Neighborhood Sun is raising capital on a convertible note at a $27.5 million valuation. This price is too steep for the company’s current level of traction. While Neighborhood Sun is growing steadily – a 550% growth in kilowatts under management in 2021 – that growth isn’t generating strong revenue yet. Neighborhood Sun brought in just $1.5 million in 2021 revenue. A revenue-to-valuation multiple of more than 18x is too high for a company without significant technological advantages.

Solar power is widely regarded as a critical component of a clean energy future. It’s no surprise that the global solar power market is expected to reach $369 billion by 2030, expanding at a healthy compound annual growth rate of 7.2% until then. Around 39% of US homeowners say they’ve considered installing solar panels in the last year. 

While Neighborhood Sun benefits from the large-scale tailwinds boosting the adoption of solar power, the company is only addressing a specific slice of the solar power market: community solar. It’s not clear exactly what that market is worth at present, but it is obvious that community solar is expanding rapidly. One study predicts that the US community solar market will expand by 50x to 80x its current size within the next 10 years. Community solar is regarded as a key method to deliver sustainable solar power to low- and moderate-income communities around the US, so the government is investing in programs to speed its adoption. All of these factors are good signs for Neighborhood Sun’s market potential.

Neighborhood Sun was founded by Gary Skulnik, a longtime climate advocate and clean energy entrepreneur. Skulnik started his career as a journalist, then became a pro-environment lobbyist on Capitol Hill. After that, he founded Clean Currents, a clean energy startup that focused on wind power. Skulnik led Clean Currents for eight years, growing the company to $22 million in revenue. After a brief period as a clean energy consultant, Skulnik founded his second company, Neighborhood Sun. 

Beyond its founder, Neighborhood Sun is staffed by two other senior executives with deep expertise in clean energy. Thom Smith joined the Neighborhood Sun team last year when Neighborhood Sun acquired his company, Astral Power. Now Neighborhood Sun’s chief revenue officer, Smith leverages two decades of sales experience, the majority of it in energy and solar. Before founding his own company, Smith was the head of national accounts and business development at Direct Energy. 

The final member of Neighborhood Sun’s executive team is John Wilson, CTO. Wilson has nearly 30 years of product and software experience. He entered the solar world in 2013 as the founder of Better Current, which produced solar charging stations. These days, Wilson leads the development of Neighborhood Sun’s Sun Engine software platform. 

Neighborhood Sun also has several other mid-level team members beyond its CEO, CRO, and CTO. Overall, the team has decades of combined experience in the clean energy industry and is well balanced across sales, marketing, finance, and product. The team currently only has one technical team member, which could limit the potential of its Sun Engine platform. However, this collective seems well suited to scale a community solar business. 

Neighborhood Sun manages community solar programs. That service is not very well differentiated from other community solar managers, which can likely achieve similar outcomes. The only differentiator that Neighborhood Sun can boast is its Sun Engine software platform, which helps community solar firms manage their energy programs. Sun Engine is reportedly an advanced suite of tools for establishing, scaling, and monitoring a community solar program. The platform’s feature set appears to be more advanced than other similar tools. However, Neighborhood Sun is not truly a software company. It only has one technical team member, and directly enrolling community members into solar programs is the focus of the company’s website. While Sun Engine is Neighborhood Sun’s key differentiator, it appears to be competing through other strategic priorities that are less differentiated. Therefore, Neighborhood Sun faces stiff competition from a number of other community solar companies trying to secure a foothold in this growing industry. 

Neighborhood Sun is growing at a decent pace. The company brought in a little more than $890,000 in revenue in 2020, and according to the raise page, this grew to $1.5 million in revenue in 2021. However, revenue expansion brought along deeper net loss. The company lost $1.1 million in 2020, compared to $1.4 million in 2021. Neighborhood Sun’s burn rate is relatively high. The company employs a decent-sized team with many mid- to senior-level leaders who seem to be well compensated. Neighborhood Sun spent $1.3 million on compensation and benefits alone in 2021. 

