Selling software to industrial corporations is not easy.
You’ll spend millions developing the perfect product, building custom features, and meeting with the C-suite of these corporations - only to be rewarded with a $40K six-month trial pilot at a small, non-core business unit.
At Energize Capital, I frequently speak with entrepreneurs that lack understanding of these industry dynamics. Often times, entrepreneurs with a background outside of industrials think that selling software to energy companies will be as easy as selling software to large tech firms in Silicon Valley. Unfortunately, they become disillusioned quickly.
Industrial corporations are built to minimize risk. Unlike tech firms in the Valley, industrial companies deal with hazardous materials, large construction projects, and high voltage equipment. Imagine trying to tell an oil and gas company to “move fast and break things.”
Because risk aversion is built into the DNA of industrial corporations, they believe that adopting new software introduces risk to their business. And if you drill down to the incentives of executives at these corporations, the executives are incentivized to minimize safety incidents, minimize production downtime, and minimize change to the organization.
But, don’t worry, it’s not all bad news. If a software company can prove value through the long sales cycles and persist through the trial pilots at these industrial corporations, the software is likely there to stay.
If an industrial corporate feels that they have sufficiently vetted the software, they will usually begin to roll it out across several business units. At this point, their aversion to risk becomes a feature, not a bug. Because these corporations want to minimize change, the newly adopted software is not easily replaced.
To get technical, while sales cycles are long for industrial software, the net dollar retention of industrial software companies is usually very good. Once the software has been adopted, industrial corporations expand their usage and rarely churn.
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So - if you’re a founder or investor in climate and industrial software, make sure to understand your customer. In the end of the day, the best software companies are those that can turn customer risk aversion into an advantage.
Has Energize done any modeling around longer sales cycles and lower probability of churn in terms of how this creates an asymmetric investment opportunity? It sounds similar to risk/rewards for new drug development.