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:
While many software investors preach the importance of finding “product-market fit” – the magical milestone when a company’s software begins generating repeatable, scalable revenue – our Energize team believes it can be a red herring when applied to climate software. Instead, we encourage climate SaaS entrepreneurs to consider an amended version: product-budget fit. While false signals of product-market fit can lead founders down costly strategic pathways, developing a thorough understanding of your software’s buyers and budgets can set climate software startups on the road to enduring growth.
Why? True to the through-line of our “10 Ways to Win in Climate Software” series, much of the answer lies in the nuances that distinguish climate software from traditional enterprise software. Let us explain.
Imagine the following scenario: You are a climate software founder. You’ve finally sold the third, fourth and fifth iteration of your product in the same industry with a similar sales motion and a consistent pricing and contract structure. You feel that now is the time to begin pouring sales and marketing fuel onto that crackling product-market fit fire, so you raise capital, ramp burn rate, hire a sales leader, staff up on account executives (AEs) and prepare to launch your climate software rocket ship to the moon.
Then things start going wrong. Turns out, several of your major customers have budgeted your climate software solution as an “R&D pilot” within their innovation groups. When the economy takes a downturn, three out of those five customers axe their innovation budget and drop your software. Even worse, your climate software product is not yet truly scalable and requires heavy-handed services and customization. You’ve spent a significant portion of the capital you raised selling, implementing and serving customers six through 10—and while the initial growth looked great, it’s quickly eroding.
We’ve seen this scenario play out time and time again. Climate software customers – such as energy and mining companies, utilities, and completely new sustainability departments at tech companies – are different than traditional enterprise software customers, and the way they budget and buy software is also different. By identifying buyers’ paint points and behaviors, climate software companies can claim their slice of the budget pie.
Energize portfolio company Sourcemap is an example of a climate software startup that has prioritized product-budget fit as they scale. Sourcemap provides supply chain due diligence software to track product inputs all the way to their source, identifying environmental, labor, regulatory, trade and other supply chain-oriented risks. When Sourcemap formed in 2011, customer budgets were still developing. So they remained patient and lean, and they prioritized product as they waited. By focusing on product quality and scaling efficiently, they were able to refine their software solution without blowing runway and balance sheet capital on an overzealous commercialization strategy.
Now, supply chain transparency and security are at the forefront of many Fortune 500 executives’ minds. As forced labor stories make headlines and the list of supply chain due diligence regulations continues to grow (e.g., Uyghur Forced Labor Prevention Act, EU and US anti-greenwashing legislation, and the UK Modern Slavery Act), companies have opened up non-discretionary budgets to help with reporting and supply chain disclosure. Sourcemap was poised and ready with their sophisticated product, and now they can invest heavily in their go-to-market function to grow their market share in the fast-growing supply chain visibility category.
“For our first five years, 80 to 90 percent of our operational expenditure (OpEx) was focused on product and customer support, and our sales motion was primarily inbound. Now, we are striking a balance with commercially-focused functions accounting for about 50 percent of our planned headcount,” said Sourcemap’s CEO and founder Leonardo Bonanni. “By waiting to scale aggressively until after we had achieved product-budget fit, we’ve been able to capture customer demand as it materialized.”
So, where should climate software founders begin mining for customer budgets on their road to finding product-budget fit? The Energize team recommends the following approach:
1. Clearly identify the ultimate economic buyer and their budget.
Finding product-budget fit starts by understanding what budget your climate software will tap into and who owns it. Half the battle lies in correctly characterizing the buyer’s motivations, buying cycles, key decision-making criteria, major budget drivers and ability to sign the contract. Does your climate software end in a price tag with more than three zeros? If so, you will likely need approval from a higher power.
Learning about the buyer and budget will also allow your sales team to wield their two control levers – pricing and explanation of the software – more intentionally, and to identify customer red flags. For example, buyers looking for the lowest-cost solution tend to have shorter customer lifespans and may not be worth the price it takes to acquire them.
