Achieving the 2050 net-zero scenario from the Network for Greening the Financial System (NGFS) would require cumulative spending of $275 trillion on material assets over the next three decades, according to McKinsey research.1 This challenge provides a huge opportunity for leaders to launch and grow new green businesses that will transform the world for a sustainable future. In this interview, Philipp Pausder, founder and CEO of thermondo, shares with McKinsey’s Jerome Königsfeld and Markus Berger-de Léon insights on how the business scaled to become one of Europe’s largest providers of home heating systems.
Jerome Königsfeld: What inspired you to build thermondo, and how did you validate the business opportunity?
Philipp Pausder: In early 2012, we saw a huge opportunity to build and scale an integrated, online platform for consumers to plan, finance, and install modern residential heating systems. Although there were already 800,000 heating system upgrades each year in Germany, market research reports and governmental ambitions showed that twice that number were needed to meet CO2 reduction targets. Furthermore, residential power was identified as one of four areas to reduce CO2 emissions and primary energy consumption. At the time, there were SaaS [software as a service] solutions in other markets, such as real estate and car sales, but no one was using such software to directly tackle the need to reduce residential heating costs and emissions. We wanted to create a broker platform like ImmobilienScout [the largest German online marketplace for real estate] but for new, more sustainable heating systems.
We started out as a self-financed company and built our first algorithm to help customers select a greener, money-saving heating system using this initial investment. By mid-2013, we secured our first external funding round, based on the performance of our algorithm, platform traffic, and leads. Over the next few years, we raised rounds of funding approximately every ten to 12 months, which helped us fuel our growth. By 2016, we were able to raise funds entirely from internal sources.
Jerome Königsfeld: Your business is organized vertically today, but this was not always the case. Why did you pivot your business model?
Philipp Pausder: We launched in March 2013, but we went through several iterations of our business model before we arrived at the platform that best suits the market’s needs.
The biggest iteration became necessary following a surge in customers to our platform after we were featured in a major German newspaper as one of three start-ups that will change the world and we pitched our model at a global technology fair.
To meet this customer demand, we contracted with partners—including 30 tradespeople and a major German bank—to, for example, sell, finance, and install heaters. But then we experienced a growing problem with our contracted craftsmen arriving late to customer appointments, prioritizing their own customers over ours, or not showing up at all. We realized we needed to hire our own workforce. Today, we employ 500 skilled tradespeople. This necessary step, which moved us away from a pure SaaS model, was the beginning of our verticalization. Interestingly, many companies move to an integrated vertical value chain as they scale up. For most investors, this was counterintuitive because they wanted a clean platform, so we had to explain why this step was necessary and would not limit our ability to scale.
Jerome Königsfeld: You also evolved your product. How did you do this?
Philipp Pausder: Our product development has gone through several stages over the years, culminating in our current focus on heat pumps. In the first three years, we hired experienced developers to write our software stack and build the core online-market platform to sell and install traditional home heaters.
In the summer of 2016, we launched the rental model, which allowed customers to rent a heater. Although other companies were already in this market, we were the first to decouple the concept of home heaters from gas supply and also offer customers the option to secure a heat service contract directly, without going through a utility. This created demand and allowed us to charge a premium for the service.
In the summer of 2019, we launched our t1 private-label boilers, competing with established market players. The heating market has a multistage distribution structure; nearly all sales go to craftsmen, who then sell to end customers, making it difficult for newcomers to gain market share. However, our product had advantages: it was easier to install and delivered more robust, long-term performance, giving us leverage in negotiations.
Finally, in the fall of 2021, we launched our private-label heat pumps, scaling up production in June the following year to meet the growing demand for green tech.
Learn to Leap interviews
Markus Berger-de Léon: How did the organization evolve over time to accommodate its fast growth? What were the best or most challenging organizational decisions you made?
Philipp Pausder: Scaling a company is all about people, and this is where most mistakes happen. I would describe our own development as having three phases. In phase one, when we started thermondo back in 2012, we were the first to market. We were a team of young, ambitious, talented people coming straight out of university or with one or two years of experience. We had few role models, so of course we made mistakes, but we learned quickly and were always moving forward, relying on our own creativity and drive.
As we grew, we entered phase two. During this phase, we brought in people at the C-suite level who had prior experience scaling a start-up business and knew how to set up an organization structure. But we tried too early to professionalize our processes and operations, hiring managers from corporate environments who were more used to managing processes than hands-on execution. These hires turned out to be the wrong fit because they were not hungry enough anymore to work on the edge. This led to several cofounders and team members leaving. For two years, growth and innovation suffered. We learned the hard way that it is important to hire the right people at the right time. We hired senior people too early and did not let go of the wrong hires early enough.
By the fall of 2019, our company had scaled to a size where professional processes were needed. We hired a new generation of employees across all levels who had four to six years of experience. They had prior start-up or consulting experience, and we knew they could help us take our company to the next level. Our focus was on governance and maintaining our innovative and agile edge while also becoming more professional. We recognized the importance of having a mix of corporate and start-up experience within our ranks.
Markus Berger-de Léon: How have consumer behaviors changed since you founded thermondo, and how has the company responded?
Philipp Pausder: In 2013, residential energy management was still an abstract concept for most consumers. There was little knowledge, experience, or interest in the topic, and few people actively sought out ways to manage their energy usage.
Fast-forward to today, and we see a significant shift toward prosumers: individuals who generate their own energy via solar panels or other renewable sources. These prosumers are actively managing their energy usage and seeking to reduce their reliance on traditional energy sources and become self-sufficient. We recognized this change and are working toward developing complete equipment and home energy management systems [HEMs] that cater to the needs of prosumers. These HEMs will allow homeowners to monitor and manage their energy usage and make informed decisions about their energy consumption.
Jerome Königsfeld: A heat pump is an expensive purchase for a household. How do you convince your customers to make this energy investment?
Philipp Pausder: One of our main challenges has been increasing the accessibility of heat pumps to customers with lower budgets. We have implemented a leasing model, which has helped to reduce the up-front costs. By offering a more flexible payment structure, we can reach a wider range of customers, reduce their uncertainty about the financial impact of switching to a heat pump, and create decades-long relationships with them.
To do so, we also created a special-purpose vehicle—to pool money from investors to finance wide-scale heat pump installations, which individual customers could pay back over the course of a lease—and became one of Europe’s largest financiers of heat pumps.
Markus Berger-de Léon: What advice do you have for other founders of start-ups?
Philipp Pausder: We realized we should have focused on margins earlier in our company’s growth. We learned late that we should have designed our supply chain from the beginning with the goal of achieving high margins. This could have involved negotiating better prices with suppliers, optimizing our logistics and warehousing operations, and ensuring that we were selling our products at the right price points to generate the margins we needed. Further, we developed and brought our own products to the market too late. Owning development earlier would have given us more control over the supply chain and allowed us to negotiate better prices with suppliers. Additionally, selling products under our own brand would have given us better negotiation power and allowed us to capture more value from each sale earlier.
