Sunlight is the new oil: A David vs. Goliath Story

Read Time:15 Minute

The idea behind introducing young businesses to MMA audience is to provide inspiration for businesses and entrepreneurship and for personal development. This conversation is the second in the startup series.
Between coal and oil, we spend about $125Bn of foreign exchange in imports. All forms of solar energy are a strategic imperative for India. We have to elevate it in the public mind to a deeply strategic issue for India. From selling a solar lantern, Fourth Partner Energy have come a long way to a 500 crore business. They have two legs—one generating solar power and the other setting up plants for those who can afford it. They have scaled up and developed partnerships across the entire ecosystem.
Edited excerpts from the fireside chat:
Shankar: From a corporate career, why did you decide to take a leap into solar energy? How did your family take it?
This is the first and only business we’ve set up. It is our first attempt at entrepreneurship and we are learning through that process. For us, it is a personal quest. We wanted to prove that we can be entrepreneurs.
I was in management consulting for about seven years, then moved to private equity investing for about seven years. In either case, I felt I was at an arm’s length away from real action. The choice to be an entrepreneur was not so obvious. In all classic entrepreneurial stories, you will hear that they got the idea right. In our case, we got the partnership right. Saif, me and Vikas had known each other for so long. We were clear that we wanted to be together in this journey and spend a month or two evaluating the options.
We had done work in the power sector, which in India is run by large companies or the government. But decentralized energy is going to be the future. The days where you set up large power plants in one side of the country and ship power to the other end are going to be behind us. Every roof and every available space should become power plant and that’s how energy should be managed.
We saw some of it happening in the west. Germany got that story right very early. They gave a lot of incentives to migrate towards cleaner sources. They pursued it aggressively and the rest of the Europe tried to follow through. When governments come out with incentive programs, they must be able to back them up with their balance sheets.
In India, we are all blessed with plenty of sun and therefore solar energy should follow naturally. Our generation level should be much better than most of the world. Secondly, 13 of the 15 most polluted cities in the world are in our country. 65-70% of our power generation is from thermal power plants. This is not sustainable.
We entered the space with a confluence of engineering and finance. Since we came from a finance background, we had to learn engineering a bit more in detail. In the first four years, we put our head down and did that. But in the future, financing is going to become more prevalent. We think of us now as a lending company, giving 25-year loans to corporates and only having an engineering front of solar going alongside. So it’s a paradigm shift from the way our business started.
We first built the entire capability to construct plants and service them. We believed building that capability in-house is going to be the key differential for corporates. In the five years of our venture from 2010, the power sector in India had gone through lots of challenges and, therefore, banks and financial institutions were not ready to support us. We worked hard and got the right processes, people and technologies and learned from that. When the sector slowly started to evolve, we could put our position as a leader into play and do what we did. The family supported us and it was a super important part in our journey.
Can you walk us through the first external fund raise you did?
Each of us—three partners—put our first contribution into the business—25 lakhs each. It was important that we could build something that we can take to a third-party financier and which can stand up to the scrutiny of diligence and their various questions. It took us four years to get there. Our first fundraiser was with Chennai Angels. I love Chennai for that reason alone.

Angel investors tend to look at technology investments and the fad for that year, because it’s diversification of their wealth sources. Ours was a different proposition. ~ Vivek Subramanian

It was not an easy ride. We proposed to become a financing company and it is tough for angels to fund a financing company. Therefore, we fine-tuned our offering and said that in the longer term we have capabilities to build and, in the shorter term, angel funding will help us understand those capabilities and scale that up to a certain level where we finish pilots with large corporates and go for institutional fundraising.
Angel investors tend to look at technology investments and the fad for that year, because it’s diversification of their wealth sources. Ours was a different proposition. We told them that they may not make 10X on the investment but definitely they would not lose their money. They saw the value in our offering.
We took six months to get them across the line in terms of understanding what we wanted to build. But once we had that, we could see that the conversations were far more intelligent and very constructive for our future. Since then, we’ve always been very careful about how we want to partner and with whom we want to partner, and that has worked well for us.
In the early days, there was something called accelerated depreciation for solar plants and you took great advantage of that to begin with. Can you explain what accelerated depreciation was and how you leveraged it to grow your business?
Ownership of a solar plant at that time allowed you to write off 80% of its value in the first year of your operation which means the profit before tax to that extent gets adjusted. It was a tax shield. The business could invest the net cash saving from the tax component as an asset that will give them value for over 25 years.
We tweaked this idea a bit. Some companies who can hold a lot of these assets may not consume the power. So we approached corporates who would buy solar power and went into power purchase agreements (PPA) with them. For example, if we enter into a PPA with TCS, we will install the solar plant on the roof of TCS. The asset will be owned by somebody else and we will operate the contract. This gave benefits to everyone:
• The corporate who’s consuming the power gets the benefits of clean, solar energy, and it was cheaper than grid power.
• It worked out great for the corporate that owned the asset. They would get depreciation benefit and definite returns from the power plant.
• It allowed us to scale up our proposition and offer such contracts to various corporates, without raising capital ourselves and without keeping our balance sheet too heavy. We kept our assets light. It was a win-win model for all parties concerned.

