Some Rules + Suggestions for the New Climate Funds and Startups.

To the companies and investors that have just joined the climate tech space over the last year or so, welcome. I genuinely mean that. It’s great that you are all here now because this sector needs the brightest minds and the smartest money to ensure that we address the challenges we have with water, energy, sustainability, and food. And I extend this welcome to both the startups and the investors who are now interested in the space.?Because there are now a lot of you.

How do I personally know that Climate SaaS is now interesting to investors??I’ve pitched more $100M funds interested in climate tech in 2 weeks than I’d pitched for the ~4yrs of working on Varuna!?So, welcome. Here are some thoughts on how you want to approach this space before you get your feelings hurt. Because I assure you there will be some pain if we bring the poor habits of traditional SaaS to this space.

Why the flight from traditional tech/SaaS?

Before the recommendations, how did we get here? A few factors are responsible; NFTs stopped being sexy. Web3 + Crypto narratives were not helped by SBF and FTX. Interest rates went up and the era of free money has disappeared for the near future. Revenues for the traditional SaaS areas of opportunity have plummeted; Apple’s App Tracking Transparency (ATT) decision last year crashed ad revenue for FB, Snap, etc, and the general post-COVID pullback in traditional SaaS company valuations (after the heady days of sky-high valuations based on temporary growth) which led to these companies cutting back on even their cloud spend (which then led to revenue drops at AWS, Google Cloud and Azure). Mix all the above together and we end up with negative sentiments about the opportunity areas in ‘tech’. And you know sentiment rules everything right?

So, now that we’ve established that things have soured in traditional SaaS and that the interest is high in Climate, what are some things to note about this space?

1. Decarbonization???Climate tech
2. Climate = {Food, Water, Power, Air…}
3. You’re dealing with systems and they are all related:?~20% of the energy consumed (using fossil fuels) in California is used to move, treat, or heat water. According to the California Department of Water Resources, approximately 80% of the state’s developed water supply is used for agricultural irrigation. Waste from food and food-related processes ends up in our wastewater systems. We need power to clean the water. And the cycle continues. We need to address all points within the system to address climate change.
4. You’re dealing with systems, it takes time to change systems so consider your traditional ‘fund’ cycle before jumping into climate. It’s really that simple. Bringing the monthly recurring revenue growth model from traditional SaaS into climate SaaS will leave you in a world of pain every single time you get a founder update. Every single time. The water cycle and system, the power grid, the food cycle, the transportation sector etc do not operate on your monthly growth rate expectations. For e.g. SaaS software that provides insights to farmers on how to increase yield will only show whether it works or not after a full crop cycle. Excel spreadsheet models will not change that. And because system cycles are long…
5. Sales cycles are long too. But churn is amazingly low.?Another fact of the industry. Traditional SaaS has made everyone think you can spend 20 days to close a customer. That number is closer to 6 months in climate. For a technical operator in power/water/transportation who deals with a system that serves millions of people every day, the next whiz-bang SaaS solution will not wow him. He’s dealing with equipment that literally keeps millions of people alive every single day!!! Trust is how you win them over to try your new solution and trust-building takes time. And once you win his trust you end up staying deployed for years (3–5 year contracts are not uncommon). ARR growth is ~100% in climate tech (compared to ~150% in traditional SaaS) but churn is much lower than in enterprise SaaS.
6. Systems touch real stuff, hard stuff.?Extending the partner analogy; your partner (non-digital ones anyway) exists in the real hard 3D world.?Most investors coming into climate anew don’t want to touch climate companies that aren’t purely SaaS. Maybe wait till all the hardware and infrastructure required to actually fix the problem is deployed? An AI model for calculating the risk of a water or storm or weather-related shock will require real-time or near-real-time data which will have to come from some hardware placed somewhere to ensure ‘true’ data. There’s no getting around that.
7. Customer #’s don’t mean the same thing: when a city or utility or public works entity talks about customers they don’t mean the same thing as when a traditional SaaS company counts a signup on their website. A utility customer means a connection or meter utilizing the product of the utility. A multifamily home with one meter is one customer but it can have multiple consumers attached to that one ‘customer’ point. One meter (water or power) and one vehicle (individual or commercial) equate to ~2.5 actual humans. Remember that.
8. Ads on FB, Google etc don’t work.?Apple ATT already wrecked that space anyway. But it was always tough to get ads served to operators who are actually out in the field doing hard work every day. And their jobs are getting harder so avoid wasting money or time on customer acquisition channels where your customer isn’t engaging. Obvious but necessary.

I hope these help you on your journey into this ‘hard’ sector. Why should you listen to me? I was that buyer that the climate tech startup you start or the climate startup you fund will be selling to. (I was an operations engineer for a power plant that served 500k residents of London/Greater London). And I’ve been in this space for 2 decades (we bought the first set of carbon credits at my power plant. I’ll share those stories soon). I’ll also share some books to get you fully up to speed on ‘climate’.

There’s a lot of work to do in this space and I know there’s a ton for me to learn also. If you’re open to chatting just ping me and I’ll talk to almost everyone about fixing the ‘biggest issue of our lifetimes’. Let's get to work.

Seyi Fabode is the CEO of Varuna