Daniel Betts & Christian Hernandez Gallardo (Blue Frontier): How climate hardware earns trust

0:00Daniel Betts:This episode is brought to you with Luxembourg Venture Days, back on the 14th and 15th of October. It's where Europe's venture community comes together, private capital, corporates and high growth startups, all under one roof at Lux Expo, The Box. Last year, 3 ,400 attendees, more than 400 speakers and 330 plus investors actively scouting deals. We'll be there with the EUVC studio recording on site. If you're building, raising or deploying in your this is your room, head to venture-days.lu and do tell them that EUVC sent you. For the builder, the building owner that's signing and buying your solutions, what are they buying?

0:41Are they buying a cheaper energy bill?

0:44Daniel Betts:Are they buying it for the resilience that we talk about here? Is it the ESG line that they're buying it for? What is it that really moves the needle on the buyer side?

0:50Christian Hernandez Gallardo:They're buying an air conditioner, but it's very exciting to be able to just come in and give the building owner not something that they peripherally want, but something that they must have in their buildings and will buy anyway. We're selling at a competitive price and our system saves an enormous amount of energy, which reduces the operating cost for the building.

1:13Daniel Betts:I remember sitting on a board and using a phrase that I learned when I worked in the U.S. Ship was on the truck. Freeze it, have a product, and just ship was on the truck. Stop iterating on it.

1:24Christian Hernandez Gallardo:Making sure that a company that has a technology that can do so much, like we could do residential, commercial, water harvesting, like the sky's the limit of things that you could do with this technology from a fundamental standpoint, that you can end up doing projects forever without coalescing into a real company.

1:46Daniel Betts:Welcome to the EU DC podcast. Cooling is about a fifth of the electricity running through the world's buildings today. And the number of AC units on the planet triples by 2050. We're going to get to 5.6 billion of them, all needing great capacity equal to the US, the EU, and Japan combined. Existing units have not been innovated on since 1902 and are highly inefficient. Daniel's technology consumes 50 to 80 % less energy than the current solutions and ship out of a factory in South Florida and the Miami area. Christian Hernandez backed it in 2022 and joined the board. Today, they've got some news for us.

2:27Daniel Betts:Daniel, Christian, welcome to the podcast. Hello.

2:30Christian Hernandez Gallardo:It's such a pleasure.

2:35Daniel Betts:This show is not investment advice, and the hosts of this episode may be invested in the funds and companies featured. So, Christian, my friend, you came to us with the news. Give it to us in 20 seconds. The version is I'm going back to my operator roots. I am becoming the executive chairman, or have become the executive chairman of Blue Frontier, partnering up with Daniel, having backed him for the last several years to go help scale up his amazing technology. So I will be stepping back to the other side of the table. Congrats, Christian. I think everyone who steps onto the operator floor definitely deserves an applause because that is grueling.

3:13Daniel Betts:Daniel, I want to go to you for people meeting Blue Frontier for the first time. What does Blue Frontier actually do and who is sitting in it right now?

3:23Christian Hernandez Gallardo:Blue Frontier is a technology company developing a completely new way of doing air conditioning. Instead of using the technology that is the vapor compression cycle, which is 150 years old plus, we have developed a new technology called desiccant enhanced evaporative cooling that works with a salt solution that is a liquid desiccant to drive cooling directly. And this technology gives us two major benefits. One is hyper-efficiency, like we said earlier, major reductions in energy consumption, more than 50%. But it also gives us the capacity to store cooling energy such that you can decide when you're going to consume electricity for cooling and by how much, independent of when you're providing cooling into a space.

4:18Christian Hernandez Gallardo:And so the combination of these two things make it such that air conditioning no longer becomes the peak load of the grid, but also reduces the operating costs of buildings in a very substantial manner, while keeping people comfortable during the hottest days of the year. And those hottest days of the years are increasing in number across the world as the planet warms.

