Last week I was fortunate to be part of the Morgan Stanley Sustainable Finance conference. My conversation was a fireside chat with a leading executive at Morgan Stanley and the topic was “Climate Earthshots”.

MS defines Earthshots as more realistic, near-term versions of pie-in-the-sky moonshots. The topics included:
1- Potential scale of technologies that are available today: solar, batteries, wind
2- Nascent but enduring trends: electrification of mobility, carbon markets
3- Emerging solutions: hydrogen, renewable natural gas, fusion, geothermal
4- Blockers to accelerating the sustainability movement: permits, labor, soft costs, cost of capital, risk-off mentalit
5- The opportunities enabled by emerging technologies, like AI and LLM

During the Q&A section I shared my position that non-presently-operating technologies (non-industrial hydrogen, fusion, direct air capture, etc.) are nowhere near market readiness and cost feasibility. After the discussion one of the members of the audience claimed “rare for a climate investor to be so bearish”…

I don’t get swayed by frothy, hopeful headlines and I am fortunate that Energize has access to public and private datasets on the state of the sustainability market. Based on that data I believe the current environment (higher interest rates, recessionary indications, lighter private funding) moves 5 year technology targets to 10 years. But I don’t view this approach as negative because I believe the inverse to the current market opportunity is also true: technologies that are here TODAY are going to be the runaway leaders and far greater scale than anyone imagined. Batteries, solar, wind, industrial IoT technologies,nature-based carbon markets, electrification of mobility, decentralized asset development and management. These technologies are all here today and they now enjoy another 5-10 years of iteration and improvement. The future technologies are not competing with the cost of today’s technologies, but the cost curve of those solutions in a decade. This framework is why I have been using one of my management techniques to discuss the current approach to investing in sustainability: “pragmatism executed at speed is better than perfection delivered too late”…

Last summer, Energize released our comprehensive “Electrifying Everything” investment thesis, including our proprietary deep dive research report, the culmination of our 10-part blog series and our list of the top 30 software innovators applying digital solutions to help accelerate widespread electrification. In brief, we believe electrifying everything – and powering those electrons with zero-carbon clean energy – is the optimal near-term strategy to achieve decarbonization. And we believe the software companies helping deploy electrification technologies (from solar panels to electric vehicles) faster and more efficiently are in a prime position to grow their enterprise value.

Of course, anyone who has been following the markets in the last year knows that the startup and technology environment has been turbulent. So how has the landscape of companies “Electrifying Everything” changed in the last year? And how have the climate software companies from our class of 2022 fared? Roughly 12 months later, we’ve revisited our thesis and added 11 new companies to our list in the 2023 Edition of “Electrifying Everything.”

Download the full report here, and read on for a snapshot of the report’s insights.

Energize’s Top 30 Software Innovators of 2022: Where Are They Now?

Despite the last year’s challenging market environment, the climate software sector has shown remarkable resilience. Look no further than our “Top 30 Software Innovators of 2022” list for substantiation. Based on The BVP Nasdaq Emerging Cloud Index’s metrics, the performance of emerging public cloud software providers across the industry has decreased by 24.6 percent year over year, while the performance of the median company on our top 30 list has increased 140 percent. All 30 companies remain in operation, and many have achieved significant performance milestones.

Additionally, in the past 12 months, our 2022 Top 30 cohort:

– Raised $1.8 billion in total capital.

– Had a median YoY valuation increase of 2.4x.

– Achieved an aggregate enterprise value of $19 billion.

This resiliency was also evident across the broader market. Software companies launched new products and partnerships that are quickening the pace of electrification, from Aurora Solar’s integration with Mosaic to streamline solar sales and project financing, to Voltus’ and Resideo’s demand response program expansion, to Monta’s partnership with Fastned to make electric vehicle (EV) charging more accessible throughout Europe. And despite a downturn for M&A activity at the macroeconomic level, “Electrifying Everything” companies were involved in eight major acquisitions – either as the strategic acquirer or the acquired – within the last year alone.

How Software is Electrifying Everything: Energize’s Top Five Themes of 2023

As we look ahead to the next year, we believe the urgency and opportunity for climate software innovators remains, though with new considerations given the current conditions of the climate tech market. At Energize, we’ve identified five top themes that we’re watching as we evaluate the most promising software companies powering climate innovation.

