Investing with a “sustainability mindset”
In the best interest of a Venture Capital Firm and its investors (LPs)? The btov Think Tank 2019 put it to the test.
When ambitious, curious thinkers and doers come together to debate on controversial or even contradicting topics, own views (hopefully) sharpen or change thanks to new insights — or even new ideas might even “materialise”. Stepping out of our comfort zone and daily chores and questioning our future — that is the idea behind our annual Think Tank with our esteemed LPs and the community of investing entrepreneurs that forms the heart of the btov Circle of Investors.
Last summer, a dozen students from St Gallen University’s START Summit visited us in our office to discuss the future of START. They spoke about „a movement“ and their enthusiasm about Europe going forward. We also talked about big challenges ahead — in terms of the environment, politics and society — that we all have to deal with in the coming years. A few coffees (and a few more astonished exclamations on our side regarding the passion of these students) later, we came up with an idea to develop a model which would make it possible to measure the non-financial impact of start-ups.
The sustainable approach: higher effort, but also higher returns?
A non-trivial task as we probably all agree. As most VCs, we currently measure the financial success of companies through several financial and operational KPIs – which is very well invested time to take care of in order to know where the ship is steering to. But is it sensible to spend time on non-financial metrics or is it just too much a burden on both – already overwhelmed founders and investors? And: Poor financial performance could give birth to “rewarding non-financial performance as an excuse”. Also surely one could argue that (VC) investing is for profit whereas charity is charity.
But – and here comes the key question – what if sustainable investing could actually lead to higher returns?
Or in other words: Are the annual letters of Larry Fink, CEO of BlackRock, just a marketing stunt or was he serious when writing his latest letter „Purpose and Profit: An Inextricable Link“, stressing a pervasive market uncertainty which many see as an increased risk of a cyclical downturn whereby democracies are spiralling downwards into a political dysfunction?
A new framework to measure non-financial impact
As most of you probably will, we assume that the issue is real. Very real. And we got especially motivated by the START students doing so. They quickly joined forces with their colleagues at the St Gallen Symposium and took on the challenge to dig deep into the vast haystack of models around the 17 UN Sustainable Development Goals. And I mean “vast haystack” — it is incredible how many models around the UN Sustainable Development Goals exist, yet how few (or none?!) are being used in the early-stage technology world. So the students started building their own prototype of a model. btov gladly supports the development of this framework, accompanying it as partner and “real-life” challenger or tester.
Most existing models determining non-financial impact are built around established firms and the investment into those established firms through public market equities. Since the startup scene thinks, acts and works differently, develops more quickly and faces often pretty unpredictable challenges, our framework and measurement method (concentrating on technology-oriented, VC-backed startups) will have to account for that and leave room for the unpredictability and speed at which things move in our world. Though the measurement will have to start with the same baseline — a set of pre-defined KPIs and regular check-ins to discuss those.
Do we know what future we are walking towards?
A draft framework aiming to somehow make the ESG (environmental, social, governance) impact of startups measurable was then put to the test at last month’s START & btov Think Tank, which preceded the START Summit in St. Gallen. Together with the students who organised START, the St. Gallen Symposium, BDO and leading experts out of our btov community, we discussed if and how the start-up ecosystem can be held accountable for the sustainability of the technologies and business models we are developing and funding.
From targeted manipulation of social networks to “post-truth” politics or the warning of Elon Musk, Bill Gates and Stephen Hawking against the further development (and unintended consequences) of artificial intelligence — we are in an exponentially developing era which is filled with challenges that are pretty much impossible to predict for any human being. The mentioning of AI as a potential risk factor in the annual report of Google sends a clear message (see for example here). We see cultural disparities deepening over topics such as data privacy — which is being handled radically different in Eastern and Western cultures. I could go on and on.
At the same time, we see extraordinary breakthroughs and successes which have been achieved through research and science in the fields of health or energy.
Regardless of whether the consequences of the technologies or business models we back are positive or negative (or anything in between for any of the stakeholders — as reality will have it), it becomes clear that we have to put thought into what those outcomes could be and periodically test our hypothesis against reality.
Is it really worth it? Let’s start with a “mvp”
About 100 participants from academia, the investment community as well as students and young entrepreneurs controversially debated the framework. Surprisingly, a lot of participants who joined the day with a somewhat critical point of view left the Think Tank with supportive conviction.
At btov, we will continue the discussion to see how we could apply the model (or parts of it) within our processes and investment decisions. In my personal view, the minimum viable product or “mvp” would be to list the values of the start-up and the pre-defined KPIs of each startup we invest in, take this list out of the archive from time to time, compare it against reality and take action if a deviation becomes obvious.
A big “thank you” to all participants
We very much thank all participants of the Think Tank for their time and contributions to the topic. We are especially grateful to our speakers who sparked a substantial debate. Igor Perisic and Richard Socher, the Chief Digital Officers of LinkedIn and Salesforce, shared invaluable insights on AI related matters and commitment to the entrepreneurial impact idea. Nanxi Ding (in her 20s) brought in her perspective of a young generation of Chinese entrepreneurs being raised in a traditional household in Beijing and having studied abroad. Today, she manages more than 1’000 employees world-wide. Doré de Morsier, a 25 years old student from ETH Zürich, was our youngest expert. He had created Swissloop, an association of BSc. to PhD students for engineering and testing prototypes for vacuum tube transport, which scored third at Elon Musk’s global hyperloop competition in Los Angeles. He is now working on building a physical foundation for European universities to sustain Pan-European research synergies for these technologies. Doré demonstrates how much entrepreneurial energy can be mobilised and focused on a vision — without (immediate) financial outcome for the contributors. In contrast Sushant Sharma, Chief Investment Officer of Foundation Botnar, is responsible for both: Investing the assets wisely as well as maximising the impact of the foundations’ contributions. Next to the question of how to increase both — financial and non-financial impact — it is obvious that distributing accumulated funds stems from very hard work and discipline. Along those same lines, Carsten Just, Head of ERP-EIF Fund of Funds, shared the EIF’s thoughts on impact investing in relation to for-profit investing.
For me, the main outcome could be summarised as follows: What you are actually doing is managing risk. If you invest in a company that is using a non-sustainable business model (e.g. polluting the environment, using child-work, applying bad corporate governance etc.), the company will eventually run into trouble. Consequently, your investment in this company will decrease in value or even be lost entirely. In other words: Investing with a “sustainability mindset” is in the best interest of the investor and its LPs.
For the simplest reason…
A participant told me after the Think Tank: We become who we think we are. That may even be true for society in general. In that light I very much thank the entire START team for their dedicated hard work with Sophie Bree at the helm of the START Summit and Julia Bahlmann leading the framework development. This btov & START Think Tank hopefully was just the beginning — a mere building block in a much larger structure and we will accompany the framework further in the coming months.
In the end, a prolific entrepreneur put it: We are doing this “because it’s the right thing!”. And that should be a good enough reason.
We are looking forward to backing strong entrepreneurs with the btov community, willing to improve the state of our planet.
