Insights – VCs for Good 2

Capital Club hosted a second panel discussion with Venture Capitalists to talk about the responsibilities and challenges of the investment ecosystem towards people, planet and profits!

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

Seventy-four per cent of UAE investors want to leave a positive legacy through sustainable investing compared with a global overage of 65 per cent, according to a survey by Standard Chartered.1 However, the UAE’s adoption rate for sustainable investing, at 57 per cent, trails behind the global average of 61 per cent. The survey polled 2,040 emerging affluent, affluent and high-net-worth investors in the UK, UAE, Singapore, Hong Kong, China, Taiwan and India.2 Many UAE investors seek transparency about the impact of sustainable investing, with 69 per cent saying they need quantitative evidence to be convinced an investment has a social impact. About 47 per cent of investors said they have concerns about the financial performance of sustainable investments and 43 per cent believe donations can achieve a more immediate social outcome, the survey found.3 Meanwhile, the allocation of sustainable investments in investor portfolios is on the rise. Thirteen per cent of UAE investors already have more than 25 per cent of their total investments channeled into sustainable solutions, compared with just 2 per cent of investors in 2020, according to Standard Chartered.4

Another report by Swiss bank UBS found that “Mobilising just 1 per cent of the world’s $230 trillion to

$400tn of household wealth annually would help to bridge the $2.5tn investment gap needed to achieve the UN’s Sustainable Development Goals.”5

Capital Club Dubai, under its Sustainability Action Society (SAS) UAE, organized and hosted a conversation with some high-level venture capitalists in the country to better understand the drivers and vision for investing in the region. Guest experts Noor Sweid (NS), Global Ventures; Sharif El-Badawi (SEB), Dubai Future District Fund; Joost Smulders (JS), Dubai Green Fund; Maria Dolores Fernandez Flores (MF), VentureSouq; and Faris Mesmar (FM), Hatch & Boost, spoke to moderator Pedro Pereira (PP), Chief

1 SC_Sustainable-Investing-Report_2021.pdf

2 Interest in sustainable investing on the rise in UAE, survey finds (thenationalnews.com)

3 Ibid.

4 Ibid.

5 Investing in the Future | UBS Global

Sustainability Officer, SAP Latin America and Caribbean. The keynote address was presented by Dr Mahmoud El Burai (MEB), leading ‘The City We Need Now’ Campaign by UN Habitat, and Senior Advisor at RERA, Dubai.

MEB: Mohammed bin Rashid Al Maktoum has said, “The way to protect the future is to create it.” And this is what we do here in the United Arab Emirates. We are in the business of creating the future, creating hope, creating sustainability. We are committed to be carbon neutral by 2050, and are on the path of sustainability, preparing to host COP28 next year. The event today is part of ‘The City We Need Now’ campaign by the United Nations. The big question is are VCs actually for good?

The reason this conversation is important is that there is a huge funding gap of US$2.5 trillion to reach the Sustainable Development Goals by 2030, which has been exacerbated due to the pandemic with an additional need of US$1.7 trillion. Sustainability not only addresses the economic, social and environment issues, but also creates competitiveness. This is a movement, and everyone needs to take part.

NS: Global Venture invests across Middle East and Africa and manages about US$200M across two funds and some co-investing vehicles. When we started the firm about four years ago, we had one fund of US$50M and our vision statements states: “We invest in emerging-market founders on a mission to change the world.”

My belief is that growth is imperative for any company to be successful. As an investor, we can’t manage the actual impact, but we can select founders that are on missions. We have aligned with five of the UN SDGs, and since the beginning of our journey we have been measuring these as well. Our FinTech investments have enabled 24 million people to have access to financial services, digital health investment has helped four and a half million people, more recently our investments in education have impacted 450,000 children, and regarding gender equality, 34% of our founders are female. Our portfolio has created 6,200 jobs, which is credit to the founders who care about these issues alongside good financial returns. As a VC, we can take the dialogue from doing well to doing well and good.