4:44Daniel Betts:Christian, I know you have a great analogy to explain why this solution is so important right now. Of course, we all know that grid capacity is a big problem. It has been for a long time. But with the rise of data centers and the need for compute, AI is on the topic that everyone's thinking about. So tell me just your analogy for how to think about this. Yeah, a bit of background. I mean, when I first started looking at cooling, it was from an adaptation perspective, my belief that the world was going to heat and we needed to keep people not only comfortable, but actually alive. The human body cannot survive the combination of humidity and heat, literally thousands of deaths in Pakistan, India, and others.

5:27Daniel Betts:But that the solution that existed was not efficient and not scalable. And so we looked at this back in 2021. Very little innovation came across Blue Frontier at that time. Over time, yes, we invested in it primarily as a more efficient cooling technology. Daniel kept talking about this energy storage capacity during the board meetings, and we kept telling him to actually be quiet about it, focus on shipping the cooling stuff. And then at some point it hit me. Maybe he banged it on my head enough times that it finally came through. but this is the analogy. So today the grid, which is an old and aging infrastructure problem, is a four-lane highway.

6:13Daniel Betts:Two of those lanes are currently reserved and extremely conservatively reserved for cooling, for peak loads. So 48 % in California, 50 % in Texas, 46 % in the Northeast. That cannot be touched. So at a four-lane highway, you only have two lanes that could be utilized for new loads. In comes Google with his giant semi-truck for his new data center and says, can I come to the highway? And the utility says, absolutely not. I have no capacity. Google says, fine, I'll pay you to build new capacity, build me two more lanes. And the utility, the grid operator says, yeah, fine, wait seven, 12 years, come back then.

6:49Daniel Betts:Because the utilization of cooling, reservation of cooling in the grid, that is actually blocked. So what if you actually have a technology that can be deployed at scale that can actually literally open up one more lane. So you go from two free lanes to three free lanes today by doing what you already do, which is actually upgrading your air conditioning units and residential commercial hospitals, malls, etc. And now all of a sudden, you just actually increase the capacity of the existing grid while you invest in infrastructure investments to add lane four, lane five in the future. And that's actually what Brew Frontier allows today by actually the energy consumption efficiency, but also the storage capacity that it has inside the product.

7:33Daniel Betts:It sounded magical in 2022, and it's still magical today. So, am I right? This is a bit of a perfect story about how climate investing, I'm putting that in quotation marks here, in the past. much of those solutions have truly come back at us with even more importance because of the need for more infrastructure that can help us digitalize and re-industrialize the world. Am I right that this is almost like a perfect example of that, Christian? Yeah, I think in this case, it's three different needs. So one is the increased need for cooling. You and I experienced it in Europe this summer, right? Europe does not have air conditioning the same way the U.S.

8:21Daniel Betts:has. And we will have to deploy cooling to actually keep people alive. 40 ,000 incremental deaths in Europe this summer just from heat waves, but we need to do it efficiently. Two, and that links into adaptation to heating climate. And then three, yes, your point about the need for grid capacity for the AI infrastructure that we're now trying to build, where that literally takes trillions of dollars and a long time to actually deploy. I mean, there's literally Microsoft bringing a nuclear reactor back online in the U.S., billions of dollars being spent on a geothermal facility in the U.S., and yet you could actually have these attributed assets that could actually make that happen fast.

9:06Daniel Betts:Daniel, I'm super curious. These are the macro topics and the reason why this company will be super exciting for the venture ecosystem. But for the builder, the building owner that's signing and buying your solutions, what are they buying? Are they buying a cheaper energy bill? Are they buying it for the resilience that we talk about here? Is it the ESG line that they're buying it for? What is it that really moves the needle on the buyer side?

