Welcome to “10 Ways to Win in Climate Software,” an Energize series defining the playbook for sustainability SaaS entrepreneurs. In case you missed it, read the series opener.
The Silicon Valley tech boom that has defined recent decades has left many venture capital (VC) investors with a fixed view of the performance metrics that determine a software as a service (SaaS) startup’s destiny. Yet in the same way that customer base and sales goals vary by industry, SaaS growth metrics for an early company are not one-size-fits all. Defined by its own unique market conditions, the climate tech landscape has its own set of SaaS metrics that diverge from traditional SaaS benchmarks in key areas.
Founders building a climate software business may face an uphill battle when presenting their quarterly business metrics to their board of non-climate SaaS specialists. But Energize’s first (or tenth) piece of advice for sustainability SaaS entrepreneurs is to reframe the traditional SaaS metrics that often get lost in translation in the world of climate tech. Based on our team’s experience, we propose the following benchmarks for a typical Series B climate software company:
Wondering what factors drive these differences? Read on…
The addressable market is still being defined. Climate SaaS companies are often on the frontlines of the problem they’re solving for, meaning their big payoff may need to wait until the market catches up. As Sam Altman recently tweeted, the total addressable market (TAM) for climate software appears smaller than VCs would typically like to see, often totaling mere single digit billions. However, climate SaaS TAMs are often growing exponentially – making the investor sentiment that “TAM is too small” faulty logic.
Look no further than Energize’s portfolio company Smartcar for an example. Smartcar enables developers to integrate their apps with cars – from smart EV charging to usage-based insurance, contactless car sharing, road usage programs and more. When Smartcar debuted its API platform in 2015, they knew that software would disrupt the automotive industry; they just couldn't predict when.
At the time, Smartcar's total serviceable available market (SAM) was a few million connected cars across North America and Europe, and some of the major automakers had yet to release their first connected car models. To truly realize their vision, Smartcar needed OEMs to bring more internet-connected cars and EVs to the masses.
Fast forward to today, and Smartcar’s bet is paying off. Connected cars are taking over the roadways, and their platform is now compatible with over 153 million vehicles across 33 car brands. EV market share is also growing exponentially, with plug-in vehicle sales projected to rise from 6.6 million in 2021 to 20.6 million in 2025, and Smartcar is already compatible with more than 99 EV models on the road today. As a result, Smartcar's SAM has skyrocketed, with favorable tailwinds signaling continued growth.
"We invested in the opportunity for mobility innovation early on," said Smartcar CEO Sahas Katta. "By the time the connected car market formed around us, Smartcar was ready with a mature developer platform to standardize access to connected cars and enable the next generation of digital mobility solutions."
Sales cycles are slower. Startups selling climate software should be prepared for sales cycles greater than 12 months and incentivize account executives accordingly. The reasoning is twofold:
1) Because many climate software buyers are new to SaaS, convincing them to adopt subscription software – rather than the perpetual license model many traditional industries purchased historically – requires a change in purchasing behavior and potentially a change in their corporate policy.
2) Additionally, many climate SaaS customers – such as utilities, municipalities, energy companies and automakers – have purposefully lengthy procurement processes to reduce risk within their organizations.
It is critical for climate software entrepreneurs to avoid ramping up sales and marketing expenditures to compress sales cycles that simply will not comply. As we’ll cover later in this series, we have seen climate software companies ramp up sales and marketing too aggressively time and time again, burning a significant amount of capital without capturing ARR conversion.
ARR growth profile will look different. Climate software revenue growth rates don’t typically follow the standard “triple-triple-double-double-double” profile desired by VC investors for B2B SaaS. Why? Sales cycles are longer, account expansion dynamics are more methodical and customers are trained to adopt and deploy software slowly, not quickly. We frequently see Series B climate software companies growing roughly 70 percent year-over-year – a growth rate generalist VCs might view with disdain. At Energize, we aren’t scared away by slightly lower topline growth, provided the underlying financial fundamentals suggest a clear pathway to free cash flow over time.
The tradeoff to slower ARR growth is that growth rate decay can be much, much lower than the 15 percent rule of thumb for traditional SaaS (less than 5 percent in some cases, even at scale). This means that steady, consistent growth can endure and compound. We even see growth rates reaccelerate – one of our companies reaccelerated growth from 30 to 50 percent, and then to over 100 percent. The best climate SaaS businesses prioritize capital efficiency and only lean into burn when the market has materialized around them.
There are of course exceptions. In ultra-high velocity categories like solar, EV charging and carbon markets, we do see year-over-year ARR growth consistently exceed 150 to 200 percent. We still recommend a healthy balance between growth and efficiency for the fastest-growing climate software companies, as these markets remain nascent, and unexpected headwinds could distort customer adoption dynamics.
Lower gross margin is a tradeoff for stickiness. Climate software gross margins are typically 60 to 80 percent, versus the 80-plus percent target typical for traditional software. Why? A few contributors we see regularly are lower margin implementation and services revenue streams, customer success headcount that should be tagged to Cost of Goods Sold (COGS), and computationally-intensive cloud hosting costs. We think slightly lower gross margins are a feature, not a bug, of building lasting, high lifetime value (LTV) customer relationships.
Many climate software adopters are buying software in that category for the first time. Holding their hand through the implementation process is often a requirement, not a “nice to have.” Lengthy implementation services lead to a higher cost of goods sold, dragging down gross margin. However, long implementation cycles can increase product stickiness by ensuring the software is set up for success and engrained in daily workflows. Later in this series, we’ll unpack why we advise founders to invest in customer success early, and why we dissuade them from pursuing purely software subscription revenue.
Dollar retention can be very high. Once climate software is embraced by executives, it is often copied and pasted across business units. Because the software usually runs mission-critical processes that are tied to the buyer’s license to operate, climate software often becomes entrenched within the buyer’s operations. For example, many solar companies are building their entire sales and engineering workflow on Aurora Solar. EV charging installers and network operators are using Monta to increase revenue and process payments. Entire power generation networks are protected by Nozomi Network’s OT cybersecurity solution. This combination of stickiness and expansion opportunity leads to strong metrics, with many climate software companies exceeding 130 percent net dollar retention. In our opinion, high dollar retention justifies pursuing higher customer acquisition cost opportunities. Once you win a climate software customer, they might never leave.
Capital efficiency has a wide range. We often see climate software companies that are incredibly capital efficient when measured by traditional efficiency ratios like burn multiple or cash conversion score. Our most efficient portfolio companies consistently achieve burn multiples below 1x (or cash efficiency scores above 1x). That said, when markets are literally being created from the ground up, ARR and revenue may lag other key indicators of product-market fit, like customer product usage. Our advice to entrepreneurs: capital efficiency is essential in our markets, as the sooner you can control your own financial destiny, the better. However, it is important not to overemphasize capital efficiency in the early days (pre-Series A), or you might sacrifice the product lead you are building.
TL;DR: We have found that the financial profile of climate software companies looks different than traditional B2B SaaS. Consuming capital and burning cash to force unnatural market movement rarely works in the long run and often leads to non-durable ARR with high churn risk. We advise entrepreneurs to prioritize establishing an operating model and cost structure aligned to the nuances of climate software. Remember, the goal is to build a massively profitable, climate software free cash flow machine, not to simply accumulate unprofitable topline revenue. At Energize, a pathway to free cash flow is king, queen and the entire royal court.
Stay tuned for our next Way to Win in Climate Software: #9 "You Never Get Fired for Buying IBM."
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.