Welcome to “10 Ways to Win in Climate Software,” an Energize series defining the playbook for sustainability SaaS entrepreneurs. In case you missed it, catch up on our series opener and the Ways to Win countdown:
If you’ve been following our “10 Ways to Win in Climate Software” series, our culminating thesis will come as no surprise: Building an enduring climate software company requires a different set of guiding principles than those used for traditional software companies. The journey for sustainability SaaS founders tends not to fit into a neat VC framework, so the Energize team created our own field guide. But given all the added risks and complexities in the sector, you may be asking: Why focus on climate software in the first place? Allow us to make the case in our series capstone.
First, the time for climate software isn’t coming – it is now. Climate software companies can not only build meaningful sustainability solutions, they can also build real enterprise value. Predictions around the climate software market have revealed the enormity of the opportunity:
- Bloomberg New Energy Finance (BNEF) estimates that investment in the energy transition exceeded $1 trillion for the first time in 2022, matching annual fossil fuel investment for the first time.
- McKinsey estimates the net zero transition represents a $9 to 12 trillion incremental revenue opportunity by 2030.
- An Energize analysis based on a Flexera report projects that climate software has a total addressable market (TAM) of $1 to $2.2 trillion in annual recurring revenue (ARR).
- Based on the same Flexera report and a conservatively valued 10x enterprise value to ARR multiple, the enterprise value at stake is $9 to $22 trillion within the next seven years – which is roughly the average hold period of an early-stage VC investment.
These metrics point to the immense potential and progress of climate software companies. But can SaaS startups deliver on the promise to produce real revenues, real profits and real impact? A look at public market comparables indicates yes.
To inform what will be required for the next wave of enduring climate companies, we analyzed performance metrics from 30 companies in the current class of publicly-traded climate companies (pictured below), many of which offer hardware solutions or a blend of hardware, services and software. We found that the top-performing climate software companies are on track to reach a scale similar to the top public climate companies – businesses like Sunrun, Enphase and ChargePoint—and they’re doing so more efficiently.
Let us explain our findings using an adaptation of Bessemer’s cash conversion score, a leading indicator of Return on Invested Capital (ROIC) for high-growth, cash-burning private climate software companies (and our favorite growth and efficiency metric). At Energize, we generally look for companies that achieve a cash conversion score of 0.5x over time. We created our own capital efficiency metric to compare public and private climate companies. The cash conversion chart below reflects the capital consumed to reach $100 million in gross profit for public climate companies that have already surpassed $100 million in gross profit(blue) and those that currently have less than $100 million in gross profit (gray).
Now let’s extend the analysis to private climate software companies. In the chart below, we compared the cash conversion metrics for the top seven public climate companies (blue) – valued at an average enterprise value of $10 billion – to those of three private climate software companies that are approaching $100 million in gross profit (purple).
The numbers speak for themselves: If publicly traded, these three private climate software companies would rank as some of the most efficient climate tech companies to date. The average public climate company needed to consume $704 million in capital in order to surpass $100 million in gross profit. By comparison, these three private companies consumed an average of $88 million in capital to reach $100 million in gross profit, making them eight times more efficient than the most efficient public climate companies. These metrics have wide-ranging and long-lasting implications, as capital efficiency has been a strong historical predictor of enterprise value and free cash flow potential.
Our analysis of public climate companies also revealed a key commonality among top-performing public climate software companies – they tend to be “picks and shovels” businesses. In other words, firms like Enphase, SolarEdge and Nextracker can be classified as underlying workhorse technologies that power and enable the flashier and more tangible aspects of the energy transition – things like solar panels and electric vehicles. We believe the next wave of climate tech IPOs will likewise be rife with climate software picks and shovels.
As with many picks-and-shovels companies, climate software companies are not often sexy or tangible. Yet as we’ve demonstrated throughout this series, these are real companies with real revenues, real customers and real impact – and they are already being deployed today. Climate software companies are stepping up to the challenge and unlocking a new level of scale and efficiency for the energy transition. These businesses represent the digital operating systems upon which massive industries are being built from the ground up: solar, wind, batteries, electric vehicles, hydrogen, direct air capture, natural capital, you name it. And they’re doing so at margins and growth rates competitive to the public markets. For venture capital and for our planet, that’s what we consider a win.
Energize’s full 10 Ways to Win in Climate Software report is available for download here. Below is a quick rundown of each way to win, from 10 to 1. Did we miss something? Interested in exploring further? Please reach out.
10. When SaaS Metrics Fail in Climate Tech 🙅
Traditional SaaS benchmarks continually fail in climate tech. Don’t expect a clean triple-triple-double-double-double in sustainability SaaS. Build an operating plan and budget that rejects cookie cutter SaaS growth expectations. To thrive, survive. Read more.
9. “You Never Get Fired for Buying IBM”🤝
Instead of always pushing the direct sales boulder up the hill, know when to level up by partnering up. Software buyers in climate often prefer to buy innovative software wrapped up in a neat “services” package by a trusted vendor like IBM – and channel sales and partnerships can contribute 15 to 30 percent of ARR in climate software. Read more.
8. Price to Scale 🏷️
Pricing, specifically volumetric-based pricing, is an underappreciated driver of ARR growth. Climate software companies that leverage a hybrid pricing model benefit from embedded organic expansion tied to the growth of their customers. Read more.
7. Don’t Skimp on Customer Success💁
Though often overlooked or undervalued, best-in-class customer success can become an account expansion dynamo if wielded properly. Read more.
6. “Own the Problem” 🚨
Climate software companies are almost always creating their own categories. Becoming synonymous with the problem your software solves is not just a marketing tactic, but a cultural cry your team can rally around. Read more.
5. The Power of Climate Product-Led Growth 👩🏻💻
Many early climate software customers are themselves small, albeit fast-growing companies. Use product-led growth to prioritize user adoption and secure a foot in the door during the early stages of customers’ lifecycles. Read more.
4. Hype Cycles Don’t Drive Sales Cycles 💥
Hype does not equal sales. Blitz scaling to “land grab” is rarely successful in climate software, and scaling OpEx commensurate with market hype is a sure way to crash and burn. Sales cycles can frequently stretch from six to 12 months in climate software, and companies should orient their burn rate accordingly. Read more.
3. Activate the Climate Talent Honeypot 🍯
Climate software companies can attract and retain top-tier talent by tapping into the mission-oriented talent honeypot. Recognize the competitive advantage of mission in climate software by setting an ultra-high bar on talent– and make sure your impact and ESG strategies deliver. Read more.
2. Align to Revenue 📈
Selling software in an industry growing at a 20 to 50percent CAGR is a far easier climb than selling to those growing at less than 5percent annually. Align your software to high-growth climate tech industries to unlock a major revenue boost of your own. Read more.
1. Find Product-Budget Fit 🤑
Product-market fit can be a red herring in climate software. Instead, find product-budget fit. Frame the pain point your climate software solution solves form the customer lens, to successfully navigate to the right budget and through multiple renewal cycles. Read more.
This article represents the views of the author and is provided for informational purposes only. It is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Readers should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Information is subject to change based on market or other conditions.