SEB: The Dubai Future District Fund invests into VC funds and tech startups directly. We are enablers of those on a mission to do good. It is a cascading effect. We really have to start at the very top. Some LPs are now paying more attention to ESGs as part of their fund thesis and require the VCs that they invest in to also report on these activities. Venture capital is one of the most effective and efficient ways to nudge for change, but this has to be done in the right way. As with any industry, there can be good players and bad players. We just have to find the right founders and right VCs to invest in for the right reasons. However, I think the lines are blurred in regard to what is impact investing and investing in creating jobs and increasing the GDP. And then doing it in a sustainable manner.

JS: Dubai Green Fund is a Dubai government initiative (DEWA) that was created as part of the Dubai clean energy 2050 strategy that aims for 100% clean energy and net zero by 2050. The focus is mainly on infrastructure investments and renewables. From the ESG spectrum, the E, environment is our clear mandate, and we aim for direct clean energy generation or energy avoidance or energy savings from our projects.

MF: VentureSouq invests globally and regionally and has two funds – a fintech fund and a fund called ‘Conscious Collective’. With the latter, we choose to invest in early-stage technology companies that are harnessing the power of technology to do good, focusing on specific verticals such as financial inclusion, climate tech, and food and agriculture. We launched this a couple of years ago and took a step beyond the traditional financial product.

FM: Hatch&Boost is an ESG focused venture builder in Dubai. We started two years ago with the hope to start tackling climate and social challenges in our region and beyond. Our focus is purely on starting with the right hypothesis, so our ideation strategy starts with blending in different ESG factors according to several global impact frameworks, like GRI and SASB and IMP. Our role is to de-risk early-stage companies for responsible investors because we operate and invest in pre-seed tickets and seed tickets. Our portfolio ranges from different environmental focused startups to several social and community related startups.

PP: What is your motivation for doing good, how did you come to it and what does it look like?

 NS: When I started my own venture and could not find any capital. I came across some statistics in the US how VC-backed companies created 2.8 times as many jobs as non-VC-backed companies. And this is when I decided to get into the VC business to help alleviate the unemployment challenges in our region by bringing access to capital for founders. Along the way, if it is possible align with some SDGs that’s great. But helping create jobs is a venture for good already.

SEB: During a mentoring road show in the region, I met founders on the ground in Amman, Beirut, Cairo, Dubai, and listened to their challenges. It was a realization that these entrepreneurs would not only create jobs but also help build long term economies in the region. It became clear to me that venture capital backed entrepreneurship was the most effective way to make a change in the world.

JS: There is a general misconception in the market that investing in green is somehow less or not profitable, which may have been true a couple of decades ago when you couldn’t implement a solar project without a government subsidy. This is no longer the case, and in fact, in most places around the world, solar is the cheapest form power. The Dubai Green Fund aims to show the market that investing in sustainable green impact is profitable. We are an infrastructure investor looking for infrastructure returns by investing purely in green projects. Energy efficiency projects have a payback period of about four to five years depending on the technology.

MF: My realization and motivation are in understanding that the next-gen consumers, employees, employers, VC fund managers, etc., are here to walk the talk, and bring the triple bottom line approach to all business and it’s no longer an option.

FM: My transition from corporate life into venture capital came with a shift in learning in how to look at financial returns alongside impact returns. There is a lot of traction towards conscious consumerism, how to build for good and invest responsibly for good as well.

PP: How do you make sure the ventures you invest in have incorporated aspects of sustainability in their core business, such as reducing scope 3 emissions?

 NS: We are focused on investing in companies that try to solve the big problems in emerging markets that have to deal with less than two doctors for every 1000 people in Sub-Saharan Africa, or 150 million out of school children in the MENA region. We also invest in a company that has a patented technology that reduces the amount of energy and water that is required for vertical farming by 95% and brings a return on environment sustainability.