Outside of financials, Neighborhood Sun enjoyed several wins in 2021. Kilowatts under management grew by 550% year-over-year, indicating continued market share expansion. Part of that growth was probably driven by Neighborhood Sun’s acquisition of Astral Power last year, which allowed Neighborhood Sun to expand into the New York area. The company also reports that two major solar asset owners adopted Sun Engine in 2021, finding it to be a better solution than competing software offerings. Other firms seem to agree because Neighborhood Sun has grown its booked contracts from a $1 million pipeline to a $28 million pipeline over the course of the last year. Neighborhood Sun is growing steadily, an encouraging sign for potential investors.

Neighborhood Sun is a medium-risk investment. On the one hand, the company has been in operation for six years and is reliably generating revenue. With the introduction of its Sun Engine software platform, recurring software revenue can provide a steady source of income. On the other hand, Neighborhood Sun has a solo founder, which increases risk somewhat. The company’s increasing net loss is also a risk factor. If Neighborhood Sun continues to burn capital without significantly increasing revenue, it may be dependent on successive rounds of fundraising.

Neighborhood Sun has made decent progress since its last round of crowdfunding, which closed in January 2021. At that time, the Sun Engine software platform had not launched. Now, Sun Engine is winning over new buyers and generating revenue. Neighborhood Sun has also expanded revenue, from $890,000 in 2020 to $1.5 million in 2021. The company also completed its first acquisition, buying Astral Power to expand its footprint into the New York area, and its booked contracts increased in value by $27 million in 2021. Neighborhood Sun also brought on new key members of the management team since its last round, namely Chief Revenue Officer Thom Smith and CTO John Wilson. However, the company still lacks significant differentiation from other community solar management firms and continues to post large net losses. Therefore, Neighborhood Sun’s KingsCrowd rating was downgraded from a Top Deal to a Deal to Watch.

Neighborhood Sun is a Certified B Corporation doing impactful work to increase adoption of solar power in the United States. However, it may not be a high-growth investment opportunity. The company sells software but also seems to generate income from managing community solar programs. This line of business isn’t particularly scalable. While Neighborhood Sun has invested in a software platform to generate more efficient revenue and dig a deeper competitive moat, the company still doesn’t appear to be a true software business. In order to reap the benefits of a high-margin software-as-a-service model, Neighborhood Sun should invest more in its engineering team. Until then, Neighborhood Sun will likely continue to grow at a relatively unimpressive pace.

Clean energy is clearly where the world is headed. There’s no doubt that fossil fuels and other non-renewables are furthering the climate crisis, and governments around the world are uniting to invest significant resources in power sources like solar, wind, and hydroelectric. Neighborhood Sun is a beneficiary of this trend. As governments promote solar power, more solar farms and solar managers are in need of Neighborhood Sun’s software and services. 

Moreover, Neighborhood Sun has spent the last six years proving its efficacy in expanding kilowatts under management and launching an innovative software tool to manage community solar programs. Revenue has grown steadily year over year, and that growth continues with $28 million of booked contracts in the sales pipeline. Neighborhood Sun is led by a seasoned team with deep experience in solar sales, technology, and business operations. With their guidance, Neighborhood Sun has strong potential to continue its steady growth and bring low-cost solar power to millions of Americans.

Neighborhood Sun is pioneering “community solar,” shared solar power systems that provide low-cost solar access. Community solar is widely regarded as an excellent method to accelerate solar power adoption, particularly in low- and moderate-income communities that can benefit most from the transition away from non-renewable energy. Investors should note that Neighborhood Sun faces stiff competition in the solar power market. The company doesn’t offer very many key differentiators, other than a software product that could benefit from more internal support. This deal is also poorly priced at a valuation larger than the company’s current revenue can justify. 

However, Neighborhood Sun is a well-established business coming off a strong year of operations in 2021. The company looks primed to expand to new states and scale revenue efficiently. The team is experienced, and Neighborhood Sun has grown steadily each year, with a 550% year-over-year increase in kilowatts under management in 2021. With $28 million in booked contracts, Neighborhood Sun is well positioned to continue introducing solar power to neighborhoods across America. Therefore, Neighborhood Sun has been rated a Deal to Watch. 

For questions regarding the KingsCrowd analyst report or ratings for this company, please reach out to support@kingscrowd.com. 

Analysis written on April 28, 2022.