During a time of economic uncertainty and inflation, with factors like the war in Ukraine spooking the markets, do VCs still value sustainability?
“There is a lot of momentum about sustainability and ESG more broadly within the startup world at the moment,” Aditi Singh, head of direct-to-consumer startups at Amazon Web Services, tells Sifted. “Businesses large and small are evolving their business models and products to remain relevant.”
In Europe, investment surpassed $8bn last year, and according to Dealroom it's the continent’s fastest-growing startup vertical. We asked VCs how sustainability goals are impacting their investment decisions, and why ESG principles can make for stronger businesses.
Making profits and making something good
Amazon Launchpad conducted quantitative research with over 600 European VC and early-stage investors to understand the role ESG plays when making investment decisions.
The survey found that 59% of those investors have declined an investment opportunity in the past 12 months due to sustainability concerns.
Our investors to a large extent expect us to make a profit... but not only a profit, to make a profit and do something good
Synthesis Capital is a London-based VC firm focused on foodtech companies solving global food systems challenges. It only invests in companies they consider sustainable startups.
“We believe sustainability is critically important,” says Rosie Wardle, cofounder and partner. “Our mandate is to fund an alternative protein ecosystem, so essentially anything that can replace an animal in the food chain, because we believe that’s where there’s the biggest inefficiencies and the most significant sustainability challenges from a food perspective.”
Adam Niewinski, cofounder and general partner at Amsterdam-based OTB Ventures, a deeptech fund investing in European startups, says of around 800 investment opportunities a year, his fund makes only four to six deals. He tells Sifted his investors are increasingly wanting to do good while also making money: “Our investors to a large extent expect us to make a profit... but not only a profit, to make a profit and do something good."
While London-based investment firm Hambro Perks doesn’t position itself as primarily an impact fund, partner Tom Bradley also says it’s important their investments do not damage the planet.
“The basic level of impact investing as a ground zero is do no harm,” he says. “So everything we do is targeted to be minimum to neutral impact from a sustainability perspective.”
Sustainable startup = sustainable growth
Return on investment and sustainability are also interlinked. Amazon found having a strong sustainability profile means startups can command a higher valuation — about 16% on average compared to other businesses.
Venture capital is a marathon, not a sprint
“If you think about the ultimate financial success of companies, we believe that ESG will be a multiplier,” says Wardle. “We never think it’s too early to start laying those foundations because even if it’s very simple, basic foundations, that’s something to build on later as the business grows. For a lot of these large incumbent companies, it’s very difficult for them to go back.”
Niewinski agrees, adding that being sustainable also means being able to operate and make profits in the future.
“Venture capital is a marathon, not a sprint,” he says. “The best technologies are those which are actually doing something good, like making our planet more efficient, but at the same time, being sustainable from the economic perspective.”
Singh adds that a key factor to sustained growth is hiring and training the right talent. A third of startups considered retaining talent a major challenge, and with growing consumer awareness of environmental impact, attracting talent is easier for a startup with a clear sustainability strategy.
“92% of investors said that businesses who employ practices to reduce their environmental impact are more likely to attract and retain top talent,” she tells Sifted.
When it comes to calculating the impact of startups, tools can help both companies and investors.
“There are a number of services and tools which help startups forecast their ecological footprint and calculate their impact,” Singh says. “Startups can make these reports and insights available together with their projected financial, jobs and market growth.”
The Amazon Launchpad Sustainability Accelerator, for instance, calculates this through a measurement and validation tool called Climate Impact Forecast, designed by Climate-KIC, which measures and forecasts the CO2 savings of the product. This framework was used by companies selected for the accelerator.
There’s more negative sentiment probably this year around ESG... but our view is that everybody needs to be an ESG investor
"As we shaped the Sustainability Accelerator, we spent a lot of time working with EIT Climate-KIC, discussing the best way to define a sustainability-focused start-up,” says Singh. “This was important as sustainability can have varied implications and impact.”
Synthesis Capital uses its own internal metrics. “We have our own framework that we’ve developed in-house,” says Wardle. “We think that if startups aren’t able to demonstrate sustainability credentials in a quantitative, data-driven and objective way, then that’s a big risk to those companies.”
Wardle adds VCs also have a chance to help startups — especially at seed stage — with their sustainability data.
“There’s massive potential in venture to really drive sustainable practices because you’re involved with the business at such an early stage in their lifecycle,” she says. “As far as we know a lot of funds aren’t really going very deep with portfolio companies on this sort of stuff, but funds and companies are going to be scrutinised much more going forward.”
Bradley agrees, adding that while ESG has met criticism recently, investors have no choice but to get on board.
“There’s more negative sentiment probably this year around ESG than there was last year, in terms of its definition and stuff but our view is that everybody needs to be an ESG investor,” he says. “It’s unavoidable.”
Register your interest for the Amazon Launchpad Sustainability Accelerator here.