The Big Problem
We are running out of time in reaching the UN Sustainable Development Goals (SDGs) by 2030. A big reason being lack of funding. Venture Capitalists can play a significant role in the impact investing domain and help bridge the finance gap. Furthermore, impact investors can help develop a better understanding between startups who have embedded sustainability strategies and relevant funding groups.
Context
Mainstream venture capital (VC) funds are beginning to look for a new kind of unicorn—companies that will not only provide huge financial returns, but also create huge social impact. Investors are directing increasing amounts of capital to these funds. TechCrunch reported last fall that “Tech solutions for such pressing issues as the climate crisis and social inequality have seen a 280 percent increase in global VC investment from 2015 to 2020,” with London and San Francisco as two of the leading hubs. Barry Eggers, a founding partner of Silicon Valley’s Lightspeed Venture Partners, characterizes where this shift is headed: “Social impact will become a new North Star for our industry.”1 Limited partners are increasingly demanding to know how their investments in a VC fund’s portfolio companies are benefiting society. To respond, venture capitalists are seeking new ways of evaluating potential investments, adding value to early-stage companies, and measuring their impact. Can Private Equity show the way? The entrance of mainstream VC firms into the impact space mirrors how several giants of private equity (PE), such as TPG, Bain Capital, Partners Group, and KKR, have expanded their remit to address positive social and environmental impact over the past few years.
The conversation was held at Capital Club Dubai under its Sustainability Action Society (SAS) UAE. The welcome address was presented by Dr Mahmoud AlBurai, The World Urban Campaign, who called this a movement. The panel was moderated by Deepak Ahuja (DA), Angel Investor & Managing Partner Venture Catalyst, with guest experts Basem Abu Dagga (BD), Co-Founder and CEO at Aster Global Partners LTD, Romanna Dada (RD), Managing Partner at FLYFWD Ventures and Co-Founder at Childsplay, Yousuf Luiz Caires (YC), Senior Vice President at Expo 2020 and Senior leader at Dubai Cares, and Obediah Ayton (OA), General Partner at Synaptech Capital, Vivek Tripathi (VT) Founder & CEO at Olive Gaea.
DA: What can VCs do for good?
RD: Traditionally governments have sought to fill the financial gaps in solving society’s problems. However, venture builders can bring smart money which includes expert teams, global networks, mentors and advisors. Giving startups the tools and technology optimizes their business model and additionally partnering with government grants increases their chances of success. We need to aim for public private partnerships.
1 Venture Capital’s Next Unicorn? Impact | Bridgespan
BD: We felt that education (SDG 4) was one of the most important pillars of goals of the SDGs. A recent UNESCO Institute for Statistics (UIS) report2 revealed that about 258 million children and youth are out of school, for the school year ending in 2018. The total includes 59 million children of primary school age, 62 million of lower secondary school age and 138 million of upper secondary age. These are staggering figures.
We need to start accelerating the education goal and EdTech would be a lot faster, more scalable and without boundaries than brick and mortar schools. One teacher can reach thousands of students and can be easily adapted. The challenges are in the limitations of technology and bandwidth availability.
Our experience with entrepreneurs in the region is that while they have brilliant ideas, they’re not able to scale and many unfortunately take the wrong turn and fail. The venture capital studio is a better route because it helps founders with proper support, both capital and advice to help their ideas succeed in solving important problems.OA: The entrepreneurs understand the problems and are empathetic to the needs of the community. So, if we support them within their local communities, it is more effective. This is why government partnerships are useful. Our model enables investors and the local government to be involved, with a percentage of return for each party. However, the government expects back much less, with their funding goal is to supercharge the rest of the investors and incentivize for higher risk and more support for the startups.
BD: I don’t think the VC model is going to save the day. Creating an enterprise is not going to solve the many world problems. Only governments really can do this on any grand level. Grants help startups buy time. If founders talk too early to VCs and get into a financial deal, they tend to fail. We’ve had several startups that closed down because they got too excited to receive the VC funds before they were ready. The grant mechanism allows them to get to the right stage before approaching VCs. And I would tell VCs to be careful because unwittingly they might actually hurt an entrepreneur’s journey by getting involved too early. Though all funds are critical, as are accelerators and incubators, we’ve realized that the success rate of companies that have been funded by any of these mechanisms alone are relatively low. Mainly because founders are not getting enough non-financial support from the ecosystem to become a success story. The venture studio model can add tremendous value, where an entire ecosystem can be created, supporting networks built and funding is based on milestones.
