Silver Spring Networks, the smart grid networking darling once rumored to be gunning for a $3 billion valuation, filed its much anticipated IPO on Thursday. Silver Spring Networks appears to asking would-be investors to overlook obstacles that have kept it unprofitable and instead hitch their wagons to the next great networking technology frontier — the power grid.
Silver Spring wasted no time fanning the be-a-part-of-something-big flames In the opening overview of its public-offering filing.
We believe that the application of networking technology to the power grid has the potential to transform the energy industry just as the application of networking technology enabled the Internet and revolutionized the computing industry.
Silver Spring isn’t wrong. Connecting the power grid with modern technology that will allow two-way communication between utilities and customers could improve grid reliability, save energy and reduce costs. That’s revolutionary and potentially lucrative. There are just a few Goliath-sized stumbling blocks standing in the way of profitability.
By nearly every measure Silver Spring has grown by leaps and bounds. Its revenues skyrocketed from $58,000 in 2008 to $70.2 million in 2010. Its staff has increased four-fold to 593 employees and the company has invested more than $40 million in R&D. It’s also been awarded to network more than 17 million Silver Spring-enabled devices that connect homes and businesses.
Still, the company is losing money. Silver Spring lost $40.4 million in 2008, $113.5 million in 2009 and $148.4 million in 2010. In the first quarter of 2011, the company has reported a net loss of $33.4 million. And the company expects these losses to continue.
There are two interconnected problems that have and will continue to keep Silver Spring — and any other smart grid company hoping to follow in its IPO footsteps — from profitability for at least awhile.
The problems center on utilities and their classically misaligned relationship with cutting-edge smart grid companies like Silver Spring. Utilities tend to follow the pack and are rarely early adopters of new technology or products. Meanwhile, companies like Silver Spring — makers of the latest and greatest smart grid tech — must convince the lemming-like utility industry to take a chance.
Incredibly long sales cycle
As a result, Silver Spring’s sales cycle is long and unpredictable, as it states under the risk factors portion of the S-1 filing. Utilities have to get through their budgeting, procurement, competitive bidding, technical and performance reviews and the regulatory approval process before Silver Spring will see any money. And that can take several years, according to the company. Pilot programs to test the product can delay it further.
So, it’s no surprise that as of March 31, Silver Spring had some $422 million in deferred revenue. Meanwhile, the company has an accumulated deficit of $401.8 million.
A reliance on stimulus money
Silver Spring is waiting for the utilities to pay up. But that’s been slowed by a delay in stimulus grant money. Silver Spring isn’t waiting for a government stimulus check. Its customers, the utilities are. The company notes in its IPO filing, the feds have approved and awarded utilities stimulus funds aimed at smart grid improvements. However, a significant portion of the funds haven’t yet been distributed.
Photo from Flickr user tripp, CC 2.0
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