Bringing systems thinking into venture building

Over the past decade or so, as challenges like climate change, social injustice, and biodiversity loss (to name a few) have come into clearer focus and become more urgent, there has been an explosion in sustainable entrepreneurship aimed at addressing said challenges. Just anecdotally, I am a member of an angel investor club where I notice that most of the ventures coming our way now contain some component of sustainability baked into their business models, despite the network not being exclusively focused on sustainable ventures. So although there are still plenty of dog walking and food delivery apps being created out there, it is now quite trendy to start a ‘sustainable business’: by 2015, a third of all new ventures created around the world had a social or environmental purpose, as opposed to primarily a profit-maximising aim.

However, whether you’re looking at traditional VCs, accelerators, incubators, or the more emergent space of venture builders/studios, there is still a tendency in sustainable entrepreneurship to focus on a slightly better way of doing the same old stuff. Witness the creation of many new sustainable fashion platforms which might use better materials and more ethical means of production, but are still fundamentally encouraging us to consume more. Or the products trying to make a virtue of recycled plastics, which then cycle right back into the environment on the next round. Very few new ventures are created to address the root causes of some of the systemic challenges we face.

If we think about what system change is, in simplest terms, what we are talking about is a fundamental change in how societies operate. We saw it historically with the industrial revolution, the transition from horse and carriage to automobiles, and the agricultural revolution. Even today, we are arguably in the midst of it, with the tectonic shifts resulting from the digital transformation of our economies. System change is not just something that happens to us however. It can be a deliberate act. The next transformation we need to work towards is a low-carbon, climate resilient, and just future. Achieving this will require enterprise to play a radically different role. This is where venturing comes in. We will need future-fit ventures of tomorrow, and the time to start creating them is now.

Within the venturing world, venture studios are a particularly interesting model to zero in on because they often act as a funder and a builder of enterprise. This means that, when they identify market gaps in solutions areas, they can create enterprises that address these gaps. This is not a new game, needless to say, but it is something that’s traditionally focused on creating enterprises that capitalise on a market gap to maximise profits. What we need to do now is turn the process of venture building on its head so that it centers mission-led impact, and aims for system transformation.

But this is, of course, hard. In the words of one climate venture studio founder I spoke to recently, it’s tough enough getting a good pipeline of viable enterprises to invest in, let alone thinking about how to strategically coordinate your investments to achieve system change. But this should be our holy grail. Because creating future-fit ventures for tomorrow’s world will require much more than just creating profitable enterprises in isolation of each other.

Here is what you need to be thinking about if you want to bring systems thinking into your venturing process:

• Defining your mission is ground zero. As Ann Mei Chang says in Lean Impact: “Fall in love with the problem, not the solutions”. Lots of investors in this space are still simply collecting their impact investments on an asset-by-asset basis, and ending up with what I call the mish mash of sustainability in their portfolios. Some have established themes around which to invest. But what’s really rare is to find investors thinking systemically about the impact they can create in real world systems, and how their investment portfolio can be designed to support that through the combinatorial effects of the enterprises they hold.
• Map your system of interest. Once you’ve identified your mission, system mapping will help you understand the actors and institutions coalescing around your challenge (hint: not always what you think they will be). This process also identifies the most impactful leverage points for change in the challenge area you’re working on. Those leverage points should translate directly into your investment strategy.
• Design an investment strategy that supports your mission, and is informed by the wider system dynamics. This ties back to the leverage points. A traditional venture-by-venture approach won’t get us very far in that regard. We need ecosystems of ventures, which act as a set (or indeed, a portfolio) to systemically crack some of the wicked problems of today. The Transformation Capital Initiative is an open innovation initiative pioneering this type of approach — the idea of creating strategic portfolios where investments are deliberately composed around a broader system intervention approach.
• Seek to create network effects. No one venture, or even a portfolio of ventures, is going to create transformational change on its own. The critical thing to understand here is that you as a venture investor or builder are a node within the wider system, so your impact can be transformational only if you are able to work with that wider system. For example, your system mapping might uncover that the greatest impact opportunity in your focus sector is not commercially ‘investable’ yet, and might mean you need to partner with a grant-making body to build that market. A systemic approach will likely push the boundaries of your business model, and will almost certainly mean working collaboratively with other actors in the system.
• Help the ventures you build create impact goals. Support the impact entrepreneurs you work with to center their commitment to a mission, rather than being too attached to the solution. Metabolic Ventures, for example, structures its ventures in a way which ensures alignment with the impact mission and creates the right incentives by creating dual entities: a foundation and a commercial enterprise with limited liability. The foundation holds the overarching mission and mandate, and has a minimum 51% stake in the commercial entity. The commercial entity replicates or scales a particular business model to fill a market gap, but is guided by the foundation.
• Build the ecosystem. Most venture spaces today run counter to this philosophy: they tend to operate in silos, and are characterised by transactional behaviour where the financial successes of a few ventures cover the costs of the many failures. What’s left at the end of the venturing ‘funnel’ is a few isolated success stories operating without much of a supportive ecosystem. Yet creating a sustainable economy absolutely requires such an ecosystem — in order to help build the right skills and capabilities, to help create the networking effects that will enable tipping points in different sectors to occur, and generally create a supportive environment for sustainable business models to thrive. We need not just one or two big bets to succeed, but a whole range of sustainable business models to emerge and find a supportive network that will shift the conditions of the system.

System change is complex, slow and messy. For dominant practices to become replaced, we need actors across the system to play an active part in that transformation. Entrepreneurs have shown time and time again that they are able and willing to rethink old models. Now it is time for investors and venture developers to rethink the enterprise-building ecosystem in order to catalyse the tranformative change we need.