Profit and Purpose in VC
Sustainability as Challenge in the Venture Capital Ecosystem
Facing the rise of the conscious consumer, sustainability as a global movement is heavily impacting the strategy of large corporations. The urge to be green as well as ethical is also a significant driver of innovation in the startup world.
But what defines true sustainability? What creates a difference between real purpose and mere lip service? Can Venture Capital take an active part in promoting sustainability alongside revenue growth and capital efficiency? And how could the focus on sustainable business models be a stronger value driver for VC firms?
High-speed growth and the critical consumer
The internet enables customers to make more educated choices and to question corporate behavior. A recent Deloitte study found that 55 percent of consumers will pay extra for products sold by companies committed to having a positive social impact. This growing importance of sustainability is boosted by the impact of social media. Through multiple social platforms, critical consumers can spread their opinions to a wider audience, ultimately taking an active role in shaping business conduct, products and services.
Meanwhile, new technologies and businesses growing at large scale lead to a massive influx of capital. This creates a culture of intense speed of growth and high visibility. The main critique of fast-growing companies is often geared towards a lack of sustainability with a bias in favor of momentum and rapid revenue growth, quick exits together with shareholder profit.
Customer loyalty requires holistic approach and true integrity
Even the world’s most-notorious asset manager, dubbed a “vast money machine”, BlackRock, makes the case for a broader, more ethical stance to investing. CEO Laurence Fink indicated earlier this year: “To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”
Sustainability as key factor for consumers’ trust and loyalty requires an authentic, holistic approach and not just hollow words. Koio, a luxury sneaker brand based in New York City, puts a strong emphasis on sustainability in the entire value chain, from choosing the highest-quality and longest-lasting materials to only cooperating with hand-selected craftsmen in Italy to ensure the highest standards in working conditions. As a result, the company has earned a very loyal customer base and positioned itself as a love brand that people are eager to buy from.
When companies fail to take responsibility
Being a responsible corporate citizen becomes even more important as startups mature and growth results in increased public awareness. Digital transparency makes it easier to distinguish between those firms that have made sustainability an integral part of their vision, core business and processes and those using it as a mere buzzword. The latter group risks being faced with public backlash. In consequence, harsh headlines, negative attention on social media, calls for boycotts and tough questions from stakeholders require immediate action with unclear outcomes.
A recent example is Amazon, who weathered public criticism for years over treatment of its workers, lack of recycling, and other sustainability issues. Now, more than a decade later, Amazon CEO Jeff Bezos seems to have found a new appreciation for sustainability. In a letter to his shareholders, he wrote:
We are committed to minimizing carbon emissions by optimizing our transportation network, improving product packaging, and enhancing energy efficiency in our operations, and we have a long-term goal to power our global infrastructure using 100% renewable energy.
As many have pointed out, there’s a catch: this well-intentioned commitment came after years of criticism about lack of focus on sustainability. Nevertheless, until Bezos provides full transparency on Amazon’s sustainability metrics, it will be hard to judge whether he thoroughly tackles social wrongs or engages in a simple PR stunt. In the meantime, the public will be watching.
Global sustainability trends: circular and sharing economies
Al Gore’s fund “Generation Investment Management” highlights the move toward a circular global economy. Re-commerce platforms, like Refurbed and Momox, address social and environmental concerns and alleviate financial burdens. By breaking up the traditional model of consumption (“take, make and waste”), these platforms represent best practice examples for circular business models in a multi-billion-dollar market (read more about recommerce).
Another global trend is the growing emergence of the sharing economy. Some of the world’s most successful business models like Uber, Airbnb, and DriveNow are based on the principles of collaborative consumption and the consumer preference of using goods or services over owning the assets. Acton investment Cluno follows suit, offering a flexible, monthly “no questions asked” car subscription service.
VC firms to promote sustainability
To address global environmental, social and governance challenges, VC investment must play a key role in the development of sustainable innovation.
Looking back at 20 years of history in VC, Acton only supports ventures that consider sustainability — both in terms of business model and, increasingly, in terms of impact on the environment and society — as an integral part of their company’s purpose. By making an investment decision based on sustainability principles, we back young companies for growth on the long run.
While ownership will change — and hopefully create profits and value along the way — companies must deliver to all their stakeholders. Employees should have good working conditions and share a sense of belonging and team spirit. Partners, as well as customers, should be able to enjoy trustworthy, long-term relationships with mutual benefits. This has a profound impact on corporate values, vision and the ultimate strategy.
Meeting these stakeholder needs is only possible if entrepreneurs and investors jointly build companies which have long-time horizons, balancing the need for growth and the desire to create lasting success. Ultimately, this will result in enormous brand value, happy and loyal customers and a vivid organization.
Sustainability means more to us than just building a portfolio of sustainable companies. We invest capital with a high responsibility for achieving a consistent return across all fund generations. It means helping companies to find a balance between strong short-term growth and long-term capital efficiency. In times where capital seems to be endless and ubiquitous, this is a virtue that becomes neglected but will certainly have a renaissance in the next down turn.
Useless as a catchphrase, catalyst as a value
For VCs, there are many ways to promote sustainability. Essentially, it boils down to the values a VC fund represents and how much sustainability is a genuine part of the decision-making process. Developing a framework that fosters environmental and ethical standards on all levels is a central challenge of our time.