The frenetic growth of crowdfunding platforms in the personal-loan space, like Lending Club and Prosper, is encouraging usage of online marketplaces for other kinds of lending activity, like specialty-market commercial loans. A case in point: Mosaic, a new vehicle for facilitating small solar-energy projects.
Mosaic, which was founded in 2011 but started collecting investors’ cash just this year, is attracting individuals who want to support environment-friendly causes and get a decent investment return. Mosaic has so far taken in about $6 million of such funding, which it uses, along with financing from other sources, to make loans to owners and developers of solar-energy systems, says CFO Steve Richmond. The company generates revenue from interest on the loans, and investors pay an annual fee equal to 1% of their total investment.
Investors get monthly principal-and-interest payments that are also funded by the developers’ loan repayments, with yields thus far ranging from 4.5 percent to 7 percent depending on the solar project. To date most of the investors are dabblers: They can put up as little as $25, and Richmond says the average account is about $2,000, but “we think that’s going to grow pretty dramatically.”
The investments are certainly not risk free. Mosaic securitizes the loans as debt notes that investors can purchase. If a solar project fails or for other reasons its owner or developer can’t repay the loan, those who invested in that project won’t get their money back. That has not yet happened with any of the 19 projects Mosaic has financed so far, and given their business models the risk is fairly low, Richmond says.
“Solar has an interesting cash-flow characteristic,” he says. “It needs a lot of financing up front to build the system and get it running, and then it effectively runs with very little maintenance for a long period of time. So while the owners or developers have little overhead, they sell the electricity they generate to utilities under very strong contracts that often have 20-year terms. That gives them the cash flow to make repayments on the loans, which are over five to 12 years.”
When evaluating whether to finance a project, the first thing Mosaic looks at is the utility contract. “We do a lot of due diligence,” Richmond says.
Richmond co-founded Mosaic with CEO Dan Rosen and president Billy Parish. Those two, while attending a solar-energy conference, discussed an idea for helping people who didn’t own their own roof-space to, in effect, “go solar on somebody else’s roof.” They started blogging about the idea, which is how Richmond met them.
“It started with me commenting on their blog posts,” Richmond says. “I had been tracking the early growth of Lending Club and Prosper, and I said, ‘Guys, this is a perfect fit for that kind of platform.’ After my second or third comment, Dan reached out to me directly.”
An English major at Princeton, where he also took a full complement of pre-med classes, Richmond nonetheless found his first job in 1996 at small investment-banking firm Hambrecht & Quist (which was acquired in 1999 by Chase Manhattan). “It was the magic of that time,” he says. “With a liberal-arts background you could get a job at a Wall Street bank.”
His career since then has included co-founding two other technology firms: SavvyMoney, an online financial service, and SelectMinds, a provider of talent-acquisition and social-recruiting software.
Richmond’s opportunity at Mosaic dovetails with his interest in the environment, which began in childhood. “I came from the kind of family where if we were walking up the street we’d pick up trash,” he says. “And my dad, who had been an Eagle Scout, brought into the family values around outdoor entertainment like hiking and camping.” But the “aha moment” came during his high-school years in the late 1980s, when acid rain created by steel and coal mills such as those in Ohio and western Pennsylvania became big news and prompted Cincinnati-born Richmond to think hard about society’s impact on the environment.
With good reason, society’s interest in the environment has never been sharper than it is now, and the demand for solar energy is such that Richmond believes the volume of investment in Mosaic-financed projects may be “20 times” greater in 2014 than it was this year. In fact, he finds it somewhat puzzling that banks’ appetite for risk is so low that they’ve not even taken much interest in directly financing such relatively safe projects.
“It’s still a specialty asset class at this point, and banks’ ability to lend to asset classes that don’t have a long-term track record is a bit constrained,” Richmond says. “It takes specialized underwriting and origination experience, and there are only a couple of institutions doing it really well. But there is so much demand and there is nothing to stop that trend.”
Although solar is never going to be 100 percent of the power mix, Richmond says, versus the alternatives “it’s pretty darn good and getting better all the time.” The cost of solar panels has dropped 95 percent in 20 years, and 40 percent since Mosaic was started two-and-a-half years ago. “As the cost of the raw material goes down, and it’s a one-time cost at that, the [internal rate of return] starts to get really good,” says Richmond.