Selling Power "Door to Door"
For consumers, new players like Liberty Power represent hope for lower energy costs, a rising concern at a time of spiking fuel prices. Mr. Peņa points out how industries like airlines and telecommunications have lowered their prices under deregulation. "In airlines, the public has saved billions of dollars on ticket prices; in telecom, you can get phones almost for free. … You will see the same thing in the electricity sector as more states turn to deregulation," Mr. Peņa predicts.
Liberty Power began selling in 2002 in New York City, where high electricity costs squeezed small businesses. The company's sales staff knocked on the doors of professional offices, restaurants, and bodegas with a message of cheap electricity.
In time Liberty won contracts with large customers such as New York Life and Lowe's. For corporations and government agencies, the company's Hispanic ownership offers a selling point. "Almost all the big companies have made a commitment to diversity spending, and now they can buy electricity [from a minority supplier]," says Mr. Peņa. According to the company's EOY application, it is "uniquely positioned as the only national electric provider that is Hispanic-owned."
Cost & Capital
So far, Liberty has kept its costs low through operational efficiencies. The company started with four partners in 2001 and currently has only 37 employees, plus hundreds of telemarketers supplied by outside contractors. But at this point in the company's growth cycle, the cost of capital looms as an issue.
Wholesale electricity trades in units of 25 megawatts, enough power for 25,000 homes or small businesses. A 25-megawatt supply for one month costs roughly $1 million, so the numbers can grow big quickly during times of fast growth. The cost of capital relates directly to price and profitability for a power broker like Liberty.
In its search for capital, Liberty was one of the companies that presented their cases to potential investors at the Hispanic Business CEO Roundtable on Capital Markets, held in conjunction with the EOY Awards Gala November 10 in Beverly Hills. "I was impressed by the feedback from investors at the Hispanic Business EOY event," Mr. Hernandez says. "Right now we are actively pursuing those contacts."
To date, the company's financing has come from the founding partners' savings, plus contributions from family and friends. This bootstrap approach worked only because the company obtained large credit commitments from power suppliers.
Although venture capitalists and long-term investors such as Mr. Peņa at Vestar have continuing exchanges with the company, no equity investments have been finalized, according to Mr. Hernandez. "We have talked to strategic and financial investors, and they have been impressed by our management team," says Mr. Daire. "We are strong in the finance area, strong in energy, and strong in sales and marketing. … [The investors] are buying an instant management team."
And, unlike many entrepreneurs, Mr. Hernandez has a major carrot to dangle before private investors: a profitable exit strategy.
Based on 2005 revenues of approximately $100 million, he plans to reach $2 billion within the next five years and then take the company public or sell it to a major player in the industry. Given the high profile of energy costs, and the trends toward deregulation at the state level, the strategy makes sense from a market perspective. On the financial side, Mr. Hernandez quotes the wisdom of super-investor Warren Buffett: "We continue to look for large energy-related assets."
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