unsurprisingly, with new opportunities come new challenges. 

Surely most of our readers are familiar with the urban legend of the Chevy Nova in Latin America. The story goes that General Motors (GM) wanted to enter the LATAM market with one of their best selling vehicles, the Chevy Nova. There was only one problem, though: Nova translates to “it doesn’t go” in Spanish, which led to GM retreating and pulling the Nova out of LATAM. Of course, this didn’t actually happen, as the Nova actually did quite well in countries such as Venezuela and any native Spanish speaker would not take “Nova” for “no va.” Regardless, this story is a great cautionary tale for the difficulty of understanding and meeting the needs and requirements of local culture and customs.

Another challenge in operating and investing outside of your home country is navigating vastly different regulatory and legal environments. As an example, Europe has more than 25 different regulatory areas, each with unique permit requirements, tax codes, and HR regulations. 

With that being said, the strength of rule of law and unpredictability of local governments is another risk to cross-border investing. As we have seen with the regulatory crackdown on tech giants in China over the past three years, companies operating in foreign countries are ultimately at the whim of those local governments. The Chinese crackdown was particularly harmful to investors, as their tech industry experienced $1.1 trillion of value destruction from 2020-2023, most notably the shelving of Alibaba subsidiary Ant Group’s $37 billion IPO.

Our Translation 🕵️

We at VWB are extremely bullish on the opportunity of cross-border investing and geo-arbitrage (go figure, huh?). Particularly as the US market is facing recession and inflationary pressure, it is important for venture investors to diversify their portfolios to new markets. In addition, emerging markets are incredibly ripe for innovation and disruption as their technological capabilities and infrastructure are becoming ready for the digitalization and mobilization that has led to immense value creation (and outsized returns) in the US over the past 20 years.

The potential is massive. Emerging markets had a combined GDP of $48.1 trillion in 2022, and that number is expected to grow to a staggering $60.2 trillion by 2025. In our opinion, the primary force driving this generation of value? Globalized venture capital.

That’s all for today, folks. Thank you for reading!

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-Paula and James