1. Clean energy installers and developers are now heavyweight software buyers.

As renewables installers and developers increasingly outsource functions like project design and management to third parties, companies that offer automated and scalable software solutions for renewables – like PVcase and Pexapark – are quickly growing their revenues and total addressable markets (TAMs). We are seeing renewable energy customers purchase multimillion annual contract value software deals with increasing frequency within our portfolio and the companies we evaluate. Meanwhile, these contracts are expanding at a rapid clip – the top five renewable energy and EV customers for four of our portfolio companies expanded their contracts by 845 percent over the past five years!

2. High interest rate environments put CFO offices in the limelight.

‍The cost of capital has surged throughout the last year, highlighting the value of technology that can help reduce financing and transaction costs and risks. According to internal analysis, we estimate that a sustained high interest rate environment of more than four percent could add 25 to 40 percent lifecycle costs for electrification projects. And as shakeups in the banking sector continue to underscore the need for fintech innovation, we believe the potential for sustainable infrastructure project finance software like Banyan Infrastructure (an Energize portfolio company), Perl Street and Odyssey shines even brighter.

3. The “soaring soft costs” challenge is replicating across energy technologies.

U.S. residential solar soft costs remain stubborn at 65 percent of upfront costs. The cost breakdown for EV charging is no better – we estimate 80 percent of project costs in EV charging are driven by soft costs. We hypothesize that virtual power plants (VPPs) and residential heat pumps will be the next two emerging electrification technologies to face rising soft costs alongside declining unit costs (for a complete breakdown, see Energize’s mental model for energy technology innovation cycles). Software companies that automate time- and labor-intensive processes in these markets to drive down costs – like Sealed – will be increasingly valued.  

4. Interconnection and siting challenges open the door for software solutions.

‍Bottlenecks from long interconnection queues and intensive pre-construction processes are currently slowing the pace of renewables deployment. We believe companies that can help open the floodgates by increasing transmission capacity and simplifying site assessments will be rewarded. We have now seen numerous examples of how transmission grid enhancing technologies (GETs) could increase available transmission capacity by 50 to 100 percent (or more) at minimal cost. Climate software companies like Neara are already stepping up to provide streamlined risk mitigation and assessment solutions.

5. Europe is the mad science lab fostering the rapid electrification of everything.

‍For a glimpse into the future of rapid electrification, look no further than Europe, where adoption rates of solar, EVs, heat pumps and grid flexibility markets are five to 10 years ahead of North American adoption rates. EV share of new car sales exceeds five percent in 15 separate European countries, with many above 15 to 20 percent (the U.S. crossed five percent in Q4 2021). European heat pump sales are outpacing the U.S. by more than two times. We believe the software companies helping increase the scale and efficiency of electrification technologies in these geographies – like our portfolio companies Monta and TWAICE (based in Denmark and Germany respectively) – are poised to grow alongside the booming markets they serve.

Introducing the Top 30 Software Innovators: Class of 2023

With these themes in mind, we present the full list of Energize’s Top 30 Software Innovators of 2023 across each of our “Electrifying Everything” categories. These software innovators are becoming the operating systems for economy-wide electrification. They’re helping deploy today’s climate solutions at scale, and they’re doing so while tagging themselves to top growth trends – helping tackle deployment barriers while serving high-revenue verticals and geographies. We’re excited to track their progress, and we look forward to continuing to support mass electrification throughout 2023 and beyond.

Per our election criteria, each company in the list should have the following characteristics:

• Private company that has not announced intent to IPO or SPAC
• Software or asset-light business model. This does not include pureplay manufacturers, novel chemical or material processors, project developers, installers, etc. but does include firms that have developed a novel software or digital architecture to scale a non-SaaS business model
• Significant portion of revenue comes from “Electrifying Everything”-specific use cases
• Should not be recently acquired or a subsidiary of a larger company
• Should have a clear GHG (greenhouse gas) reduction impact via “Electrifying Everything”
• In our belief, these firms should be most likely to achieve highest enterprise value over the course of time by internal Energize analysis

Full List of 2023 Top 30 Software Innovators in Electrifying Everything:

Bold italics denotes new entrant

*Denotes Energize portfolio company

Solar

– PVcase

– Anderson Optimization

– Odyssey

– Aurora Solar*

Battery Storage

– TWAICE*

– KoBoldMetals

– SPAN

Wind

– LevelTenEnergy

– SkySpecs

Transmission

– ‍Neara

EV Charging

– Smartcar*

– Monta*

– ev.energy

– WeaveGrid

– ChargerHelp!

