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 our Ways to Win countdown:
As the race to transition to a sustainable and decarbonized global economy intensifies, the climate ecosystem is undergoing its own metamorphosis. Climate-focused companies founded in the last several years – from clean energy developers to EV original equipment manufacturers (OEMs) – are undergoing massive growth spurts powered by market tailwinds. And a rapidly maturing customer ecosystem provides a built-in opportunity to efficiently increase annual recurring revenue (ARR) for climate software startups. Many early climate tech customers that began as small- and medium-sized businesses (SMBs) with low annual contract values are transforming into massive spenders on software, with true enterprise-grade scale potential and customer needs.
But how can climate software startups ensure they “grow up” in parallel with their fast-growing customers? At Energize, we believe product-led-growth (PLG), or more specifically climate PLG, is a frictionless route that climate software companies can take to get a foot in the door during the early stages of customers’ lifecycles. At its core, PLG is a business strategy that prioritizes easy user adoption by removing access barriers and focuses on the end user rather than the executive buyer. (OpenView Partners runs through the history, evolution and characteristics of PLG for those looking for a 101.)
Unlike sales-led companies where the goal is to take a buyer from Point A to Point B in a sales cycle, product-led companies focus on how their product can develop with the customer, starting with a simpler product that can expand over time. Put simply, PLG is a tool that allows climate software companies to meet the customer early and evolve with the customer:
- Meet the customer early. Many of the best climate software companies harness PLG effectively by offering a self-service product at a modest average sale price (ASP) that targets individual users. Individual users such as engineers, sales reps, software developers and scientists can be power adopters of PLG software – as the first user, then as internal champions, then, finally, as external advocates.
- Evolve with the customer. PLG is an opportunity for climate software startups to iterate on their own product roadmaps by learning what the customer wants and their willingness to pay. The specificity and fast-growing nature of the industry make it effective for climate software companies to pair their self-service product with a complementary enterprise offering. Because self-serve is often used by SMB customers that tend to have higher churn (and a higher cost to serve), combining PLG self-serve with an enterprise offering creates a product/sales flywheel that can lead to faster growth, better efficiency and enhanced profitability. Strategic hiring is also paramount for successfully evolving alongside customers. Remember, unlocking enterprise scale accounts doesn't happen by default – it requires climate software companies to invest in enterprise product talent with experience in "category creation" environments.
The power of PLG can be illustrated by five climate pioneers: Sunrun, Sunnova, Enphase, ChargePoint and Invenergy (a leading developer and operator of sustainable energy solutions, and a founding partner in Energize). A decade ago, each of these companies would have appeared as an SMB on a software company’s customer list. In 10 short years, they have hired thousands of employees. And because PLG prioritizes barrier-free software adoption, customers are more likely to scale their software alongside their growing headcount than they are when using software with more red tape. As these companies have grown into climate behemoths, they’ve matured into enterprise accounts for their climate software providers.
For example, according to Energize analyses from PitchBook and LinkedIn data, the average headcount for these companies in 2012 was 159 employees. The annual contract value (ACV) for a climate software company with a contract covering 5 percent of the average employee base with a $250 monthly license per user would be ~$25k. Fast forward to today and the average headcount among these companies is 3,500 employees; if using the same contract terms, this would result in an enterprise ACV of ~$950k – which implies a world-class net dollar retention rate of 149 percent. Simply surviving and continuing to serve these five customers would result in a 400x increase in business, demonstrating how climate PLG can create top enterprise software over time.
So how can a climate software startup implement a PLG strategy? Based on our experience, our team at Energize recommends the following approach:
1) Offer a simple version of the product. It’s much easier to sell a potential customer on an uncomplicated software solution than one that requires significant training, and it’s much easier to sell enterprise software to an existing customer than a new one. We’ve seen companies that market scaled-back versions of their complex software attract end users like renewable energy engineers and designers that become long-lasting product users. The energy and utility data software company Arcadia is a great example. To get started, Arcadia’s software offers API access that energy and distributed energy resource (DER) solution providers can use to rapidly gain an accurate picture of baseline energy consumption and spend by consumers and businesses across many geographies and market segments. If a customer develops a stronger appetite after this first exposure to Arcadia’s most basic energy usage API, they can engage with Arcadia’s additional software products and services, including more advanced energy savings analytics and access to renewable energy credits (RECs).
2) Create a product journey. Climate software companies that adapt their product packages to fit their customers’ needs – from a self-service product to a full suite of enterprise software offerings – can lean into the conversion power of internal champions and lead their customers down a road of continuous adoption and growth. For example, one of our portfolio company DroneDeploy’s largest customers began as a single engineer purchasing the drone data capture and analysis software with a credit card. By continuing to provide more product features for streamlining solar site construction, DroneDeploy became increasingly integral to the customer’s operations and significantly expanded the number of users on the account over time. “Being able to mature with customers from infancy to enterprise scale has unlocked massive growth opportunities for our reality capture platform,” explained DroneDeploy CEO Michael Winn. "On average, across all industry verticals, our accounts grow by 26 percent in the first three years."
3) Tailor your software suite to fit your customers. The use-first, scale later nature of PLG gives climate software startups an opportunity to understand what their customers need (and want) and to roll out additional solutions accordingly. When our portfolio company Aurora Solar first started out, they were primarily focused on streamlining the design of solar projects. As the amount of people using Aurora’s software grew, new use cases and focus areas emerged. Aurora used these insights to inform their product strategy and decided to build out their sales software engine by developing proposal tools and a contract manager, as well as expanding their design platform to include expert design services.
4) Invest in top product talent. Hiring is an essential piece for ensuring the success of your climate PLG strategy. Find and recruit great product management leaders who have experience scaling software from nascency to enterprise level, even if they’re new to the climate ecosystem. Our portfolio company Patch, for example, has staffed their product team with SaaS industry veterans who are transferring their category-creation expertise to help Patch effectively serve customers in the emerging carbon markets sector.
In the rapidly changing climate landscape, PLG allows climate software companies to lock in their customers early and proactively evolve product offerings to grow alongside them. If used effectively, the power of PLG can help climate software companies emerge from their early nests as top enterprise software!
Next up? Ways to Win in Climate Software #4: Hype Cycles Don’t Drive Sales Cycles
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.