Accelerating Impact Through Innovative Venturing
Dr. Marta Ra is the cofounder of the international network Women in Sustainable Finance (WISF), a mental health and well-being ambassador.
As a society, we trust innovation will resolve the world’s environmental crisis: Science and Technology will find the answer, just as they have many times in the past.
Yet according to the Global Sustainable Investment Review, only a very small percentage of the $35T in ESG investments per year is allocated to accelerating high-impact, disruptive businesses, the so-called “Impact Unicorns.” The ones that can transform entire industries to become carbon-free or restore natural ecosystems. Instead, most of the investments go into expanding the application of existing technologies to public infrastructure or large corporations.
Looking back, this has been the case in many sectors during the last few decades. Slow adoption of solar and wind technologies in favor of large subsidies to make oil and gas more competitive. Low penetration of electric cars in favor of increased efficiency of diesel and gasoline engines. Continued improvement and growth of plastics packaging rather than implementing sustainable reuse models or widely recycled materials like paper. Continued focus of financial institutions on climate change adaptation and risk management, instead of repositioning financing on mitigation, value creation and regeneration.
“Simply investing is not enough and a more supportive role needs to be taken by providing technical, management and operational skills to help accelerate and scale them. This is essential when working with climate solutions that combine technology, software and the physical world of materials, energy and waste to increase both their impact and business success,” says Ellen Bakke Mawdsley, non-exec director at BlackRock Switzerland and Impact Investing Advisor.
Code Red For Humanity
The world is now in a “code red for humanity” state, as commented by Secretary-General António Guterres in the last IPCC 2022 report. Incremental solutions are not enough anymore; we need fast market adoption of breakthrough innovation. But with so little of the ESG investment going to disruptive businesses, the tipping point into mainstream adoption is being further pushed out.
Because of this delay, the same IPCC report 2022 estimates that a 100x increase in investment in step-change innovation would be required for these breakthrough solutions to scale up and have a significant impact on the two most urgent and critical environmental issues of our times: climate change and biodiversity loss. The German Energy Agency (DENA) found that Germany alone needs $22.7 billion in order to deliver a positive climate impact by 2030, while Europe as a whole would require more than $100 billion. This equals the entire amount of VC investment in the region.
“Venture capital should play a crucial role in increasing sustainable and responsible business practices. If aligned with the relevant ESG criteria, it can be substantial leverage for start-ups to help drive innovation and accelerate the realization of the UN Sustainable Development Goals,” says Antonio Hautle, executive director at UN Global Compact Network Switzerland & Liechtenstein
The gap between the fast-increasing demand for impact VC funding and the limited availability of large funds in this space is astonishing. According to the Financial Times, there were only six VC funds larger than $100M entirely focused on Impact investing in Europe. This creates a significant barrier for start-ups looking to scale, despite Europe’s global leadership in innovation and technology generation at R&D level.
A promising and much-needed solution has recently disrupted the market and ecosystem. Among many other market players, the World Economic Forum called out the “Innovative Fund for our Future” in 2022. How is venturing evolving to fill the impact innovation gap?
A New Paradigm Emerging For Impact VC
Here’s how VCs are adapting to better match Impact investment needs:
• Better Sourcing: Focus on ready-to-scale businesses that can transform entire industries. These are the young businesses that not only have a breakthrough technology ready to grow but also have their customers’ sustainability needs understood. Solution pull beats technology push.
• Better Financing: Instead of investing small amounts in hundreds of small companies and hoping that a couple will be successful and generate stellar returns (“spray and pray”), invest big in 20-30 curated companies with the potential to revamp their industry.
• Better Operations: Support these young businesses with operators who themselves know firsthand how to introduce market-ready solutions in the industry. They know the infrastructure, the distribution, how to judge talent and organizational requirements to scale.
• Better Exits: Help founders find the best solution for continued growth and adoption of their solutions after VC exit. Maximize the combined network of preferential connections with large corporations, top PE funds and IPO support.
• Better Results: An approach as above that is focused on top founders and their impact businesses enables the largest climate and biodiversity impact in the shortest amount of time possible—contributing to net zero by 2030. What’s more, Impact investing is not philanthropy. Good returns are there for those who recognize the viable solutions to their dreams and are brave enough to lead them to the problem owners in the market.
Overall, these are crucial strategic choices, and amount to the same revolution that Private Equity funds saw when they realized financial engineering was not enough anymore to obtain above-average results, and thus created strong operating teams to drive economic results.
The model is at the opposite end of what most VC funds have done so far in this space (the “spray and pray”), providing a significant advantage: these 5 choices act in a synergistic way to increase the acceleration and adoption rate of the sustainable technologies the world needs.
“We are commercial innovators at heart, so we fit seamlessly with founders who are interested in scaling up quickly and achieving significant financial and sustainability impact,” says Luca Zerbini, Una Terra co-founder and Managing Partner.
Only time will tell if this approach is truly superior, but we can only hope for our environment that we are on the right track.
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