FM: We have a big funnel of issues that need to be solved, so whether it is climate or community-related, creating jobs or catering for a better life, there is a lot to be done. We need to start solving these real problems and deploying capital in a very responsible way.

MF: It is important for startups to be aware of things like Scope 1, 2, 3, emissions and their supply chain, especially in emerging markets. They have the opportunity to leapfrog, with the existing technologies, talent, and capital. They can be a better type of company and serve their customers much better. An impressive example is company from Chile that became a unicorn within a year, and they are a B-Corp. Right from the outset, they chose to embed impact in their core business model – providing insurance to uninsured people. The founder made a conscious decision to go for the B-Corp certification which is a gold standard holding the business accountable to the highest degree in all areas – environmental, social duties to the community, and to their governance transparency. And in one year, they grew 20 times and recently raised their unicorn round. There is opportunity to be financially successful by being an impact focused business.

SEB: When we look at projects or investments, we look at the incremental benefits. If a project can achieve X material percentage of savings in their energy consumption, then that’s a win and it’s a project that we can invest in. It doesn’t mean the actual business that owns this project has to be 100% green, but they are working towards the cause. Obviously, there is a lot of work to be done towards achieving net-zero by 2050 and we are taking small manageable steps that can be evaluated independently. We encourage the companies to look at all the levels of their emissions but for our investment decision, we look at a specific project and ascertain its positive impact.

Audience 1: Does the panel think there’s a penalty or tax that the western nations and companies should pay for using resources in an irresponsible manner and creating the bad emissions for all these years and who are now telling lesser developed nations that they can’t use these natural resources?

 SEB: I think the largest, oldest companies and countries are who are responsible for getting us to where we are today should bear the biggest burden and not the startups and SMEs. Why not tax the largest companies and countries who have caused the problems?

PP: Regulations are getting stricter, and governments are pushing investors to align with higher standards of sustainable finance rules. What is required for this region to mature?

 NS: We had several European investors that were interested but unable to invest in our fund because we don’t qualify as an Article 9 fund as yet, which is stipulated by their governance rules. These stricter new rules coming from Europe and the USA will, in the short term, exclude capital investors in this region, unless we can get to that level of compliance. However, this is frustrating because if you really want to change the world, then there are companies in the emerging markets worthy of investment funds on many different metrics, which cannot get to the benchmark standards quickly. There is a disconnect and it is stopping funds trickling into innovative companies in emerging markets.

FM: Entrepreneurs here need to continue the journey to create the impact they strategized for when they began the company. This will require support, regulations and perseverance.

Audience 2: Data shows that there is US$370 trillion in global financial assets and the funds required to achieve the SDGs is 1.1% of this total amount! Furthermore, the SDGs are calculated to have an

estimated business assets value of US$23 million. Are we capable of allocating 1.1% of global financial assets through accelerating impact investing to reach the goals?

 SEB: We are capable of doing this and the trend will pick up momentum with ESG targets quickly becoming a must, and it is also hitting the VC industry. Like every innovation, it will pick up speed and adoptability and those that don’t get on board will die out. The new companies are going to find better ways to do the micro-loans on a daily basis to feed people, to get healthcare across countries, bring in new suppliers and new customers.

At Dubai Future District Fund, we look at the 2050 economic horizon. The world population’s going to double; the E7 will replace the G7 due to population growth; there will be massive migrations in the next 30 years; and food security is going to be huge challenge. By default, all this will allow the old to wane, and the new to survive. However, if we want to accelerate this, then we need to put regulatory frameworks for the larger companies.

MF: Investors, by definition, are risk averse. Impact Investing as a term has only been around for a decade. And ESG is now rapidly picking up, with a lot of credible research coming out of large institutions that sustainability does pay-off in the long term.

FM: The acceleration is around the corner, as more data is emerging and being made public. As the financial systems gauge the impact measurements, there will be more assurance and confidence to change the whole asset class (public market, capital markets or liquid assets) around ESG. We are getting there.