DA: What are the experiences of a startup founder in the impact space?
VT: We are a six-month-old startup in the sustainability space. The experience with the region’s incubators has revealed that it is still not as mature as the West, and they are more interested in startups involved in deep technology. It’s a struggle.
DA: How do you measure impact investment?
BD: We start by understanding what sort of problems are founders going to solve? We then try to match with the SDGs to make sure that we’re on track to achieve direct impact to specific targets. Then we have
2 Out-of-School Children and Youth | UNESCO UIS
to scale it down to understand the baby steps. What is the next hundred days going to look like? How is this entrepreneur going to be established? How will we support the entrepreneur? When do we start paying the checks? And when do they need the money to actually grow their business? We are definitely driven by financials and performance, but we are also focused on the right goals.
Audience 1: There are groups worldwide that are coming together like the Task Force for Climate Related Financial disclosure (TCFT) and Sustainable Finance Regulation (SFDR) from Europe. It’s a big movement with a framework, metrics and impact risks, because every investor is at risk because of climate change. There are new guidelines for investments. The VC mindset that looks at only financial returns is fast becoming obsolete. The is a problem with private equity and larger companies purchasing smaller startups and utilizing them for their own greenwashing initiatives. How do we protect our entrepreneurs against this?
OA: A young company based in the UAE, has a challenge, ironically, of a lack of competition in the market. Which makes the market quite stagnant and immature, and big corporations don’t necessarily see an uptake for its technology. The venture builders, with corporate innovation hubs are important for startups because they act as gateways into some of these large corporations.
RD: However, there are startups who would prefer not to sell to large corporations because they want to create real change and impact. And there are entrepreneurs who are not looking for the big buy out exit, but instead more inclined towards an IPO or tokenization.
BD: Regarding the issue with greenwashing, this needs to be checked and controlled. However, there is ‘offsetting’ which is allowed. Many entrepreneurs are more like family businesses and there are nuances in how they function according to the region and culture, and it would be good for VCs to understand this better.
DA: Are VCs measuring against SDGs metrics? Are they too short-term focused?
YC: Long-term outcomes like education ventures are complex. There is a need to have financial metrics and milestones that link to impact outcomes. The challenge for VCs who have a very particular preference for returns and timelines, is that obviously they want quicker ROIs. This is an important conversation that startups and VCs need to have.
RD: Startups need to build sustainable businesses that generate revenue with timeline goals to become independent and grow into a corporate.
Audience 3: We back later-stage companies and create fellowship programmes for ventures that work to solve SDGs. I see a gap in funding for this stage when companies could potentially compete with the Fortune 500 companies. What can we do to create the right partnerships and ecosystem for greater impact?
BD: Scaling up is a challenge. The market in this region is not as large or homogeneous as in India or the USA. Different legislations, cultures, and markets prevents companies from being able to target large populations.
Audience 4: Return versus Impact: Ideally, it should be aligned but that’s not always the case. However, investors are only focused on high returns. How ready are VCs to accept lower monetary returns, keeping in mind that impact is also an important return?
RD: At the core, VCs are very different from corporate investments, and are interested in investing in startups that are purpose-driven, however their business models must also show sound financial returns and scalability, besides impact.
Audience 5: How do we build business models in the agriculture space, that is aligned with more popular VC funds allocation related to technology?
BD: It would be useful to map the agritech space and evaluate which investments can be made with a mix of short- and long-term results and returns, and then try to support the founders that can potentially bring successful technologies from different markets. About 80% of our investments are allocated into businesses that can grow at a relatively fast pace (within 2-5 years). And about 20% funds are put into longer term initiatives.
Audience 6: Can impact business really be scaled enough to achieve the SDGs?
OA: What is the gap? What is missing is the structures that can help market your product or service and bring more influence and users. From a VC perspective, it’s our job to build better structures that allow startups to walk into a sound ecosystem with as much support as possible.
YC: SDGs are designed more for countries and governments to report on, so even if your startup has SDGs embedded, it doesn’t report on this. The question is to what extent are VCs doing their part to make sure that the SDGs are achieved by investing in alternative companies that help us achieve the outcomes, delineated by the SDGs.