– Stable

Clean Firm Power

– None currently

Building Electrification & Efficiency

– Runwise‍

– Sealed‍

– Convex

– cove.tool

Demand Flexibility

– Voltus

– Enode

– Uplight‍

– David Energy

General

– ‍Arcadia‍

– Orennia

– Palmetto

– Pexapark

– Perl Street

– Banyan Infrastructure*

Not included in our list of the Top 30 Software Innovators “Electrifying Everything” but think you should be? Let’s talk.

A company in the Energize portfolio with a focus on renewables is in a big GROWTH mode to meet the market opportunity. As part of that internal investment, the team is hiring for two key positions. The roles are not yet public but if you know of any candidates (or you yourself are interested) please do reach out! We are helping the company identify the right candidates prior to a more broad reveal.

The company is based in Europe and prefers European to Central US candidates for time zone balancing.

VP of Engineering: Reporting to the CEO to develop technical aspects of the company’s strategy to align with its business goals, oversee architectural decisions, evaluate and advise M&A targets from an IT perspective, lead organizational initiatives and grow and develop the technical team.

Looking for 5+ years as a B2B SaaS hyper-growth startup environment with a prior “Head of Technology” and/or CTO title. Technical expertise in platform scaling, API platforms, integrations and M&A.. with commercial acumen as well! This is a technical athlete in a high impact role.

VP of Product: Reporting to the Chief Product Officer to lead a team of product managers on new products that align to the strategy and business goals . The role is primarily operational in focus (build out new and improve existing product managed processes) and the remainder will be strategic (translate business goals into product goals!). Coaching, training, and hiring will be a big part of the role.

The right candidate here has 8+ years of digital product management experience and 4+ years in a VP of Product role with required experience in the B2B SaaS business model.

To deploy capital as a professional investment firm, first the firm must raise capital for the specific Fund strategy. The capital contributors in a Fund vehicle are called “Limited Partners” and tend to be institutional asset managers, family offices, corporates or individuals. There are several ways these firms evaluate a prospective firm (aka “Manager”), the investment Partners making investment decisions, and the strategies being executed.

A common early request that a Manager receives during evaluation is: “Can you please share your track record, by Partner?”

The Energize answer to this specific question is – and always will be – “no”. For the life of me I can’t understand how in a modern, collaborative investment firm there is such an isolated way of evaluating team performance. Do we have a firm-level track record? Of course. But in the excel column(s) where most LPs want to see deal attribution, we leave it blank. For us that ownership and attribution concept simply doesn’t match our culture and our strategy.

At Energize every investor and most members of our operations platform are involved in EVERY investment opportunity… both before the investment is executed, and especially during the investment period.

How? The investor tracking a theme may not be the individual who has the most interest in the topic by the end of a deep dive. The Energize board member(s) and observer that we and the entrepreneur agree upon may be an entirely different individual who has the best founder-firm match. Furthermore, the board seats at Energize tend to rotate every few years as a company’s scale and opportunities/barriers change with the market. We also have two strategies now: ventures & growth, and each strategy feeds off the other, enabling enduring success.

As a thematic investor, the ability for our entire team to bring a “communal prepared mind” to an investment opportunity is one of our greatest assets. Any attribution or compensation structure that rewards or implies individual deals is a flaw in the system. My point here is that when an Energize team member is on the board of a company there is no “my deal” in the association. Rather, you will hear Energize team members say “I represent the Energize team on our investment into [company].

I can see how attribution works at more horizontally spread firms. But even in those situations, I struggle to see how that investment partnership isn’t more than the equivalent of a shared dentist office business model, with Partners renting out the available chairs. Our approach to this attribution is non-standard and the structure has pushed several high-profile LPs away because we are not fitting the regular mold. The most common criticism we receive is the inability for us or the LPs to identify potential or future underperformers. We understand the discomfort with our communal approach, and we are OK with this being a meaningful barrier for new stakeholders (new employees, new investments and new Limited Partners) to consider before opting into the team.

