“Not a day passes without us seeing the many ways in which technology can advance peace, human rights and sustainable development for all.” António Guterres, Secretary-General United Nations.
In this era of accelerated growth driven by technology, we profoundly believe in innovation as a key driver to address the world’s environmental crisis. Yet, according to the Global Sustainable Investment Review, only a very small percentage of the overall $35T per year investment in ESG is allocated to accelerating high-impact disruptive businesses, the so-called “Impact Unicorns”. Instead, most of the investments go into expanding the application of existing incremental technologies, extending public infrastructure and subsidizing large public corporations.
We have observed this trend in almost in all sectors in the last few decades: the slow adoption of solar and wind technologies in favour of large subsidies to make oil and gas more efficient and more competitive; the low penetration of electric cars in favour of increased efficiency of diesel and gasoline engines; the continued improvement and growth of plastics packaging instead of more sustainable reuse models or widely recycled materials like paper; the continued financial allocation to climate change adaptation instead of significant repositioning to mitigation and reversal.
Possibly these are all things that can gradually improve the environmental situation, and one may also assume done with the best intentions (i.e. not related to incumbents’ interest in maximizing profitability by maintaining the status quo or political support to who has the largest influence or wallet). I have also worked in and advised many large corporations in my career, convinced like many others that I could modify the system from the inside and rely on commercial-ready innovation to start improving the existing situation.
However, I believe we are now in a situation where the incremental solutions are not enough anymore, and we need to accelerate market adoption of breakthrough innovation. For those who know innovation well, it is typical to have in any given company or sector about 70% of the investments in incremental innovation, around 20% in step-change innovation and 10% in true breakthrough innovation. Unfortunately, today less than 3% goes into disruptive businesses that can transform entire industries and make them carbon-free, restore bio-diversity and become more sustainable. As a consequence, we continue to move out the tipping point of adoption, and we cannot reach the steeper part of the S curve for many innovations, which would be truly impactful from an ESG and UN SDG perspective. The United Nations and IPCC estimate that this delay now means that 50% investment would be required for sustainable breakthrough and step-change technologies 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 (based on WEF rankings).
Indeed, even on the investment market side, we notice a strong imbalance between fast increasing demand for impact VC funds investing, and the limited availability of large funds in this space. According to the Financial Times there are only few funds larger than $100M entirely focused on Sustainability in Europe, which creates a significant vacuum for start-ups to be able to be scaled, despite Europe’s global leadership in innovation and technology generation.
Starting from this analysis, we have engaged with LPs from high-net-worth individuals to family offices, from corporations to endowments, from private banks to funds of funds. What came out of our interviews and discussion is a clear set of needs, which should be embraced by VC Funds.
- Better Sourcing: Focus on ready to scale businesses (i.e. early growth already generating revenue) and innovation that can truly transform entire industries, using proven pre-screening criteria for spotting market needs both in BtoB and BtoC and on understanding the customer / demand side rather than the technology / supply side, in order to maximize commercialization, boost adoption and minimize market risks. Leverage key partnerships, including preferential access to curated deal flow, e.g. from EIT-KIC, technology centres and universities, in order to select the companies with the best teams, superior and proven solutions, and customer acceptance.
- Better Financing: Consider the use of evergreen funds, which can be scaled over time, but can start investing immediately, so as to maximize alignment, transparency and liquidity, and reduce costs for limited partners, while promoting sustainable technologies and innovative business models for the long run. The ability to continuously raise and invest, to keep a high the ratio investment/funding maximizes a focused approach for limited partners and compounds financial results, thanks to the opportunity to reinvest distributions.
- Better operations: An experienced operating team with a proven strategic implementation process to scale market-ready solutions for the climate and biodiversity crisis, focusing on strategy, growth, talent, financial and operational support. Accelerating value creation where it matters most, from inception to scaleup to exit requires laser-focused Strategy and an experienced and complementary team, with a strong track record across Growth, Innovation, Talent, Capital, and of course, Sustainability. In our survey, founders and scaleups have been consistently choosing active and experiences team to lead Series A+ rounds and given them better valuations than competition, because they believe in their ability to accelerate results and to support them in key areas like strategic development, customer introductions, new market entry, value proposition definition, value pricing and willingness to pay, additional smart money, exit preparation, etc. Money is a commodity, know-how is worth a premium.
- Better Exit: Preferential connections with top PE funds with a focus on ESG and Sustainable Development; C-level network with large corporates and their Corporate Venturing and M&A teams; co-investments with other VC funds to maximize combined set of connections and share risks or provide complementary know-how; and experience in going public through SPAC/IPO both in Europe and in the United States, in order to help founders finding the best opportunities to see their business grow beyond their wildest hopes.
- Better Results: Track and monitor ESG results as much as financial ones, to achieve the largest climate and biodiversity impact per euro in the shortest amount of time possible – contributing to net zero and zero waste and 30%+ IRR. This allows funds to achieve top quartile MOIC and IRR, and to show their true commitment to Sustainability, using any of the most respected models and frameworks like those of PRI, EIF, GIIN, and in line with Art. 9 of the SFDR in the EU.
Overall, these are decisive strategic choices, which will shape both the architecture of a fund and the formation of its leadership team. Clearly, they are very often at the opposite end of what other funds are doing in the same space, so it takes significant courage and resilience to take this path.
“Two roads diverged in a wood, and I— I took the one less traveled by, and that has made all the difference.” (Robert Frost)
We believe however that this setup provides a significant advantage and these strategic choices act in a synergistic way to increase acceleration and adoption rate of unique sustainable technologies in all the sectors that have a significant impact on climate change and biodiversity loss.
“The greatest threat to our planet is the belief that someone else will save it.” (Robert Swan)
This call to lead is also very dear to me: I believe that only leadership and all its characteristics will allow to take the accelerating growth of the best solutions to climate change and biodiversity loss. Please reach out, and join the expanding movement of those who care enough to invest their own time, resources, capabilities into the most important quest of our times.
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.