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:
At Energize, we like to get creative when pulling sources of inspiration for our climate software parables – like the Greek epics from high school literature class. Remember when Odysseus, on his journey home from the Trojan War, approaches the Sirens with voices as sweet as honey? Turns out, those Sirens were trying to lure him to his demise. In climate software, there are plenty of comparable Sirens calling for startups to scale their team and ramp up spend – think investor tweets and industry blogs proclaiming the next big thing. Hype is a classic feature of our tech era, but it’s often an unreliable compass for startups to follow. Today, climate tech enthusiasm, industry marketing, media coverage and investor appetite are constantly touting the latest climate innovation, but fanfare doesn’t always equal customer demand.
Resisting the hype can be difficult, but climate software startups can take a page from the legendary Greek hero’s book. Odysseus tells his crew to tie him to his ship’s mast to avoid the Sirens’ trap, and he’s able to safely continue his journey home. Likewise, startups should dig their heels in during hype cycles by moderating spend, especially in sales and marketing, until the market comes to them.
The moral of this Energize story? Hype cycles don’t drive sales cycles! Hype cycles are prevalent in climate software, especially since climate tech innovators are continually developing new technologies and customers are testing out solutions for the first time. But customers aren’t always ready to make the purchase, especially for new technologies that haven’t “crossed the chasm” into mainstream adoption. Energize believes climate software companies’ growth in operating spend should mirror their customer buying and sales cycles, regardless of the chatter that might be surrounding their technology or industry. This is especially true for sales, marketing and business development spend. We have routinely seen landgrab or “build it and they will come” strategies fall flat in the emerging climate software space. To secure steady annual recurring revenue (ARR) growth, startups – even those with proven technology and interest – need to be prepared to wait for customer demand and stay capital efficient until the market is ready.
Energize’s portfolio company ZEDEDA – a provider of edge management and orchestration services, focusing on renewable energy among other markets -is a shining example of a capital-efficient SaaS startup that navigated around hype cycles on their path to ARR growth. Doing so required ZEDEDA to master our two key tenets: ignore the hype and align to sales.
In the years following ZEDEDA’s 2016 inception, the world’s imagination was captured by the edge’s potential to be the next frontier for the internet. The explosion of the Internet of Things (IoT) brought the desire for everything around us to become more connected. Although most IoT devices aspired to be “smart,” the computing power required for any real and meaningful analysis was not available at the source of the data (the edge). This problem was particularly salient for renewable energy, where investors and innovators ploughed hundreds of millions of dollars in capital and resources to shift the center of computational gravity from the cloud to the edge. Gartner analysts hailed edge computing as among the most important strategic technology trends in 2018. The Sirens’ song was strong.
ZEDEDA’s CEO and co-founder Said Ouissal saw that while the potential for edge computing was massive, the digital infrastructure required to unlock this market was not ready. The myriad of hardware devices, sensors and applications that the edge comprises had no way of talking to each other and no way to interface with the cloud effectively at scale. Many edge deployments failed, and broad enthusiasm turned to skepticism. Meanwhile, ZEDEDA focused on building a product that fit their customers’ emerging needs. They developed an open operating system that would become the enabling layer for managing and securing edge computing at scale. This meant staying “heads down” on product development and focusing on customers with strong commitments to edge projects (not surprisingly, most early customers were in the data-intensive and operations-heavy energy and industrial verticals). ZEDEDA knew that mass adoption would take time as most companies in these industries were still early in their own digital journeys.
Today, some of the largest device manufacturers, OEMs and systems integrators trust ZEDEDA as the backbone for their edge offering – and the company’s architecture for edge computing powers use cases ranging from solar operations to EV software updates worldwide. As we say at Energize, to finish first, you must first finish. Due to their focus on driving real value and their appreciation for the long road to scale, the team at ZEDEDA has been able to ride the tide as the waves of hype cycles have given way to the steady streams of market demand.
“Given the crucial role that security, scalability, and simplicity must play in edge orchestration, we knew our customers would come – it was just a matter of when,” said Ouissal. “By using market metrics instead of industry buzz to guide our spend, we’ve experienced revenue growth of 300 percent in the last year alone, and we’re now designed into some of the largest edge computing deployments in the world.”
ZEDEDA’s experience may seem straightforward in retrospect but identifying a hype cycle in real-time is often murkier – especially in an emerging field like climate software where new technologies tend to create media buzz but the lack of a direct blueprint makes market demand difficult to predict. So how can startups parse out what’s noise and what’s market demand? The Energize team recommends the following three-step approach:
1. Always ask: Is there a real, growing and sustainable budget yet?
Before increasing spend, climate software entrepreneurs should ensure customer budgets are durable and growing. Many pre-Series C climate software startups are commercializing in parallel with their market creation and customer education phase. It’s easy to mistake ecosystem buzz, press and top-of-funnel interest for real customer budgets. For example, we saw a surge of investment activity and perceived customer interest in virtual power plants (VPPs) in 2018. However, capital deployed and company burn rates were out of sync with revenue progress. Of the more than 100 VPP startups we evaluated, the average ratio of revenue per dollar of capital consumed was 0.15x, implying a bottom quartile cash efficiency score. Our recommendation for climate software founders? Spend more time than you think you should validating customer budgets and buying intent. If budgets are still being defined, stay lean and focus on building a market-leading product while keeping sales and marketing expenses modest.
2. Look for leading indicators of product-market fit.
We like to keep it simple at Energize, and revenue is the simplest indicator of product-market fit. Too often we see climate software companies with massive sales teams but not much revenue. Even better? Revenue from customer cohorts that have been through one or two renewal cycles. If the revenue is sticking and, ideally, expanding, then it could be time to increase sales and marketing spend. While this advice would be true for any form of enterprise software, we see indicators of product-market fit misinterpreted more frequently in climate software…more to come on this in an upcoming Way to Win!
3. Know your sales cycles!
Recall that climate software sales cycles are often longer than their traditional SaaS counterparts (six to 12 months versus less than three months). Companies need to be prepared to manage their sales and marketing spend accordingly. We encourage climate software founders to preserve cash runway for two to three consecutive sales cycles at minimum. If your sales cycle is 12 months, you should consider having at least three years of runway. Framing runway with sales cycles ensures progress on commercial milestones, and revenue can be proven before tapping the capital markets again. Climate SaaS startups can also develop license and fee structures that require meaningful upfront investment from the customer (with the ability to recover it after deployment) to test their customer’s purchase commitment and shorten the sales cycle.
In summary: Market hype does not always mirror sales and revenue progress. During times of increased chatter around new technology, climate software startups should tie themselves to their figurative masts and maintain a balanced approach to burn rate until the market tailwinds come to them.
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.