We believe that value creation and business building is a long-term game and the best teams are running “relay races” vs the single runner sprints. As Energize scales, we intend to maintain this team-first approach and I think it will be a positive contributor to the portfolio performance in the long run, regardless of who represents the firm at any given time.

Goldman Sachs has a podcast called Exchanges at Goldman Sachs. They kicked off their 2023 series with a summary on the M&A outlook for 2023, titled “Complex but Optimistic Outlook for Deal Making”

There were 5 topics in here that jumped out to me for their relevance in the current environment. I also thought these were helpful in simplifying what megatrends the biggest balance sheets in the world are focusing on right now.

Corporate Simplification: investors are looking to invest in companies that have exposure to specific sectors. The economy is being affected and rebounding quite differently depending on the sector and investors are heavily using a lowest common denominator approach to multiples if a company has a sector with material headwind exposure. This is causing spin-outs at larger corporations and firms with more clear growth opportunities to receive more attention.

The Trend of Technology Shift is Still Accelerating: technology companies that help corporates meet strategic goals are still high on the priority list- COVID made clear where certain companies were unprepared in their technology stacks, supple chains, customer engagements. Corproates are still trying to reposition their companies for the increasingly digital economy and finding ways to drive customer value through technology acquisitions.

Focus on ESG is Still Accelerating: most large corporates have long-term strategic goals to better incorporate ESG targets into their businesses. Activists are beginning to launch ESG-specific campaigns.

Private Market Liquidity is High: Private market investors have record cash levels. But these investors are very comfortable, and already imposing, heavy structure on investments. Europe is also more favorably priced (both due to valuation multiples and currency fluctuations) and this is creating US private equity firms increasing deal interest in those markets.

Financing and M&A: Record high cash balances at the Fortune 2000 and investment grade debt is still reasonably priced and available. The ability for large corprorates to get creative with their balance sheets will create a wave of M&A opportunity IF sellers are willing to come down to market on pricing. Rate volatility is currently hurting deal volume, but higher rates wont crush volume – so long as the rates settle at those higher levels.

A summary topic is “Confidence” at the C-suite level. Executives are thinking longer-term and trying to prepare companies to be more resilient so that there is near-term quarterly hits but as well as long-term risk preparation for resilience.

Drivers to “Confidence” at the Fortune 500 level and Series A-D level can be quite different. The startups that successfully emerge from the last few chaotic years will be strong and resilient. Many of our investments that have exposure to “technology”, “ESG” and have “simple” industry and customer value propositions are happy with their current market position.

Hello everyone… I hope your 2023 has been starting well! Our team is back and already geared up for another tremendous year. But first, a quick look at the current market.

2022 was a tumultuous year with dramatic public market swings. There are now daily announcements of sizable layoffs from technology giants like Salesforce, Amazon, and Facebook. I believe that these foundational companies have firm grasps on their businesses and foresee top line softening in 2023. With those weakening indications, many software companies are now cutting personnel costs to manage 2023 free cash flow. As a result of muted growth expectations, Energize is now seeing public market valuation declines for technology companies find their way into the earlier stage.

Across the technology markets, we are seeing (whether publicly announced or not) nearly every company reduce current workforce by 10-20%. These adjustments are happening through Reduction in Force events, standard performance reviews, or more managerial tactics (return to office requirements, etc.) I personally believe this “trimming” is probably healthy for the market as cost of capital stabilized to more traditional levels and is forcing more focus at every maturity level.

There is also a bifurcation in the market. While technology budgets and valuations are currently under more scrutiny, corporate support for sustainability and energy transition related budgets has grown materially over the past 12 months. Companies with direct exposure to renewables, the electrification of mobility, materials efficiency and the carbon markets are overachieving. The corporate demands in these areas are overcoming interest rate and recession concerns and we expect that these sustainability markets will be rare greenshoots for the entrepreneurial ecosystem in 2023.

The holding horizon for an investment in the venture and growth investing markets is guided to be 5-10 years. With that long duration, great companies compound value in good and hard years. The best companies compound value and maintain cash efficiency so that they can identify the optimal time to create liquidity for shareholders. 2023 is going to a tougher year in the markets and I do not see many liquidity events. But, energy and sustainability will be uniquely positioned to grow amidst the broader macro concerns. I’m both an optimist and a realist and am cautiously optimistic for our portfolio and investment pipeline.