Why we invested in Cala Systems
Every home in the US, practically speaking, has a water heater. It is as ubiquitous, perhaps more so, than the toaster or the kettle. It also has the advantage to their producers of costing about $800 - $3000 (at least $775 more than a toaster) so gross revenue is better. This is a serious business (at least $5bn p.a. domestically, $30bn p.a. globally with a lot of growth to come) that has not really moved much structurally in the last 40 years or so. Electric water heaters have been around since roughly 1900, and the subtle nonsensicality of the tankless water heater market, powered by gas and propane which is dirty, expensive and volatile in price. Great.
Enter the heat pump. Now, incumbents like AO Smith, Rheem and Bradford White (together 90% of the US market) understand the heat pump offers considerable benefits in the efficiencies of an existing water heater. Still, it’s an expensive undertaking to really redesign the water heater (not to mention already humming production lines), so they essentially retrofitted it to their existing electric water heaters, making something that sort of delivered on the promise of the heat pump for the water heater. We invested in Cala Systems because of this mistake.
The heat pump should not be underestimated - used properly and in the hands of the right product designers, it can be a revolution in the efficiency of something as commonplace and ubiquitous as the water heater. And this matters. Water heating accounts for around 20% of home energy use, and a significant proportion of the water that enters the home passes through the water heater. You solve the water heater, and home water efficiency and energy efficiency make a massive leap forward. But you have to do a clean sheet design not only around the new technology but also around the broader world that is emerging -- the world of electrification, IoT, smart home, distributed energy resources. You can’t just plonk it on top of the existing design, like some kind of unreliable, plastic, cheap, beepy hat (and they all beep, all the time, because they’re always breaking).
Let’s break down why we invested in Michael, Mike and the team at Cala Systems to usher in a new horizon of home water heating through a step-change in Heat Pump Water Heater (HPWH) technology.
A Once-in-a-Lifetime Market Overton Window
Currently, about 48% of water heaters in the US use natural gas, 46% use electricity, and the rest use propane, fuel oil/kerosene, or some other fuel source. In the age of the heat pump, this will make no sense. Between 2021 and 2022, the market for HPWHs, initially only 1% of the market, grew 26% against a drop in YoY sales of all other types of water heaters (gas tankless, gas condensing, electric resistance, gas tank, plus the overall water heater market). We estimate last year the segment grew 50-100%. The market is clearly shifting toward HPWHs in large part due to pure economics – heat pump water heaters save a lot of money for homeowners that use electricity, propane or fuel oil (half the market). In addition, several regulatory changes, including 30-40% in IRA tax credits for installation, DOE energy efficiency rules, and state policies expanding incentives, building code upgrades, marketing efforts, loan programs, are all contributing factors. These market changes will drive HPWHs from 1% to 35%+ of the US market in 2029. As the world's first intelligent HPWH, Cala is positioned to both benefit from and accelerate these trends.
From a consumer's perspective, Cala does the core job of delivering hot water at low cost better than any other water heater. Moreover, it empowers homeowners to integrate water heating into their homes and personal priorities as never before, through capabilities like minimizing their greenhouse gas emissions via coordination with times of clean electricity on the grid, preheating water before potential power disruptions, synchronizing water heating with the output of the home's solar system, and more. Over and over again, the reaction to Cala's features is, "Huh. This just makes sense." Cala is redefining what people expect from a water heater, enabling the company to take advantage of the unique opportunity in the water heating category today. These changes have created an Overton Window for a new entrant, and Cala Systems is well-poised to take advantage of the opportunity.
Structural Difficulties for Incumbents to React
This is a classic David vs Goliath battle. Rheem and AO Smith are big companies, with all the scale and distribution advantages you would expect. This will be tough. But it is really hard for incumbents to go through the process of cannibalising their own product lines, because that is what they will have to do to compete with Cala. Their legacy architecture can’t deliver the results of the Cala unit, and in order to achieve the same results, they will have to fundamentally redesign their units that they are already selling, and redesign their production lines without the overall business falling out of bed. Not impossible, but very hard, and very expensive.
High Say/Do Ratio
In the context of this opportunity, and in the context of building consumer hardware, you need the team that fundamentally gets it. This is the best hardware team we have seen in terms of process and raw execution. It helps we have known them since 2021, and their progress has been remarkable. The unit they have built saves 15-45% of energy against existing HPWHs, and is a blend of hardware, software and control innovation that is nothing less than beautiful. This morning’s launch is deeply exciting, and actually comes 2 months ahead of schedule. No one in hardware is ahead of schedule.
We’re Not Underwriting a Learning Curve
Mike Ting, the co-founder and VP of Engineering, has deep consumer expertise from Bose and SharkNinja (the man knows scale). Michael Rigney the CEO has been through two exits, and co-founded another construction tech company which means he knows his market upside down and back to front. They really know the water heater market, especially the sensitivities in the go to market requirements motion. They have $3m in signed LOIs with installer partners and counting, pre-launch. They have hired exceptionally well. They’re backed up by an eyebrow-raising group of advisors, including Becky Scribner, with 15 years experience at Nest and Honeywell. They know what needs to be delivered, and how.
Thoroughness, Preparation and Foresight
The diligence discussions were a breath of fresh air. For literally everything we brought up, not only had Michael and the team already thought it through, they had set out their thoughts on a slide (it was eerie, it happened so often). They showed us in no uncertain terms that they were thorough, experienced and fully prepared to build this company. They disagreed with the VCs that told them you can’t brand a water heater (of course you can, I mean LOOK at it). They had a product and company plan that looked the tough stuff dead in the face, and we now regularly use an aphorism we got from Michael with our other companies - “Build the company you’ll need to be eventually”. They also really understand practicality. I can’t say too much, but there is beauty in how they’ve thought through this design. They’re also practical in their financial approach, shown by how they will build their first production line. It really is very exciting.
There is so much more we could write, and we don’t underestimate the scale of Cala’s challenge - but if they get this right, this is a new brand in a multi-billion dollar global industry that is in upheaval. There is also a giant prize here for consumers who get to stop throwing away their money, to the tune of $20+bn a year in saved operating costs, not to mention saving 3% of US GHGs (yes, really). Michael, Mike and all the team - thanks so much for letting us be a part of it, and welcome to the Burnt Island. Happy Birthday.
