Diligencing VCs, Battle of ESG standards & Singapore’s Green Loan Grants, (Nov’20 Monthly Reads)
Welcome to the “Monthly Reads” article series, where I compile interesting articles I chanced upon in the previous month. Here, we cover the fields of impact, startups, venture capital, and general business. Key takeaways are summarized into sub-headings, followed by additional commentary for each article. Content for this series is adapted from my LinkedIn posts.
Key Takeaways:
- Conducting some due diligence on investors before accepting their money could save founders from a lot of pain
- Inspiring entrepreneurs dream big
- Large multinational organizations and companies are important for ESG standardization, but taking action presents a dilemma
- While governments should support the growth of green finance, this should be done in a careful and thoughtful manner
Extras (published an article this month, feel free to check it out): “Grants & Subsidies List for Singapore Startups”
Conducting some due diligence on investors before accepting their money could save founders from a lot of pain
Saw a short guide on how founders can conduct due diligence on their investors before accepting money. It may sound weird since diligence is usually done the other way.
Some thoughts:
1. My prior misconception: value-add to portfolio companies is a huge aspect of VC work.
- With the exception of accelerators, incubators, venture builders, and activist investors, most VCs provide limited value-add besides their investment, offering useful introductions, occasional strategic advice, and some publicity. Still, this can be very helpful, especially for less experienced/ connected founders.
- However, investors seldom get involved or guide the operational aspects of the business. As most VCs have large portfolios and limited ownership stake in each, spending excessive resources on startup-specific help does not make sense. In general, good founders should also be the most knowledgeable in their field, meaning that there is little VCs can offer.
2. Learning: limited value-add does not mean limited harm.
- While bad investors are rare, they can give immense long-term pain once they are on your cap table. Case in point: https://bit.ly/3294I5C
- The small amount of time doing basic diligence on investors and rejecting some term sheets is a small price to pay to avoid bad investors
Inspiring entrepreneurs dream big
“Entrepreneurship” and “Social Enterprise” are terms that get thrown around a lot. Came across this old article from 2007 that explores their definitions. No doubt, the words’ meaning has diluted and changed significantly since then.
The definitions put forth are much more exclusive compared to the broad manner in which these terms are applied today, and are quite restrictive. However, it is this inspiring definition that drew me into the world of startups/ impact and made me ‘pivot’ from my path in STEM in the first place:
- Entrepreneurship- where entrepreneurs engineer a permanent shift from a lower-quality equilibrium to a higher-quality one. A Schumpeterian form of creative destruction with mass-market adoption, significant imitation, and the creation of an entirely new ecosystem of economic activity (think Apple’s iPhone or eBay that brought online marketplaces mainstream)
- Social entrepreneurship- similar to entrepreneurship but with a focus on fixing ‘unjust equilibriums’ and producing social outcomes. It builds toward systematic widespread change in the long term rather than creating small localized benefits.
While we may now consider small business owners who participate in and contribute to the current/ pre-existing ‘business paradigm’ entrepreneurs, this early definition of entrepreneurship reminds us of a time where the term is reserved solely for the few who dream big.
Large multinational organizations and companies are important for ESG standardization, but taking action presents a dilemma
The ESG industry is in need of more standardized reporting as it matures to prevent greenwashing and to enhance clarity in the ESG investments space.
It’s interesting to see how well-intentioned efforts for standardization has led to confusion with multiple ESG metrics and reporting standards floating around. Without widespread adoption, the entire purpose of a “standard” is defeated.
It looks like only large entities (countries, blocs like the EU, global organizations like CFA Institute) have the ability to produce/endorse standards and encourage their adoption at scale.
Most are stuck in a dilemma:
1. Produce a standard without waiting for the others at the risk of having multiple credible standards that cause confusion
2. Play the waiting game and hold back the progress of the entire ESG industry
My personal take would be Option (1): action is better than inaction and standards could be revised for greater global alignment at a later stage.
While governments should support the growth of green finance, this should be done in a careful and thoughtful manner
Great to see Singapore taking tangible steps toward enhancing the green finance ecosystem here. Still, the EU remains the global leader in ESG/ impact/ green finance in terms of government efforts, and Singapore has a long way to go. At least we are seeing more steps in the right direction.
Some thoughts on the initiative:
1. While having grants to catalyze growth in the space in the early stages is great, green loans/ bonds should, in the long term, be a financially logical product that persists without the need for artificial subsidies
2. We should be careful with the $100k/borrower grant for reporting & validating costs. There have been companies (globally) paying good money to those who can report ‘creatively’ and portray companies in a good light by overemphasizing positive efforts and glossing over negative areas. We do not want to subsidize such efforts.
3. Subsidizing banks’ expenses in producing sustainability loan frameworks is great. However, would it be more cost-effective (and less confusing for borrowers) to produce a standard framework shared by multiple banks rather than subsidize the development of separate frameworks? If banks want to customize, perhaps having a standard foundation and room for customization could be an alternative.