In India, for political compulsions, the entire pyramid is reversed. We have free power for farmers, low cost power for residences and the highest slab power for commercial and industrial customers. ~ Vivek Subramanian

To the normal person, it wouldn’t matter where the power comes from. It’s an indistinguishable commodity. What makes people come to you? What is your proposition?
True, the power is indistinguishable. But let me go back to the basics. India is a very unique country where almost 50% of the power generated is consumed by commercial and industrial segments. In almost all the countries in the world, the power tariff for the industry is the lowest because it is kept as an incentive for corporates to put up larger facilities. The power costs for residential consumers and agricultural sector are higher.
In India, for political compulsions, the entire pyramid is reversed. We have free power for farmers, low cost power for residences and the highest slab power for commercial and industrial customers. We are already struggling to compete with China on manufacturing in general but also because of a high price of power.
Solar power is not only green and sustainable, for the commercial and industrial sector, it is also cheaper than grid power. So they can use it as a cost reduction tool.
We have our EPC capabilities and we build a good quality asset with the best components. We have a team of 50 plus engineers on our rolls for asset management service and ensure maximization of generation, tracking through our app the power generated in each plant every 15 minutes. We have 2000 plants across the country. We have comparisons between plants and a constant focus on trying to maximize the savings for the customer.
For the customer, cheap supply of solar power alone is not enough. The plant should function for a long period. It is here that we fit in perfectly. 40% of our orders are repeat orders.
To summarize, it is not just the plant or the power that you’re selling. You are selling the continued maximized performance of the plant and the maximized savings, coupled with some innovative financing option.
I know that very soon you needed more capital and entered into a partnership with TPG who is not just an investor but truly your partner. This question is to Mayank Bajpai, Partner-TPG Growth & The Rise. Mayank, was it the space or the entrepreneurs or some combination of the two which attracted you to this investment?
It is always a combination of both. In the early days of The Rise, we were very keen on renewable energy as part of the key sectors and we focussed on developing markets.
The long-term partnership is not just about the space, it was about how Vivek, Saif and their team worked. The biggest testimony to all this is their customer base. Once they got a customer, they never lost him. We never pretend to know a company better than the founders and the management team. We are there to support them in any capacity whatsoever. We have not seen in many companies, across geography, the kind of culture, responsibility, passion and ownership as in Fourth Partner Energy.
This was a seminal partnership for you, Vivek, in that it elevated you from wherever you were to a different orbit. But in this strategic partnership, you ceded a majority of your company to somebody else and it is a gut-wrenching decision. I am drawing from my own experience when I had to cede a majority ownership to somebody. Tell us about that thinking process and the emotions you had.
We look at ourselves as a lending agency, which means that I have to constantly keep raising finance and therefore we would have given up majority. When we chose our sector, we saw what’s happening in that sector globally. Our mindset was already in tune to that extent. The other aspect, Shankar, is the title of this discussion—David versus Goliath.
In the solar industry globally, some of the largest pension funds and infrastructure funds are all here for big chunks. To scale up, you need a big brother alongside you. TPG has just been that for us. The tie-up gave us the money and wings to the aspirations. We could think of acquisitions and new lines of business, keeping the customer at the centre. I am at the customer premises for the next 25 years with a contract that I have entered into today. What else can I give this customer? How else I can engage with them is a constant question. The customer centricity of the business is clear to us.

