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 the series opener and #10: When SaaS Metrics Fail in Climate Tech.
At Energize, we have a few memorable one-liners that have emerged over the years during our deal sourcing and diligence processes. As we look to find the best climate software companies in which to invest, we often start by surveying our corporate network, including our strategic limited partners. We ask questions like: Where are budgets growing? What are the biggest pain points in your business? What technology vendors do you work with?
As we were exploring cybersecurity software solutions for renewables, we asked one U.S. utility which software vendor they selected to protect wind turbines and solar farms against cyber threats. They responded, “IBM, of course!” We then asked the IBM team how they developed their sophisticated cybersecurity software. Turns out, they had a partnership with the cybersecurity software solutions startup Nozomi Networks. So, why did our LP say the software was IBM’s? Because, you never get fired for buying IBM! Their software just works.
And so the story goes. We ultimately invested in Nozomi Networks, and we have carried forward the lesson that startups can level up by partnering with major players like IBM.
The Energize team strongly believes that climate software startups adopting an effective partnership strategy can tap into a “super lever” to increase their go-to-market efficiency. Partners can help climate software companies play bigger: enhancing brand awareness, increasing customer credibility, refining product specifications, streamlining sales and gaining access to an essential distribution channel when selling into the climate software buyer base. If done well, a small operating expenditure (OpEx) input can provide leverage for a large annual recurring revenue (ARR) output.
As Nozomi Network’s partnership with IBM illustrates, partnerships with established software organizations can help climate software startups tap into outsized commercial opportunities. The underlying reasons why many large corporate buyers turn to legacy software vendors are important to recognize:
- Climate software is deployed on mission-critical energy, industrial, agricultural and building equipment, the bedrock of our economy, and so it has to work. Working with tried-and-true software vendors is a risk management mechanism to avoid catastrophic systems failure.
- Trusted technology partners like IBM, Accenture and Mckinsey have established business development relationships with economic buyers and, critically, speak the language of their customers. They frame technological innovation in customer verbiage, rather than tech buzzwords, and with a customer business case in mind. Deep understanding of industry context and customer value are essential in climate software but can be challenging to tap into with sales development reps and account executives trained in more traditional SaaS selling.
- When a large corporation considers allocating budget to an innovative workflow or technology like climate software, they often start by hiring a third party to help evaluate and prioritize their entry. Gatekeepers like IBM, Schneider Electric, Bain and others are trusted voices for corporations foraying into the climate software frontier.
It’s not enough for partners to just be logos on a webpage. From an investor perspective, we look for startups that can provide concrete examples of how their partnerships are structured and delivering value (and vice versa). Based on our experience vetting climate software partnerships, we offer the following guidance:
Be able to show your partner’s quantitative contribution to pipeline and revenue. On average, between 15 and 30 percent of ARR is originated via partnerships for Energize’s portfolio, and we typically expect one-fifth of a climate software company’s revenue to be driven by partners. We even have one investment with more than 50 percent of its pipeline originated via channels.
Energize portfolio company TWAICE serves as a great example of how a channel strategy with top-tier partners can be highly effective. TWAICE provides predictive analytics software for tracking EV battery performance and grid-scale battery integrators responsible for the resilient and safe operation of batteries on the power grid. Their software is trusted by major automotive OEMs, and they elevate their value proposition by working with leaders such as Munich Re for insurance solutions and ChargePoint for fleet management software.
“Batteries are increasingly responsible for keeping the lights on and moving people to where they need to go, therefore it is essential that we build a best of breed partner ecosystem,” said Stephan Rohr, TWAICE’s founder and Co-CEO. “Going forward, we expect over 30 percent of our revenues to stem from our partners and even more to be influenced by joint engagements.”
Structure partnerships with customized KPIs. Establishing clear and quantitative performance metrics and incentive structures that adequately encourage sales throughput are critical for effective partnerships. Partnership flavors that span full-blown joint ventures, reseller agreements, go-to-market partnerships, white-label arrangements, and OEM-software agreements should be optimized with the partner’s core products and business model in mind. For example, a system integrator like Accenture wants to sell consulting hours stapled to the implementation of enterprise software, meaning a clean reseller agreement may work well for an emergent climate software category like carbon accounting where heavy implementation work is required. An industrial conglomerate like ABB is prioritizing core product sales of its own equipment, in which case an OEM-software agreement could work best. Revisiting the TWAICE example, the battery analytics company established a joint venture with TÜV Rheinland to launch a battery health service underpinned by TWAICE’s analytics and independently certified by TÜV.
Let partnerships run their natural course. Symbiotic partnerships are a win-win for customers and your climate software startup, but don’t be afraid to move on from relationships that turn parasitic. Discuss pipeline and sales conversion expectations upfront, and avoid the sunk cost fallacy that lures companies into disadvantageous situations long term. The weight of ineffective partners – that aren’t generating sales, are hogging resources, or are otherwise deterring value – can crush climate software startups. On the other hand, be open to exploring new opportunities with synergistic partners. Partnerships can also catalyze natural M&A discussions, as they help build trust in corporate development. Once the partner “super lever” is engaged, there’s no telling where it will lead!
Next up? Ways to Win in Climate Software #8: Price to Scale - Coming soon on Energize's blog!
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.