9:29Christian Hernandez Gallardo:They're buying an air conditioner. So the beauty of entering, like creating all these solutions to the grid directly through a product, we're creating it through a product that people buy and need today. So the market for air conditioning exists, is highly robust, very dynamic, and growing at a very fast pace. The conventional air conditioning OEMs are having trouble keeping up with that increasing demand for product. And so when we plug ourselves into that market, we become part of the churn of changing out air conditioning. And in fact, it's overwhelming the company in terms of the level of demand that we have compared to our capacity to grow the company at the speed that we want to grow it to have the level of impacts.

10:14Christian Hernandez Gallardo:But it's very exciting to be able to just come in and give the building owner not something that they peripherally want, but something that they must have in their buildings and will buy anyway. And that's what's happening. So we're selling at a competitive price, and our system saves an enormous amount of energy, which reduces the operating cost for the building. And then lastly, we've actually built a better overall air conditioner. So our system controls humidity and temperature independent of each other, enabling us to use a digital twin, the same digital twin that allows us to control the energy storage capabilities and flexibility of the unit.

10:56Christian Hernandez Gallardo:We also launch to create flexible cooling capacity into the building, adapting it to the actual need of the people inside the building or the use case of the building. So in cases, for example, there's a hot spell or a heat dome as it has happened here in the United States, we increase the cooling capacity of our unit directly to the needs of the building while the conventional air conditioner just stays at a single sort of point of cooling with reducing efficiency. In our case, we're able to...

11:31Daniel Betts:Daniel, give the example of the cinema for the Odyssey.

11:35Christian Hernandez Gallardo:Yeah, exactly. Like, for example, here we have a system at the Museum of Discovery and Science where the IMAX theater is being cooled by a Blue Frontier system. And the Odyssey, so we're having record heat and the Odyssey is being shown, breaking records, and it's being shown from 7 a.m. in the morning all the way to 10 p.m. at night. So the cooling needs of the building have exploded. The humidification requirements of the building have exploded. at the moment when the conventional air conditioning systems, because it's so hot outside, are running at partial efficiency and are unable to keep up with the load.

12:15Christian Hernandez Gallardo:So Blue Frontier looked at the load profile of the building and we realized that we could boost, by intelligent and controlling our system, we could boost the cooling capacity into the building. And so we deployed software into our system to drive the cooling, drive for deeper levels of dehumidification, to make people comfortable. And that's only possible with intelligent systems that have that level of levers of humidity, temperature, and also increasing efficiency and the capacity to store energy so we could also optimize the energy efficiency of the unit for the building. And this just happened this summer.

12:55Christian Hernandez Gallardo:And we've done it at bowling alleys and at restaurants and at supermarkets where we have been able to deploy overall a better experience for the building user based on our capacity to adapt to the actual needs of the building. So why do people buy it? It's because it's better, better, better in every way.

13:18Daniel Betts:Tell me one line on the cost of this thing, Dan. Does it, because it's clearly a more sophisticated system than an old AC. What does it do to the cost? What does it do to the cost profile over lifetime, that type of thing? Just one line.

13:33Christian Hernandez Gallardo:Yeah. So we generate over per unit. These are 15 to 20 ton, what is called dedicated outdoor air systems for commercial buildings. We end up creating around$300 ,000 of overall lifetime value for the building owner. That is a lower capital cost or a competitive capital cost compared to a conventional unit. So there's no incremental cost to our unit to buy it. Plus, we create$10 ,000 to$15 ,000 in savings per year in electricity. Here in the United States, in Europe, it will be higher due to higher prices of electricity that you guys have. Plus, the energy storage element enables us to eliminate the capacity costs to the building and also enables us to operate on time of use and float through time of use rates and enables us to participate in distributed generation and our purchase agreements with the utility, which allows us to provide another level of savings directly to the building owner or to the utility or to the aggregator that is working with us.

14:37Christian Hernandez Gallardo:And so it's less expensive, less expensive to operate and provides better cooling.

14:44Daniel Betts:Yeah. I want to ask you both about the stage you're at as a company because you're now moving from being a science and engineering company to really being a sales and service company. Tell me, where are you on that journey? What does this mean in terms of what you need to deliver and build as a team?