Audience 3: In agriculture, there is a challenge with conflicting SDGs. If you invest for saving water, the carbon footprint goes up exponentially. If you compost and collect waste from homes, again the carbon footprint is affected. How do you tackle this?

 PP: SDGs can be sometimes challenging, and often look at the greater long-term good more effectively implemented by the government through wholistic infrastructure plans and projects. Additionally, it requires more collaborations between private sector industries and offsetting measures when there are conflicts. More investors are recognizing this, with appropriate frameworks for effective sustainability strategies.

FM: If you want to scale in one direction, sometimes you will need to have offset measures, which are doable. You need to analyze and decide whether the direction of your business model, at scale, will cause more overall good or damage?

Audience 4: In medicine, there is a term called ‘triage’, where you try and avoid handling what is already dead or near death, and instead move your attention to what can be saved. And then you put on ice what can be dealt with later. When it comes to allocating funds, can triage be applied to certain sectors or industries?

 SEB: I don’t see that triage at a large scale. I think in the VC impact community, there are some industries that clearly get negatively screened. Nobody is going to make a sustainable investment in plastics. However, the rest becomes a mandate of the thesis. If you have larger funds, then you might be able to tackle industries that need a lot more funding, for example, closed loop economies.

Pitches from VCs to the audience:

 SEB: At the Dubai Future District Fund, we struggled in developing a strategy that was very impact-focused and needed to be a performance-based fund as well, since that way we can align incentives across the entire cycle. We have two pillars. One is ‘future of finance’, and that is the 15 to 20 fintech sub-sectors, the horizontal themes of financial inclusion, and embedded finance. The other pillar is ‘future economies’, which is less about the underlying sectors that make up that pillar, and more about how we see the technology shifts between now and the 2050 economies and the drivers of the changes.

Though VCs think they can future invest, actually they are investing right on the horizon, and it’s very difficult to invest 20 to 30 years out. As a government fund, we do hope that we are able to fund enough VCs to do the regular things and we are able to free up capital to invest in the gaps. And these gaps to us are frontier tech, deep tech, and things that the private VCs who have a 10-year life of their fund are unable to do. We’re an evergreen fund. Our return horizon is forever.

We are looking at these two or three cycles of returns and as a government fund, we can look further while supporting those investing today. On the future economies, some Health tech, Edtech, Logistics, Supply Chains, Food Security companies would fit our thesis. We look at the SDGs, and the existential issues of the world as our rudder to guide us on what is considered as ‘future economies’ and ‘future finance’. Our team debates this vigorously. Some questions we ask are “Is it going to solve a billion people’s problems?” “Is it going to address some of the wrong things that are happening in the world?”.

JS: We like to invest in projects and infrastructure that have visible cash flow in the environment space, but locally there are actually too few of these projects for us to invest in. Ironically, our challenge is not capital, but too few opportunities to invest in. We are very keen for everyone to pitch to us projects and to work on these initiatives so that we can actually deploy the funding.

Globally, there has been a lot of attention given to the SDGs and capital will come but we also need more projects and companies incorporating the triple bottom line strategies. We hope that all VC companies who fund impact startups are going to be successful, and they reach a stage where they have bigger projects and can scale so that bigger long-term investors like us can come in. We need to work together to achieve this.

MF: I have two pitches. First, we are looking for founders working on a climate tech, food tech, supply chain, or financial inclusion solutions. And secondly, to any executive who would like to learn more about how to start an impact investing thesis, we have a ‘conscious investor fellowship’. It’s free and runs from September to November with 25 fellows. Applications are going to open in the next month or so, so please join the movement.

FM: I have two pitches. The first one is for entrepreneurs – we are actively looking for super responsible, fearless, and relentless talent to build with us. The second pitch is basically about consolidating capital networks – we would like to start these conversations and look at impact returns alongside financial returns. We’ve seen a lot of traction, with focused initiatives from the government to push the impact investing agenda, but we need to rally, all of us, public and private sector together, to impact the country, the region, and the globe.