Germany’s home to Europe’s two biggest domestic energy tech startups: Berlin-based Enpal and Hamburg-based 1Komma5. They’re both unicorns, they’ve both raised billions and they both want to cover homes across Germany in solar panels.
There’s one central difference. While Enpal sets up new installation businesses as it grows, 1Komma5 buys up smaller installers and integrates them into its business.
“If you looked at 1Komma5’s structure without knowing it was a climate tech, you’d think it was a PE firm,” says one investment banker.
1Komma5 is part of a wider trend in European tech, where startups roll up smaller businesses — just like private equity houses have long done — and then add a software layer on top. Other European examples include German healthtech Patient21, which acquires dental practices and UK startup Cera, which acquires care providers.
“In Europe right now there are more companies doing roll up plays for vets, doctors, opticians and plumbers than AI companies,” podcaster and investor Harry Stebbings wrote on LinkedIn recently.
Following in PE’s footsteps?
For a long time, private equity firms have made their riches from buying up small businesses in a fragmented industry — from vet surgeries to funeral homes and car washes — and merging them into one. Take CVS Group, which owns 500 vet practices across the UK, Ireland and Australia; and FC Skyfall Capital, a buyout firm which runs 275 care homes in the UK.
The strategy allows PE firms to maximise profits via economies of scale, acquire customers in new markets quickly and score a valuation which is typically higher than the sum of the individual businesses.
Enter the rollup startup
The new wave of startups are, like the PE buyout model, acquiring businesses; the difference is they’re also rolling out their special sauce software on top.
One such example is Berlin-based startup Patient21, which acquires dental clinics and rolls out its appointment booking and patient data software across them. Its raised $212m, from VCs including Target Global and Piton Capital.
When founder Cristopher Muhr first started the business in 2019, investors would often ask him why he wasn’t building a purely digital company, he tells Sifted — but opinions are starting to change. While digital-first healthtechs may have faster growth initially, they only ever control a limited portion of the patient journey.
“In areas like healthcare, a certain part of the value chain happens in the physical setting,” says Muhr. “Examination, for example, is a key part of the patient journey. If you’re not able to see the patient and examine the patient physically, that’s a big part of the healthcare journey that you can miss out on.”
The company has built its own clinics too. “M&A is just a tool to get there faster as many of the permits are there, the foundation of the clinics is already there as well as the team,” says Muhr, estimating that out of the 45 clinics Patient21 owns, 10 of them were built from scratch.
Another example is British healthtech Cera, which provides care to people at home and delivers some of its services through partnerships with the NHS. The startup raised $320m in 2022 and announced a fresh $150m in debt and equity in January.
When Cera expands into a new location, it sometimes does so through acquiring a pre-existing home healthcare company, typically a small family business.
“We’ll acquire it, roll out our technology and software, and then bring it onto our operating model,” says founder Ben Maruthappu. “It can give us a running start, rather than starting from scratch.” It’s not Cera’s only expansion tool; it also hires care workers and sets up new locations organically.
Cera has built patient management software that it rolls out to acquired companies, just like Patient21 does. Software is rarely something smaller home healthcare businesses are using, Maruthappu says.
“They may not consider using software because they’re very small and they’ve been running their business a particular way for the past 20 years, and they’ll keep running it that way.”
Acquisitions keep marketing costs low, software brings the value add
German startup 1Komma5 was founded in 2021 and supplies heat pumps and solar panels to households. It buys up smaller installer businesses — which employ electricians and other trades — as it expands, offering them equity in 1Komma5 as part of the buyout package. As well as supplying hardware, 1Komma5 uses its software, dubbed Heartbeat AI, to optimise homeowners’ energy assets.
Acquisitions work well for 1Komma5, says Jacob Bro, an investor at climate tech fund 2150, which backed 1Komma5 at its Series B round in 2023. The company gains from the reputation of the local installer businesses and the referrals that come with them, keeping marketing costs low.
That said, the company’s strategy differs from a PE outfit in that it focuses on the “cultural fit” of companies it acquires, and the management tends to stay on. “They look to identify the young, entrepreneurial regional leaders,” says Bro, who sits on 1Komma5’s board.
The PE buyout model aims to create a valuation higher than the sum of the acquired companies’ valuations. Bro says 1Komma5 uses software to achieve a similar dynamic. “For it to be a venture case, you have to have the technology piece that creates a value that’s much greater than the sum of the parts,” he says.
‘The next frontier is how you marry digital with physical infrastructure’
The trend of digital businesses acquiring physical infrastructure or producing hardware isn’t new; the biggest companies in the world — Amazon, Microsoft, Apple, Tesla — combine software and physical assets together.
But the trend is accelerating, founders tell Sifted, and it’s helping bring traditional industries into the 21st century.
Maruthappu says an investor recently speculated to him that a lot of the easiest SaaS opportunities have been acted on, leaving industries that require physical and software.
Muhr agrees: “I think a lot of the low hanging fruit of this wave of digitisation has been picked. The next frontier is how you marry digital with physical infrastructure.”
In the case of 1Komma5, Bro says it wouldn’t be able to help customers benefit from its energy management software without having control over the hardware assets too.
“It’s very hard to bring new innovation at scale to the customer without owning the distribution channels,” he says. “You can’t just click a button on a browser and then run the software on the cloud. You need the physical assets, you need that combination.”
Adding to the draw of combining software and physical assets is the increasing difficulty of making money from SaaS alone, says Maruthappu.
“AI-based tools are expensive and in some cases, SaaS companies are having to pick up that new expense, which is making their margins less attractive than what companies had five or 10 years ago,” he says.
Read the orginal article: https://sifted.eu/articles/startups-private-equity-roll-ups/