In the solar industry globally, some of the largest pension funds and infrastructure funds are all here for big chunks. To scale up, you need a big brother alongside you. ~ Vivek Subramanian

Today we have expanded to giving customers on-site and off-site solutions. We moved with our customers from India to all the neighbouring countries as well. We are talking to our customers about how they can have clean transportation using electric vehicles. We could make the world our playing ground.
What we need to assimilate and assess is the value of my holding rather than how much I own. As the business matures, you realise that your resources are equally important and that should be a separation between ownership and management.
John Kerry is now the green czar in the Biden Administration. What was the role that he played with you and how did you leverage him in the past?
The former US Secretary of State John Kerry has been actively involved with the whole creation of TPG Rise Fund. He was always eager to participate. Renewable energy has been a very passionate topic for him over decades. We were looking for the right platform that would get him excited.
He was extremely excited about the work of Fourth Partner Energy, a company in the distributed solar place. He appreciates the journey in the solar space is very tough and a lot of hand-holding could be required at different key junctures, in a market like India. He was on the board of one company in the US and that was our company.
Vivek: We are probably the smallest organization that John Kerry may have been involved with. I rehearsed all my presentations that I had to make to him. He kept us on the toes. Secretary Kerry can walk into any country, meet the head of government anywhere and talk to them about what they’re doing in renewable energy or how they are going to champion their country.
He took us to meet a lot of key people in our country as well. We got great insights into the way Niti Aayog and some of the central ministers were thinking about our space. The other aspect of John Kerry’s involvement is about how well he understood the challenges of entrepreneurship and scale. Obviously, it has been a huge fan boy moment for us when President Biden chose him to lead his climate activities, which were otherwise completely stalled in the US in the years before that. Unfortunately, he had to now resign from our Board and he was very kind enough to write about it. I am amazed by the humility that he has shown for his stature and his involvement with us. We learned a lot from him.
Your company has now passed the startup stage and you are now a midsize company. I’m sure this has meant lots of changes in the way you work and manage. We don’t often get to see young companies who have made this transition successfully, scaled, both in terms of business and in terms of management structure. Can you please take us through this transition?
The bigger pain is to sometimes let go as an entrepreneur. That has been the greatest learning for both Saif and me several times. We have this urge when we get up in the morning, as most entrepreneurs do, with very high energy and you may step on the toes of the managers you have appointed. There are serious conflicts that you bring to the table. Of course, that same drive and energy takes the corporate forward as well. But it is so important to let go and I don’t have an easy answer to that. We have constantly tried to empower our people, making sure that we are looking at the decisions they make, rather than judging the decisions they make as they make them and, allowing them to learn from it. We have got the core team that we put together right. 80% of our organization has been handpicked by us. We are about 320 people. We make sure that they are in alignment on the culture and that they are as driven and committed to the cause as we are.
Our installed base today is about 600 MW. We want to double that each year. This kind of scale up cannot be done if you really don’t have a crack team. We sit back and review. There’s a lot of mentoring, reviews and discussions, rather than designing and running spreadsheets that we used to do before. I have been a strategy consultant before and it helps me to take a bird’s eye view and I love this phase even more than I did early. Our employees own shares in our company. So ownership is not just a fad that we use lightly. Every one of them takes ownership in their work.
There are various ways in which solar energy can be converted into power:
a) Rooftop, which is what you are in;
b) Grid scale, which is on the ground and what Adani and others do; and
c) CSP or Concentrated Solar Power.
What do you think is the right mix for India?

While most of the work we had done in the past was on on-site, we do a lot of off-site work, which is grid scale, building large parks and supplying to the same corporates. The difference between us and larger players like Adani is that they supply their power to the Distribution Company and we supply to corporates.
CSP or Concentrated Solar Power is an important technology. India has a lot of hot sun and it is ideally suited to CSP technology. But somehow, because of the rapid fall in the costs of photovoltaic cells, which is using the light of the sun to make electricity, CSP has not stood out to be a viable technology. It’s one of those ideas whose time will come. We believe very strongly in it and its future.
How are you spending your time? What allows you to cool off?
Our customers have been a little bit more forgiving. I have a wonderful team who still engage with our customers. Saif and I probably spend 20% of our time with customers, but we end up spending a lot of time with our team and financiers. Fundraising is very important because fund is a key raw material.