2. Find a pathway into mission-critical OpEx budgets ASAP.
Climate software often lands in customer budgets tasked with solving new problems, such as “innovation” or “strategy and sustainability” budgets. While these budgets can be tempting to take early on, we find they frequently turn into “empty calories” since these departments may not have the budget nor authority to sign healthy expansions or long-term contracts.
In contrast, mission-critical and OpEx budgets are what we consider heartier, “meat and potatoes” customer budgets for climate software companies to tap into. They often require a robust business case and are aligned to key revenue and profit growth drivers or other fundamental business objectives (such as uptime or safety). Most importantly, these budgets tend to lend themselves to multiyear, recurring software contracts – and they typically don’t evaporate during leadership turnover or economic downturns.
3. Avoid “death by PoC,” – or the road to nowhere.
Too often we have seen proofs of concept (PoCs) send climate software to purgatory. In addition to typically being funded by innovation budgets (see recommendation #2 above), pilots sometimes entail testing solutions from multiple vendors – including your competitors - and frequently end without anything in place to prompt a longer-term commitment. While PoCs are often necessary for customer buy-in, climate software companies can boost their chances of converting PoCs to expanded contracts by working with the customer upfront to define success metrics and embed them within the initial agreement. When possible, we recommend climate software companies establish an expansion agreement that begins automatically following completion of the PoC, without requiring additional approvals or budget allocations.
Additionally, we recommend climate software companies omit PoCs when calculating ARR to avoid inflating performance metrics with nonrecurring revenue. Interpreting pilot revenue as confirmation of product-budget fit can also massively distort product roadmap decisions and encourage spending on go-to-market (GTM) ramp up too soon – missteps that are particularly common in climate software since companies are funneled into PoCs at higher rates.
4. Beware of customers on information-gathering missions.
Many climate software buyers have lofty ambitions to become purveyors of software themselves. We advise climate software entrepreneurs to take those intentions seriously, despite the low probability of an industrial firm or energy company successfully establishing a software business line. We have seen many wild-goose chases and even formalized customer relationships that turned out to be information-gathering projects for developing a software solution in-house.
5. Don’t ramp sales and marketing spend until you’ve cleared a renewal cycle or two.
Too frequently, we see climate software companies ramp sales and marketing spend too early, attempting to “land grab” despite false indicators of product-budget fit. Increasing GTM expenditures at the wrong time can result in extreme capital inefficiency, making it challenging for companies to raise their next round of financing. Instead, Energize recommends focusing on customer stickiness and expansion metrics. With renewal and expansion data in-hand, a climate software entrepreneur can allocate GTM resources confidently.
6. Align sales team compensation with company-level objectives.
Make sure your AEs’ sales incentives are consistent with your climate software company’s long-term goals. Ask yourself: Are your AEs only compensated to think about year one of the contract? Are they compensated on total contract value (TCV) rather than annual recurring revenue (ARR) or generally accepted accounting principles (GAAP) revenue? Are they compensated the same on low-margin services and high-margin subscriptions?
Frequently, climate software companies are forced to adapt sales practices to fit how their customers allocate and set their budget. For example, we often see industrial customers request perpetual licenses, causing AEs to push for quotas targeting TCV rather than ARR. Forming these types of misaligned quotas can create sales incentives that are hard to unravel. Meet your customers where their budgets live, but don’t sacrifice sales integrity entirely.
Remember: Selling climate software can be messy. We understand that, ultimately, climate software founders must do what it takes to burrow their way into a durable budget allocation. You might need to start with innovation and strategy budgets – but use the opportunity as a paid means of networking within the organization to line up to a mission-critical budget expenditure. A customer might refuse to work with you without a low-cost pilot period – that’s okay, but know how to read the customer buying signals and move on if there isn’t a clear pathway to a recurring relationship. Product-budget fit is hard won, but the day your customers unequivocally say, “Our business could not do without this software,” and, “We’ve already budgeted to spend more next year,” is the day you’ve reached product-budget fit.
Not ready for our 10 Ways to Win in Climate Software series to end? Read our series capstone.
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.