15:03Christian Hernandez Gallardo:So in the last two and a half years, the number one role of Blue Frontier has been to advance this technology to a product. And there's a big difference between building prototypes and building products that are reliable. And that has required an enormous amount of engineering rigor. But at the same time, we have been in the process of building the confidence in the market that we are something that you can buy and deploy in your actual buildings. So moving from pilots to the actual market, which is where the growth occurs. We have also built out the scaffolding of sales in the air conditioning market.

15:41Christian Hernandez Gallardo:Here in the United States, most air conditioning in the commercial building space is sold by a series of regional companies that are resellers or sellers of the OEM solutions directly to mechanical contractors and building owners and building managers at the time that they have projects. And so we have placed ourselves in partnership with now over 60 field offices that are in the process of selling Blue Frontier units into projects that are already in existence. And we now cover around 85 % of the United States in terms of representation with geographic concentration right now in the southeast of the United States and now growing into the northeast.

16:26Christian Hernandez Gallardo:And as the company grows, we are in a process of training more sales engineers to become advocates and sellers of Blue Frontier systems into the market. To date, we've trained over a thousand sales engineers to sell and deploy Blue Frontier systems across the United States. And that process has been one in which we have demonstrated the performance of our unit in what we may call pilots. These pilots have demonstrated over now 90 ,000 hours of operation in the field. They have showcased all these things that, when we say them, energy storage, hyper-efficiency, better cooling, sound like science fiction to a building owner or to a mechanic-owned tractor.

17:15Christian Hernandez Gallardo:All of those things have been proven to the market with customers on the other side that are excited and happy with the services that we have provided. And therefore, we have now entered the market no longer as into the early adopter market, but now into what I would call the early majority market, which just wants air conditioning. So we released the product, this sort of big unveiling of our product to the general industry this year in February. And we actually were designated and won product of the year award by the industry through the AHRI industry group, which is the global industry group that controls air conditioning.

17:56Christian Hernandez Gallardo:And so since then, the market has exploded around us. The demand for our products has overwhelmed our sales team. which is trying to make sure that we are able to deliver product that will mesmerize and make, surpass any expectations that our customers have. And we're also in the process of landing projects on their basis of design for projects that would go into next year. So it's a really exciting time at Blue Frontier. The other side to that, by the way, is, okay, so demand has exploded. it. Now we need supply. So we are frantically building.

18:36Daniel Betts:Before we go supply, because we should touch on supply. And we all know that Elon Musk, of course, famously has said that the hardest thing is to build manufacturing capacity and very strong manufacturing capability. But before we go there, I'd love to ask you both just to try and tease out some of the learnings that you've had around building a go-to-market motion that rests on partnerships and dealerships and distributors? Because the venture playbook and what most founders out there will be able to go and search out is how do you build a SaaS company and how do you do go-to-market as a SaaS company?

19:14Daniel Betts:But this is obviously very, very different. It's one that many gravel with. So to founders that are building this type of sales motion, what would you say to them? They really need to think about getting right and which may be a bit counterintuitive in that. I might jump in here and say, the buyer is very risk adverse, right? Because the buyer also has a recommender, which is the person that sells you your air conditioning system. Nobody gets fired for buying IBM. So they're going to sell you what they know. They're going to sell you your carrier unit or your train unit. It works. They make the commission.

19:51Daniel Betts:They can move on pretty happily. So getting that influencer over the hurdle of recommending something new is what they've been working on for the last few years. And that's why it was past the tipping point now where actually these third parties who, by the way, yes, they might make commission from us, but they make commission from carrier or train just much more easily are now beginning to flip and begin to recommend this. And so it's building that trust to then get the end buyer, what happens to be the building owner, to accept it. Or the designer of the system would then sell to the building owner.

20:28Daniel Betts:So like this multi - What did you do to get that recommender trust you enough to pick you over the existing solution?